Partner Tessa Hoser and Associate Livia Li discuss the lending and secured finance environment in Australia.
The following article appeared in the 2015 edition of The International Comparative Legal Guide to: Lending & Secured Finance. This was first published by Global Legal Group Ltd, London, and is reproduced with permission.
1.1 What are the main trends/significant developments in the lending markets in Australia?
The main commercial trend in the Australian lending market in 2014 was a move by borrowers towards the debt capital markets and away from bank funding. Specific trends noted included:
- Growth in debt capital markets both in terms of domestic issuers and offshore issuers (the so-called "Kangaroo" bond market). Smaller corporates have used the domestic bond market to diversify their funding sources and reduce their borrowing costs. Larger senior unsecured issues have been undertaken by domestic and offshore corporates, banks and sovereign/semi-sovereign entities. Other issuance has been driven by Basel III and Solvency II-equivalent capital raising by banks and insurance companies. Secured issues have been undertaken by airport operating companies and project finance companies.
- Green bond issuance by IFC, Stockland Group Limited and the National Australia Bank sponsored fund have seen this product emerge in Australia, with signs of more to come.
- An increase in lending by non-traditional lenders such as pension funds, joint venture funds and through the US private placement market.
- Securitisation issuance has continued to grow, particularly in the auto receivables sector. There have also been a number of significant US and European RMBS and ABS issues by Australian banks. Domestically, further covered bond issuance has taken place. A likely area for securitisation growth is master trusts, once the Australian bank regulator, the Australian Prudential Regulation Authority (APRA) releases its requirements for master trust issuance by banks. There has been no indication as to when those rules will be released.
- Syndicated and bilateral asset-based lending with reference to receivables pools has increased notably in the Australian market, with some transactions forming part of acquisition finance structures.
- Project financing in the infrastructure rather than mining sector has grown but the outlook remains somewhat uncertain in some States where political changes have resulted in a withdrawal of government commitment to privatisation programmes.
- More generally, the mining sector continued to suffer from lower commodity prices and some smaller mining companies were placed into administration or receivership. Restructurings of mining facilities increased.
1.2 What are some significant lending transactions that have taken place in Australia in recent years?
Listed below are a number of significant transactions that were concluded in 2014 and early 2015 that reflect the trends noted above and in which the firm was involved:
- A$2.1bn syndicated loan facility provided by 5 banks to the ALTRAC Light Rail Consortium (consisting of Transdev, Alstom Transport Australia and Capella Capital) on the Sydney Light Rail PPP Project. The Sydney Light Rail Project is a complex transport link that is to be constructed in the central business district and densely populated parts of Sydney.
- A$1bn+ acquisition of 100% of the Royal North Shore Hospital and Community Health Services PPP which also involves a refinancing of all external debt provided to the project entities.
- A$497m facility in relation to acquisition of 70% of Sensis Pty Ltd by US-based Platinum Equity Advisors, LLC from Telstra Corporation Limited. Sensis is the directories business which owns and operates directories including the Yellow Pages and White Pages in Australia. The facilities included a US$315m term loan facility and a A$50m asset based revolving credit facility.
- A term loan facility to a subsidiary of Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA), a Fortune 100 financial services organisation, in connection with its joint venture entity's acquisition of the Mt Ommaney Shopping Centre in Brisbane, Australia. This is TIAA's first investment in Australian retail real estate assets. It already holds Australian office real estate assets.
- A$277m asset-backed pass through securitisation issuance by Fleetpartners, a leading leasing and fleet management company in Australia. This is the first auto operating leasebacked securitisation by an Australian issuer.
- A$1.2bn issue of senior unsecured bonds issued by Royal Bank of Canada, as part of its US$40bn programme.
- Adani Abbott Point – A$100m secured note issuance by the Abbott Point Coal Terminal No. 1 entity that operates what will be the world's largest coal terminal.
2.1 Can a company guarantee borrowings of one or more other members of its corporate group (see below for questions relating to fraudulent transfer/financial assistance)?
A company can guarantee the borrowings of other members of its corporate group but those guarantees can be vulnerable to challenge for various reasons. For example, if there is insufficient corporate benefit for the guarantor member of the group (see question 2.2 below). In addition, where the guarantor or beneficiary entities are public companies or are related bodies corporate of public companies, particular rules regarding the authorisation of intragroup guarantees must be followed. Those requirements can include shareholder approval of the grant of the guarantee. Where the guarantee constitutes financial assistance in relation to the acquisition of the shares of the guarantor company's parent or ultimate holding company, then additional approval requirements apply (see section 4 below).
