AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin
5.7 General Principles of Enforcement A secured party’s right to enforce its loan, guar- antee or security will be governed by the under- lying debt and security documents. A financier will typically be able to accelerate the debt upon the occurrence of an event of default or other enforcement event. Guarantees can only usually be enforced following a default by the principal obligor. A secured creditor will have enforcement rights under the security documents and applicable legislation. The security documents will typi- cally set out the secured party’s right to enforce its security by appointing either a receiver or a receiver and manager. Pursuant to the Cor- porations Act (regardless of whether they are appointed as receivers or receivers and man- agers), receivers and managers are afforded a broad ambit of statutory powers which enable them, subject to the security documents under which they are appointed, to enter into pos- session of the secured property, carry on the business of the grantor company or realise the secured property, among other things. Under the Corporations Act, a holder of regis- tered security over all – or substantially all – of a company’s assets can appoint a voluntary administrator. Once a company goes into vol- untary administration, a person cannot enforce a charge on the property of the company except with the written consent of the administrator or the leave of the court unless the person who holds the charge does so over the whole or substantially the whole of the property of the company. During administration, a person who holds a charge of the latter type can enforce that charge within the first 13 business days follow- ing the appointment of the administrator.
appointed. These duties are enshrined under Sections 181 and 184 of the Corporations Act and arise under general law, and include a fiduci- ary duty to act in good faith for the benefit of the company as a whole and for a proper purpose. In a secured lending context, these duties often come under scrutiny where a subsidiary is asked to guarantee the debts of its parent or sister companies within the same corporate group. For wholly owned subsidiaries that are considering guaranteeing the debt obligations of their par- ent, the above duties are often viewed in light of Section 187 of the Corporations Act, which enables a wholly owned subsidiary to adopt a provision in its constitution enabling it to act in the best interests of its holding company (and in so doing, will be deemed to be acting in the best interests of the company itself). Financiers will usually request that any wholly owned subsidiar- ies providing credit support have this provision in their constitution. Where Section 187 of the Corporations Act is not available, care should be exercised to ensure that the corporate security provider derives some benefit from granting the guarantee or security and that granting the guarantee or security is in the best interests of the corporate security pro- vider. In making that determination, direct ben- efits (such as the company’s ability to use funds drawn under the facility) and indirect benefits (eg, if the company requires the ongoing sup- port of other companies within the group) can be considered. However, each company within the transaction must derive sufficient benefit itself when entering into the financing transaction. A guarantee or security could be set aside by a court if that court finds that the directors of the security provider have breached their duties and the lender was aware of that breach.
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