Asset Protection 2: Registered Debentures (2 March 2011)
This is the second of a series of articles regarding asset protection.
This article discusses the use of registered debentures for asset protection purposes.
A “debenture” is a mortgage or “charge” over the whole of the assets and undertaking of a company, to secure monies it owes to the debenture-holder or “chargee”.
A debenture is also often described as a “fixed and floating charge”:
(1) the “fixed” component attaches to company’s fixed assets, such as plant and equipment, which the company may not dispose of without the debenture-holder’s consent;
(2) the “floating” component “hovers” above the company’s trading assets (such as stock and cash) so that they may be dealt with in the ordinary course of business, but then becomes fixed on those assets if the company defaults under the terms of the debenture, such as failing to pay an amount that falls due to the debenture-holder or if a liquidator or administrator is appointed.
By securing shareholder or related party loans with debentures, the shareholder or related party creditor will be in a strong position if the company becomes insolvent, by being able to a appoint a receiver to realise the company’s assets and pay the amounts owing to the related party creditor ahead of the company’s unsecured creditors.
However there are a number of important requirements that need to be observed:
1. Under the Corporations Act, most kinds of charge, including debentures, must be registered by lodging a special form with ASIC within 45 days. Failing to register a registrable charge will be render it void against a liquidator or administrator.
2. No step may be taken by the related party chargee to enforce the charge for 6 months after its creation without court permission (which is rarely granted).
3. A debenture in favour of a related party creditor will be rendered void if, within 6 months after its creation, an administrator is appointed or a successful winding up action is commenced against the company.
For these reasons, debentures in favour of related parties should be created and registered as soon as possible, before any monies are advanced.
For more information about asset protection, do not hesitate to contact Demian Walton or David Lurie of our firm on (03) 8602 4000.
The content of this publication is intended only to provide a summary and general overview of the subject matter covered. It is not intended to be comprehensive nor does it constitute legal advice.