2.2 Are there enforceability or other concerns (such as director liability) if only a disproportionately small (or no) benefit to the guaranteeing/securing company can be shown?
A director of a company established under the Corporations Act 2001 (Cth) (the Corporations Act) is required to act in the company's best interests, with care and diligence, in good faith and for a proper purpose. A director must avoid any conflict between his/her duty to the company and his/her personal interest and is under a duty to disclose any personal interest that may cause a conflict. There are both civil and criminal penalties, as well as personal liability that may arise, where directors breach their duties under the Corporations Act.
A director is an officer of the company and in order for a guarantee to be valid, the company must have had the power to grant the guarantee and that power must have been validly exercised by its directors when approving the grant of the guarantee. Where a guarantee does not satisfy these requirements then it may be voidable, either because there was no commercial benefit for the company in granting the guarantee, and/or, at the instance of a liquidator, because it was an uncommercial transaction or an unfair preference, granted to the lender to whom the guarantee was given. (See Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1.)
2.3 Is lack of corporate power an issue?
As noted above, a company needs to have the requisite corporate power to grant a guarantee.
An Australian company has all the powers of an individual except as limited by its Constitution. Therefore, it is usual for the Constitution of a company to be checked to ensure that the company has the power to grant guarantees and if so, whether any specific requirements need to be met.
In the exercise of these powers, establishing authority of the directors is important. Under the Corporations Act, a third party dealing with a company may make a number of assumptions regarding, the authority of persons who appear from the records of ASIC (Australian Securities and Investments Commission), to be directors or the secretary of the company and the due execution of documents signed by those individuals on behalf of a company. Those statutory assumptions may only be made if the person did not know or suspect at the time that the dealing or document was entered into, that their assumption was incorrect.
2.4 Are any governmental or other consents or filings, or other formalities (such as shareholder approval), required?
Shareholder approvals and other formalities (such as filing of resolutions and documents with ASIC) may apply in relation to guarantees that are related party transactions or constitute financial assistance (see section 4 below). Where there is a concern that a guarantee might not be for the commercial benefit of the company, then a lender may require that, in addition to director approval, the company's shareholders resolve to grant the guarantee. It should be noted that this may not be effective in resisting a subsequent claim by a liquidator, on behalf of the other creditors of the company (see question 2.2 above). For transactions involving consumers or small businesses, there are additional requirements under the National Credit Code.
2.5 Are net worth, solvency or similar limitations imposed on the amount of a guarantee?
Although the Corporations Act does not impose any limitations on the amount of a guarantee, the amount of a guarantee will be relevant in evaluating whether the directors of the guaranteeing company can be said to have acted in the best interests of the company in granting that guarantee. Arguably, if the company could be rendered insolvent, were the guarantee called, then, absent some equivalent benefit (such as access to group funding or a counterindemnity), it would be difficult for the directors to argue that it was in the best interests of the company to grant that guarantee. For consumer transactions, it is important to note that the Code of Banking Practice requires that liability of the guarantor be limited.
2.6 Are there any exchange control or similar obstacles to enforcement of a guarantee?
Unless the recipient of a guarantee was listed on the Australian Government's sanctions list which prohibits payments to certain corporations, individuals and countries, there are no exchange control issues which would prevent payment under an otherwise enforceable guarantee.
3 Collateral Security
3.1 What types of collateral are available to secure lending obligations?
Security can be taken over virtually all types of property.
There are different regimes and specific rules which apply to taking security, and generally the set of rules that apply will depend on the type of collateral subject to security. The two main regimes are: security over real property; and security over personal property.
With respect to security over real property, each State and Territory has specific laws and regulations and generally this involves taking a mortgage over the land.
With respect to security over all personal property (being all property that is not land) and excluding certain statutory rights, the governing legislation is the Personal Properties Securities Act 2009 (Cth) (PPSA).
The PPSA takes a "substance over form" approach when determining what constitutes a 'security interest'. A security interest is defined under the Act as an interest in personal property which secures payment of money or performance of an obligation. This would include traditional forms of security such as a charge, conditional sale agreements and a pledge. In addition, there are 'deemed security interests' which may not necessarily secure payment or performance of an obligation that are deemed to be a security interest under the PPSA. These include interest in a transfer of an account and an interest in a lease of personal property which meets certain criteria.
