Understanding a Company Charge and the PPSA
Essentially, a company charge is a security interest held by a lender over the property of a company. The charge is given by the company (the chargor) to the lender (the chargee) to secure payment of a debt or obligation.
A charge does not give the lender a legal interest in the property by way of mortgage or possession but a right to enforce its interest upon the happening of an event, such as default or insolvency.
Company charges provide security for the lender yet flexibility for the company. The loan contract sets out the type and terms of the charge that the borrower agrees to grant. The charge can be fixed over identified property and/or float over transient assets such as trading stock.
Some features of the company charge however have changed since introduction of the Personal Property Securities Act 2009 (Cth) (PPSA). In January 2012, the PPSA implemented a national framework for creating and registering security interests in personal property and introduced the Personal Property Securities Register (PPSR).
The PPSR is a central register for secured financial interests over all personal property (i.e. most property excluding land).
The notion of a company charge continues to be fundamental in corporate financing, however, the PPSA has changed the traditional terminology, the form of a charge and the ways for creating and registering all security interests on the PPSR.
This article explains the traditional concepts of a company charge and provides a brief overview of the PPSA and its effect on the future of company charges.
The different types of company charges
A charge may be fixed or floating.
A fixed charge attaches to specific identifiable assets of the company such as motor vehicles, plant or equipment. The chargor retains ownership of the assets however if the chargor defaults, the chargee has the right to recover the loan through proceeds of the sale of those assets.
Assets subject to a fixed charge cannot be dealt with (transferred, sold, mortgaged) by the company without it first obtaining the chargee’s consent.
A floating charge ‘floats’ over all company assets, present or future, or certain categories of assets. The assets are non-specific in that they may change over the duration of the charge, for example, stock in trade or accounts receivable.
‘Crystallisation’ of a floating charge is triggered by an event such as default on repayment of the loan or a receiver or administrator being appointed to the company. Upon crystallisation, the charge becomes fixed and attaches to the assets and the lender can enforce its rights to recover the debt. Once fixed, the chargor cannot enter into any agreements in relation to those assets.
The distinction between a fixed and floating charge is important in terms of flexibility and priorities over security interests. A floating charge gives greater flexibility to the company borrowing funds as assets may be dealt with without the lender’s consent.
From a lender’s perspective, a fixed charge is more effective as it secures the loan over a specific asset or assets and the lender is likely to receive priority in the event of a dispute. Compare this with a floating charge where other creditors may also have interests in assets which may restrict the chargee’s recourse to repayment or the amount available to satisfy the security.
Company charges after the PPSA
Briefly, the PPSA provides for the creation of security interests in personal property, the process for registering an interest and the ways that priority will be determined in the event of competing interests.
Financial interests in personal property now fall generally within the broad description of ‘security interest’ defined as:
An interest in personal property provided for by a transaction that, in substance, secures payment or performance of a obligation (without regard to the form of the transaction or the identity of the person who has title to the property).’
Lenders wishing to secure their interest in personal property and register that interest under the PPSA will do so through a complying security agreement setting out the agreed terms of the interest to be created.
The security document will need to provide for the ‘attachment’ of the interest to the company asset and the rights of the borrower (now known as the grantor) to deal with the property during the term of the loan.
A charge will be known simply as a ‘security interest’ specified to be over the assets of the company (now known as collateral). The distinction therefore between a fixed and floating charge will be immaterial as the security interest will be described as being over ‘all present and after-acquired property’. Consequently, the concepts of ‘floating’ and ‘crystallisation’ will be irrelevant.
With the PPSA relatively new, references to pre-PPSA concepts such as fixed and floating charges will likely continue. Many new concepts were introduced by the PPSA and it is likely its provisions will evolve to take account of recommendations and reviews.
If you would like to know more about company charges or security interests under the PPSA, please contact us on (03) 9600 0162 or email email@example.com.