One of the unique features of the PPSA is that it establishes certain priority rules regulating priority between different creditors. In addition to the security interest being enforceable against the grantor and third parties, the PPSA provides a 'perfection' mechanism, which allows secured parties to perfect their security interest. The different modes of perfection and general procedures are set out in question 3.2 below. The priority rules are quite complex but the general priority rule is that perfected security interest will take priority over unperfected security interests, and first perfected security interest will take priority over later perfected security interests.
3.2 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?
It is possible for a secured party to obtain a 'general security' over all assets of the grantor. This is known as a 'general security agreement' (GSA) which is security over "all present and afteracquired property". Alternatively, a secured party may wish to take security only over specific assets of the grantor, and this will be done by way of a 'specific security agreement' (SSA).
Assuming there is valid security interest and the grantor has rights in the collateral, there are certain requirements that must be met under the PPSA for a security interest to be enforceable. These include capturing the security interest in a security agreement evidenced by writing that describes the particular collateral, and states that a security interest is taken and signed or otherwise adopted or accepted by an act of the grantor. Furthermore, in order to obtain the highest possible priority, the secured party may perfect its security interest by one of three methods (depending on the type of collateral):
- by registration on the Personal Properties Securities Register (PPSR);
- possession of the collateral; or
- obtaining control over the collateral.
3.3 Can collateral security be taken over real property (land), plant, machinery and equipment? Briefly, what is the procedure?
Security can be taken over real property, plant, machinery and equipment. As discussed in question 3.1 above, security over real property will be governed by the particular State/Territory regime applicable to the land, and this is determined by the location of the land. The procedure usually involves taking a mortgage over the land and registering the mortgage at the land titles office in the relevant State/Territory.
With respect to plant, machinery and equipment, to the extent that they are not found to be fixtures to the land, these assets will be considered to be personal property and are therefore governed by the PPSA. (See question 3.2 above.)
For specific types of financing such as equipment finance and asset finance, where the lender leases a valuable asset, or otherwise provides funding to acquire such assets, the lender/secured party has a 'purchase money security interest' (PMSI) over the funded asset. The PPSA provides that a PMSI, if registered properly, has "super priority" over other security interests. The rules regarding the registration requirements of PMSI are complex but generally this involves registration within a specific time frame, depending on the type of collateral.
3.4 Can collateral security be taken over receivables? Briefly, what is the procedure? Are debtors required to be notified of the security?
Security can be taken over receivables, and can be taken under a GSA (as part of the overall security) or an SSA (if only receivables are taken). Receivables, along with inventory, bank accounts and other types of current assets, are known as 'circulating assets' under the PPSA, which means that unless the secured party takes 'control' (as defined in the PPSA), the grantor will have the ability to deal with the collateral.
Obtaining control under the PPSA requires certain steps to be taken by the secured party, in addition to entering into a security agreement. Although the secured party need not go as far as notifying the account debtors of the security or take over collection of the accounts, the secured party may wish to agree with the grantor to deposit all proceeds from the receivables into a specific bank account and obtain control over that bank account. These additional procedures would be particularly important for lenders who are providing receivables finance or asset-based lending, where the cash flow from the receivables are the prime security for the loan.
3.5 Can collateral security be taken over cash deposited in bank accounts? Briefly, what is the procedure?
Security can be taken over cash deposited in bank accounts. As noted in question 3.4 above, bank accounts are circulating assets under the PPSA and the secured party may wish to consider taking additional steps to obtain control over the bank account. Generally, if the secured party is an authorised deposit taking institution in Australia (within the definition of 'ADI' under the PPSA), the PPSA deems such secured party to have control over the account. Other secured parties will need to enter into a side deed with the bank which holds the account to obtain control over the account.
3.6 Can collateral security be taken over shares in companies incorporated in Australia? Are the shares in certificated form? Can such security validly be granted under a New York or English law governed document? Briefly, what is the procedure?
Company shares are considered personal property under the PPSA and for unlisted companies are generally certificated. A GSA is commonly used where the security provider grants security over all of its assets, including all company shares. Alternatively, an SSA can be entered into where the secured party only take security over the shares. Perfection can be achieved by either registration on the PPSR, or to obtain control or possession (where the shares are certificated).
Shares in Australian Securities Exchange (ASX) listed companies are uncertificated and are evidenced in a company's electronic register. The shares are transferred by a sponsoring participant through the Clearing House Electronic Subregister System (CHESS). Perfection of security over shares is usually effected through registration of a financing statement on the PPSR.
If the secured party wishes to obtain control over the shares, the parties may enter into a CHESS sponsorship agreement which appoints the secured party as the 'controlling participant' on CHESS.
In the case of certificated shares the secured party can obtain possession by holding the share certificates, and collect blank transfer forms signed by the security provider. This should enable that party to transfer the shares to itself or another person or otherwise deal with the shares upon enforcement.
Assuming that the shares or the grantor of the security are located in Australia, and the secured party can establish it has a 'security interest' (as defined in the PPSA, see question 3.1 above), then security can be taken over the shares, subject to compliance with the requirements set out in the PPSA (see question 3.2 above). The question of enforceability of that New York or English law document will depend on the rules regarding enforcement in Australia on foreign judgments (see section 7 for a discussion on this generally).
3.7 Can security be taken over inventory? Briefly, what is the procedure?
Security can be taken over inventory. As discussed in question 3.4, inventory is a pool of circulating assets under the PPSA and the grantor is free to deal with the inventory unless control is obtained by the secured party. Although it is possible for the secured party to take additional steps to obtain control over inventory, depending on the nature of the financing, it is not common for a secured party to do so, as the grantor's ability to deal with inventory goes to the core of the grantor's day-to-day operations of their business.
Perfection can be achieved by one of the three methods (see question 3.2 above); however, for the reasons discussed above, it is unlikely a secured party will obtain physical possession or control over inventory and therefore, the most common perfection method will be registration on the PPSR.
3.8 Can a company grant a security interest in order to secure its obligations (i) as a borrower under a credit facility, and (ii) as a guarantor of the obligations of other borrowers and/or guarantors of obligations under a credit facility (see below for questions relating to the giving of guarantees and financial assistance)?
Yes to both but subject to the other matters set out elsewhere in this article.
3.9 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets?
Notarisation is not a requirement for obtaining or registering a security interest under Australian law.
Small fees are payable to register a PPSA financing statement online, and fees associated with amending financing statements. It is important to remember that if incorrect information (such as the wrong serial number) is registered, then the registration may be ineffective.
There is also a small fee payable for registration with the relevant Land Title Office of a security interest over real property.
A more major consideration is a form of stamp duty called mortgage duty. This only exists in New South Wales (NSW) and no other Australian State or Territory.
Mortgage duty (a category of stamp duty) is only imposed by NSW where security for lending is granted over property located in NSW. For these purposes property has a wide meaning and includes, for example, shares in any company registered in NSW and the goodwill and intellectual property of a business to the extent it has customers in NSW. The current rate of mortgage duty is 0.4% of the total amount advanced (subject to a reduced rate for the first $16,000 of advances), reduced proportionately by reference to the value of secured property in NSW relative to the value of secured property anywhere else. The next scheduled date by which mortgage duty is due to be abolished in NSW is 1 July 2016, although based on past history, there is no certainty that abolition will occur on 1 July 2016.
3.10 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?
This does not usually involve a significant amount of time or expense. The PPS Register relies on the accuracy of information provided. If incorrect information is registered, then the registration may be ineffective. It is vital to double check information entered.
3.11 Are any regulatory or similar consents required with respect to the creation of security?
Security taken over regulated assets or assets, where a government agency or similar party has an interest, may have additional consent requirements, which are sometimes provided in specific legislation. The most common example of this situation is a mortgage over a lease of Crown land or public facilities where the lessor is a government agency. Please also refer to question 10.1 regarding acquisitions of Australian assets generally.
3.12 If the borrowings to be secured are under a revolving credit facility, are there any special priority or other concerns?
If the security interest arises under a GSA or if there is an SSA relating to receivables which are revolving in nature then it is important to establish control over those receivables in order to ensure that newly created receivables are also secured under that security.
3.13 Are there particular documentary or execution requirements (notarisation, execution under power of attorney, counterparts, deeds)?
There are no particular execution requirements in Australia that are more cumbersome than other jurisdictions. As discussed in question 2.3 above, certain assumptions can be made as to authorisation and power to enter into documents, that are executed in accordance with section 127 Corporations Act.
With respect to execution of deeds, care should be taken to ensure that the relevant officers of the company sign the same execution clause and page provided in the document (that is, they should not sign separate copies). There are some differing views as to application of section 127 of the Corporations Act and the assumptions may not apply, if the documents were not signed strictly in accordance with this section.
4 Financial Assistances
4.1 Are there prohibitions or restrictions on the ability of a company to guarantee and/or give security to support borrowings incurred to finance or refinance the direct or indirect acquisition of: (a) shares of the company; (b) shares of any company which directly or indirectly owns shares in the company; or (c) shares in a sister subsidiary?
- Shares of the company
Section 260A of the Corporations Act enables a company to provide financial assistance (which may include finance, loans or guarantees) for the acquisition of shares in itself or its holding company if such financial assistance would not materially prejudice the interests of the company or its members or the company's ability to pay its creditors. The onus is on the company seeking to establish that there was no material prejudice, and the assessment of whether the financial assistance was materially prejudicial is based on the facts in question. The company's auditors usually opine on the question of prejudice to creditors.
Alternatively, a company can give financial assistance if it complies with the procedure prescribed in section 260B of the Corporations Act (known as the 'whitewash procedure'). The whitewash procedure involves describing to shareholders in reasonable detail the proposed transaction and financial assistance, obtaining a shareholders' resolution approving the giving of the assistance and filing that disclosure and resolution with ASIC. The financial assistance should not be provided until a period of 14 days has expired from the date on which those items are filed with ASIC. This allows ASIC to issue a notice of objection.
Contravention of the financial assistance provisions will not affect the validity of the transaction. However, individuals who are involved in the contravention (including the lenders) may be guilty of a civil offence or be subject to criminal liability if it is found that such involvement was dishonest. For these reasons, most lenders will require that a whitewash procedure be undertaken if financial assistance is involved, unless there is very clearly no material prejudice to the company's creditors.
- Shares of any company which directly or indirectly owns shares in the company
The rules relating to financial assistance only apply if the financial assistance relates to shares being acquired in the company itself or its 'holding company'. A holding company is one which holds over 50% of the shares or which can cast (or control the casting of) over 50% of the votes or otherwise controls the composition of the board of the company. The restriction applies whether or not the holding company is incorporated in or outside Australia.
- Shares in a sister subsidiary
The restriction on financial assistance only applies to the acquisition of shares in the company or its holding company. This does not include acquisition of shares in its subsidiary or a sister subsidiary. However, as discussed in question 2.2 above, issues regarding corporate benefit should be considered.
5 Syndicated Lending/Agency/Trustee/Transfers
5.1 Will Australia recognise the role of an agent or trustee and allow the agent or trustee (rather than each lender acting separately) to enforce the loan documentation and collateral security and to apply the proceeds from the collateral to the claims of all the lenders?
The use of agent and trustee is recognised in Australia and is common in syndicated lending arrangements. In syndicated lending, an agent acts as an intermediary between the borrower and the financiers and is responsible for administering the day-to-day operations of the syndicated facility. Usually the agent acts on the basis of a lender's instructions.
If the loan is secured, the security will be held on trust for the beneficiaries, namely the lenders or other secured parties by a security trustee under a security trust deed. A lender's ability to enforce the loan is regulated by the underlying loan document and usually, as the security trustee holds the security, the security trustee would enforce the security on instructions from the lenders and other secured parties.
5.2 If an agent or trustee is not recognised in Australia, is an alternative mechanism available to achieve the effect referred to above which would allow one party to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately?
This is not applicable (see question 5.1 above).
5.3 Assume a loan is made to a company organised under the laws of Australia and guaranteed by a guarantor organised under the laws of Australia. If such loan is transferred by Lender A to Lender B, are there any special requirements necessary to make the loan and guarantee enforceable by Lender B?
Lenders often seek the ability to "sell down" their rights and obligations under a facility agreement. Under Australian law, obligations cannot be assigned and therefore, the primary loan documents often include transfer provisions and a standard form accession deed. This usually establishes consent of the existing parties to the future novation of a lender's rights and obligations and the accession/transfer document, upon execution, effects that novation. The security trust deed will usually include as a 'secured party' a transferee under the above mechanism.
Assigning debt, under section 12 (3)(a) of the PPSA Act, is more complicated as it may constitute a "deemed security interest" under the PPSA which will required certain notice formalities to be carried out.
As part of basic due diligence, documents should be reviewed to determine whether there are any restrictions on assignments and transfers.
6 Withholding, Stamp and other Taxes; Notarial and other Costs
6.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security?
Withholding tax is imposed on interest, and amounts in the nature of interest, paid by an Australian resident, or an Australian permanent establishment of a foreign resident, to a non-resident. The current rate of interest withholding tax is 10%. Most of Australia's double tax treaties do not affect the withholding tax rate imposed, as they allow for a rate of 10% or higher, although some treaties do provide for nil withholding tax on lending by foreign financial institutions or government entities. An exemption from interest withholding tax may be available where the lending is an issue of debentures or a syndicated loan which results from a public offer being made (i.e., broadly, where participation in the lending has been offered in the market to a number of potential investors or financiers).
Payments made under a guarantee or on enforcing security may also be subject to interest withholding tax to the extent they can be regarded as amounts paid in substitution for interest.
6.2 What tax incentives or other incentives are provided preferentially to foreign lenders? What taxes apply to foreign lenders with respect to their loans, mortgages or other security documents, either for the purposes of effectiveness or registration?
There are no preferential incentives or tax breaks for foreign lenders over domestic lenders.
6.3 Will any income of a foreign lender become taxable in Australia solely because of a loan to or guarantee and/or grant of security from a company in Australia?
Technically, income derived by a foreign lender that has an Australian source, such as interest paid by an Australian borrower, is taxable in Australia. However, in practice this generally does not result in a foreign lender becoming subject to Australian income tax, for two reasons. First, if interest payable is subject to Australian withholding tax, or would be subject to withholding tax but for a double tax treaty or specific exemption (see question 6.1 above), that interest is excluded from being taxable income. Secondly, if the foreign lender is a tax resident of a country with which Australia has a double tax treaty, the foreign lender will generally only be subject to Australian tax on such income if the foreign lender has a permanent establishment in Australia (as defined in the relevant double tax treaty).
6.4 Will there be any other significant costs which would be incurred by foreign lenders in the grant of such loan/guarantee/security, such as notarial fees, etc.?
None, other than those discussed in question 3.9 above.
6.5 Are there any adverse consequences to a company that is a borrower (such as under thin capitalisation principles) if some or all of the lenders are organised under the laws of a jurisdiction other than your own? Please disregard withholding tax concerns for purposes of this question.
Presuming the parties are unrelated and dealing at an arm's length basis, there should be no adverse consequences from the application of Australia's transfer pricing regime.
7 Judicial Enforcement
7.1 Will the courts in Australia recognise a governing law in a contract that is the law of another jurisdiction (a "foreign governing law")? Will courts in Australia enforce a contract that has a foreign governing law?
Parties to a contract are free to choose any governing law they wish so long as the choice is made in good faith and is not against public policy. The choice must be clear and unambiguous. It will only be relevant to the contractual rights and obligations under the documents. Conversely, statutory rights and obligations may apply irrespective of the choice of law. The law that governs a security interest will generally be determined according to where the collateral is located.
7.2 Will the courts in Australia recognise and enforce a judgment given against a company in New York courts or English courts (a "foreign judgment") without re-examination of the merits of the case?
Generally speaking, judgments given by English courts are recognised in Australia without the need to re-litigate. This is because there is a bilateral arrangement for the enforcement of English judgments in Australia provided under the Foreign Judgments Act 1991 (Cth) (FJ Act). Provided that the judgment satisfies certain criteria, the judgment can be registered under the FJ Act and once registered, the judgment will have the status of a judgment delivered by an Australian court.
In order for the judgment to be registrable, it must be:
- a 'money judgment' (for the payment of money);
- final and conclusive (although it may still be subject to appeal);
- not wholly satisfied;
- enforceable in the country in which the judgment was originally given; and
- applied to be registered within 6 years after the date of the original judgment.
Conversely, judgments given by New York courts go through a slightly different procedure as there is currently no reciprocal recognition of judgments between Australia and New York courts under the FJ Act. Enforcing judgments will therefore rely on the common law principles. Generally speaking, a final and conclusive money judgment will be enforceable at common law provided the Australian court is satisfied that the New York court has exercised jurisdiction in the international sense. A foreign court will be deemed to have exercised the relevant jurisdiction if:
- the defendant voluntarily submitted to the court's jurisdiction;
- the defendant was ordinarily resident in the country of the foreign court or present in that country at the time that he/she was served with the originating process; or
- the defendant was a citizen of the country of the foreign court and the defendant actively used his/her citizenship.
7.3 Assuming a company is in payment default under a loan agreement or a guarantee agreement and has no legal defence to payment, approximately how long would it take for a foreign lender to (a) assuming the answer to question 7.1 is yes, file a suit against the company in a court in Australia, obtain a judgment, and enforce the judgment against the assets of the company, and (b) assuming the answer to question 7.2 is yes, enforce a foreign judgment in a court in Australia against the assets of the company?
This depends on a wide number of variables such as the provisions of the applicable security agreement, the willingness of the borrower to co-operate in enforcement actions and the type of enforcement action being undertaken.
With respect to registration of a foreign money judgment that is final and conclusive, registration applications involve preparation and lodgement of a suite of documents. Once the judgment has been registered, the plaintiff must serve a Notice of Registration on the defendant, under which the defendant has 14 days to file any application to set aside the registered judgment.
7.4 With respect to enforcing collateral security, are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or (b) regulatory consents?
Generally speaking, there are no particular restrictions on the enforcement of collateral security. The rules regarding enforcement of security are set out in the Corporations Act, PPSA and the relevant security agreements. In the example of appointing a receiver over the collateral upon default, the receiver's powers are largely governed by the terms of appointment provided in the security agreement.
With respect to real property, State and Territory legislation contain analogous provisions which require the lender/receiver appointed to sell the assets at market value if that asset has a market value at the time of disposal, or otherwise obtain the best price reasonably obtainable at the time of disposal, having regard to the circumstances existing when the asset is sold. For other assets, there may be specific regulatory requirements if the assets are covered by mining, power, pharmaceutical or other regulations specific to a particular industry or sector.
Please also refer to question 10.1 below regarding acquisitions of Australian assets generally.
7.5 Do restrictions apply to foreign lenders in the event of (a) filing suit against a company in Australia or (b) foreclosure on collateral security?
Subject to our discussion in question 10.1 below, there are no specific restrictions under Australian law which would apply only to foreign lenders. A foreign lender may file suit against the borrower in Australia in the same way as an Australian lender.
7.6 Do the bankruptcy, reorganisation or similar laws in Australia provide for any kind of moratorium on enforcement of lender claims? If so, does the moratorium apply to the enforcement of collateral security?
An extensive moratorium applies where a voluntary administration regime is entered into. A voluntary administration regime can be commenced in one of three ways; one is appointment of an administrator by a person who is entitled to enforce a security interest in the whole, or substantially the whole of the company's property, if the security has become enforceable.
Once an administrator is appointed, a moratorium applies, which prohibits the commencement or continuation of court proceedings against the company or in relation to any of its property (section 440D Corporations Act).
There are exceptions to the moratorium, and one exception is any secured party who holds security interest in the whole, or substantially the whole of the company's property may enforce the security interest in relation to all of the secured property within 13 business days after the appointment of the administrator (section 441A Corporations Act).
7.7 Will the courts in Australia recognise and enforce an arbitral award given against the company without reexamination of the merits?
Foreign arbitral awards may be recognised and enforced by Australian courts under the International Arbitration Act 1974 (Cth), provided that the arbitral award was made (a) under an 'arbitral agreement' (an agreement in writing that the parties submit disputes to arbitration), and (b) made in a 'Convention Country' (i.e. a 'Contracting State' under the New York 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards) or, if it was not, the party seeking to enforce the award is domiciled or ordinarily resident in Australia or a Convention Country.
8 Bankruptcy Proceedings
8.1 How does a bankruptcy proceeding in respect of a company affect the ability of a lender to enforce its rights as a secured party over the collateral security?
Depending on the type of proceedings undertaken, the enforcement rights of the lender may be affected by the Australian equivalent of bankruptcy or US-style Chapter 11 process. In the case of voluntary administration, the commencement of the administration will prevent any secured party enforcing its security, other than a secured party with security over the whole or substantially the whole of the company's property (see question 7.6 above). On the other hand, a winding up will preclude lenders from commencing or continuing legal proceedings against the company or any of its property, except with the leave of court and in return, the lenders will be granted the right to participate and vote at creditor's meetings and prove for their debt.
8.2 Are there any preference periods, clawback rights or other preferential creditors' rights (e.g., tax debts, employees' claims) with respect to the security?
A liquidator may seek court orders to set aside certain transactions preceding the winding up of the company. The two common types of "voidable transactions" which a liquidator may seek to challenge are described below.
An uncommercial transaction is one entered into when the company was insolvent and that a hypothetical reasonable person in the company's circumstances would not have entered into. Factors which may be taken into account include the benefits and/or detriments to the company entering into the transaction, and benefits to other parties. A liquidator may seek to set aside an uncommercial transaction if it was entered into 2 years prior to the winding up of the company.
An unfair preference is a transaction between an insolvent company and a creditor, by which the creditor receives more for an unsecured debt than it would have received if the creditor had had to prove for it in the winding up. A liquidator may seek to set aside an unfair preference transaction within 6 months of the appointment of the liquidator, or 4 years if the transaction was with a related party.
A secured creditor with a perfected security interest will normally be entitled to enforce security, even if a judicial winding up order has been made. Circulating assets, however, will usually be first used to pay for employee claims (wages, superannuation) and taxation liabilities, and other expenses incurred by authorities and to indemnify expenses incurred by administrators.
8.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation?
There are no companies excluded from insolvency proceedings, other than certain statutory corporations. However, certain entities are subject to different insolvency regimes e.g., for banks and other authorised deposit-taking institutions (Banking Act 1959 (Cth)) and insurers (Insurance Act 1973 (Cth)).
8.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of a company in an enforcement?
A receiver can be appointed without the initiation of court proceedings. As discussed in question 7.4 above, the power to appoint a receiver is contained in the security agreement, and the powers of the receiver therefore will arise within the 'four corners' of the agreement.
With respect to personal property, the PPSA provides that the secured party may, without a court order but subject to certain notice requirements, seize or collect, dispose of, purchase or foreclose on secured assets. In addition, it is possible to contract out of certain notice provisions in the PPSA unless the collateral is used predominantly for personal, domestic or household purposes.
In the case of a mortgage over real property, the power to appoint a receiver is implied into the instrument by statute (for example, under the Conveyancing Act 1919 (NSW)) and the power may only be exercised when the mortgaged money becomes due or where a default has been made with respect to the mortgage.
9 Jurisdiction and Waiver of Immunity
9.1 Is a party's submission to a foreign jurisdiction legally binding and enforceable under the laws of Australia?
An Australian court will recognise a foreign choice of law and submission to the jurisdiction of foreign courts provided that the choice of law and submissions is not illegal or contrary to Australian public policy.
9.2 Is a party's waiver of sovereign immunity legally binding and enforceable under the laws of Australia?
The scope of sovereign immunity in Australia is addressed in the Foreign States Immunities Act 1985 (Cth). A waiver of immunity will generally be enforceable subject to a number of exceptions such as where it concerns personal injury.
10 Other Matters
10.1 Are there any eligibility requirements in Australia for lenders to a company, e.g. that the lender must be a bank, or for the agent or security agent? Do lenders to a company in Australia need to be licensed or authorised in Australia or in their jurisdiction of incorporation?
If a lender is wholly or partly owned by a foreign corporation or individual, then there is a possibility that the security it has taken over an Australian asset could constitute an 'acquisition' under the Foreign Acquisition and Takeovers Act 1975 (Cth) (FATA) and would therefore require approval from the Foreign Investment Review Board (FIRB). The FATA governs foreign investments into Australia and acquisitions over a certain amount of interest in specific Australian assets and land will require approval by FIRB. Generally speaking, the acquisition of assets by way of enforcement of security for the purposes of a 'moneylending agreement' does not constitute acquisition of a notifiable interest under FATA.
There are no specific requirements for any particular lender to be a bank or an agent in order to be able to provide loans to an Australian borrower. However, if a body corporate (including a foreign corporation which is authorised to carry on banking business in its own country) wishes to carry on banking business in Australia, it must have obtained authority to do so from APRA. The word "bank, "banking" or other derivations of that word cannot be used in carrying on a business in Australia unless the user is an authorised bank or has obtained the consent of APRA.
A financial institution which carries on financial services business in Australia (for example, by issuing, dealing or advising in relation to deposit products, non-cash payment facilities, foreign exchange contracts, derivatives, custody services, managed investments, insurance and superannuation products to Australian clients) also needs to be authorised by ASIC in accordance with the Corporations Act.
Additional regulations and industry codes apply where a financial institution engages in consumer credit activities.
10.2 Are there any other material considerations which should be taken into account by lenders when participating in financings in Australia?
Each situation and each lender will present different issues and should be considered in light of these circumstances as the above comments are made solely as of the date of this publication, are generic in nature and do not constitute advice on any issue or circumstance.