Enforcement of a Security Interest

Upon a debtor’s default, the Act confers a range of statutory enforcement rights on secured parties. These rights are in addition to any rights conferred by the security agreement. A secured party is not required to obtain judgment against the debtor before taking enforcement action.

Parties are free to contract out of some enforcement provisions. However, in the case of property used predominantly for personal, domestic or household purposes (consumer property), this right is significantly limited to avoid duplication with the National Credit Code.

Any secured party may initiate enforcement action. But a higher-ranking secured party may obtain possession of collateral from a lower-ranking secured party.

Where collateral is liquid, such as debts owed by third parties to the grantor, the act provides for a statutory garnishee-like remedy by notice to the third party debtor.

In other cases, the Act provides the secured party with powers of seizure and disposal. A secured party may sell or lease the collateral to third parties. Alternatively, if effective notice is given and there are no objections, the secured party itself may purchase or retain the collateral. Written details of any dealing with collateral should be kept by the secured party as both the grantor and other secured parties may request a statement of accounts.

All sales of collateral must be at market value or otherwise at the best price reasonably obtainable in the circumstances. A secured party may only purchase collateral at a public sale and at market value.

An amount, proceeds or personal property derived from an enforcement process, must be allocated in order of:

  • obligations to persons holding interests other than security interests in the collateral that have a priority than the interest of the secured party;
  • reasonable expenses incurred in relation to the enforcement of security interests against the collateral, to the extent that the expenses are secured by the security interests (reasonably enforcement expenses are taken to be secured)
  • obligations to persons holding security interests in the collateral that have a higher priority than the interest of the secured party;
  • obligations to the secured party that are secured by the security interest in the collateral;
  • obligations to persons holding interests or security interests in the collateral that have a lower priority than the interest of the secured party; and
  • to the grantor.

exclusions

The statutory enforcement rights do not apply to:

  • Transactions deemed to be security interest (transfer of an account or chattel not as security, PPS lease, commercial consignment);
  • Investment instruments perfected by possession or control;
  • Property subject to a receiver or manager under the Corporations Act

Enforcement rights & remedies

Personal property & land used to secure the same obligation

The Act enables a secured party who has a security interest in both land and personal property to take enforcement steps as if the personal property were land. When making this decision, the secured party must act reasonably and consider:

  • The respective values of the personal property and the land;
  • Whether there is any connection between, and the nature of any connection between, the personal property and the land;
  • Whether the land and the personal property are both located in the same state or territory;
  • Such other matters as are relevant to the efficient enforcement of the security interest and the interest of the land.

These matters are intended as a guide.

A secured party intending to so act must give notice in the prescribed form to the grantor, a secured party perfecting immediately before the decision is made and any other secured party who has notified the secured party of its interest.

A secured party adopting this course must apply the distribution of proceeds hierarchy

Enforcement of security interests in liquid assets

Upon a debtor’s default, the secured party may effectively issue a written garnishee notice (in approved form) to the grantor’s third party debtors. These apply to a debtor’s liquid assets – accounts, chattel paper and negotiable instruments.

Upon receipt of the notice, the third party debtor must pay the secured party any amount owed to the grantor within 5 business days. If the debt is not yet due, the third party debtor has 5 business days from the due date.

Any amount received from a third party debtor must be applied by the secured party towards the secured obligation. The distribution table applies to any monies received from the third party debtor.

Notice to higher priority parties

If a lower ranking secured party intends to take garnishee action, it must give written notice to higher ranking secured parties. The notice must be given to the higher priority party at least 10 business days before the action is to be taken and must:

  • contain the name of the secured party giving the notice; and
  • contain a description of the collateral; and
  • state that the enforcing party proposes to take action against the liquid assets of the grantor (whether by garnishee notice or seizure of proceeds of collateral);
  • state the address for notice of the lower ranking secured party;

Upon being notified, a higher priority party may elect to continue the enforcement process by giving notice to the lower priority party.

A secured party must also give notice to the grantor of any action it intends to take over the liquid assets of the grantor at least 5 business days before the action is taken.

Seizure of collateral

If a debtor is in default under a security agreement, the Act provides that the secured party may seize collateral by any methods permitted by law.

A secured party may seize intangible property (predominantly intellectual property licences) by giving notice to the grantor and any licensor that the giving of notice constitutes seizure of the property. Parties to security agreement may also agree upon another method of seizure.

A secured party who has perfected their security interest by possession or control may seize collateral by provision of the same notice.

Seizure of collateral does not perfect a security interest.

Apparent possession

Where collateral cannot be readily moved from a grantor’s premises, a secured party may seize the collateral by taking ‘apparent possession’.

A secured party which seizes collateral must either dispose of the collateral or retain the collateral. Subject to the security agreement, the secured party is entitled to a reasonable period in which to secure, store and value the collateral and determine how to deal with the collateral.

Rights of higher priority party to seize collateral

A higher priority party may, by notice, request possession of collateral from a lower priority party. Upon receipt of notice, the lower priority party must give up possession of collateral within 5 business days or such further period as is reasonable. In return, a higher priority must pay an amount to the lower priority party reflecting its reasonable enforcement expenses. The lower priority party must provide evidence to support this amount. Generally, the higher priority party must pay the amount of enforcement expenses within 20 days of disposal of the collateral or from when the evidence is received.

Disposal of collateral

Once a secured party has seized collateral, it may dispose of it by:

  • Private or public sale (including auction or closed tender)
  • Lease, if the security agreement so provides;
  • If the collateral is intellectual property – by licence;

Duty to obtain market value

A secured party who disposes of collateral owes a duty to exercise all reasonable care:

To obtain at least market value for the collateral; or

Otherwise, to obtain the best price that is reasonably obtainable at the time of disposal, having regard to the circumstances existing at the time.

Statement of account

On request by another secured party or grantor, the secured party must provide a written statement of account.  The statement of account must be provided within 20 business days after the request. The statement of account must show:

  • In the case of disposal by lease – the total amount received, and expected to be received during the period from seizure to the end of the lease;
  • In any other case – the total amount received from the disposal of the collateral;
  • The total expenses relating to disposal of the collateral;
  • Any amounts paid to secured parties; and
  • The balance owing by the secured party to the grantor, or by the debtor to the secured party, as the case may be.

6 months

If the secured party has not disposed of collateral within 6 months, it must give a written statement of account to any other person with a security interest or the grantor within 20 business day of their request. The 6 month notice must:

  • State that the secured party has not disposed of the collateral; and
  • Show the total amount received in relation to the collateral during the 6 month period starting from the seizure date of the collateral; and
  • Show the amount of expenses relating to the retention of the collateral

Collateral disposed of by enforcement mechanisms is taken free of the interests of the grantor and all security interests in the collateral.

A secured party may also dispose of collateral by purchasing it if:

  • The secured party gives the required notice; and
  • No notice of objection is given to the secured party.

If a secured party receives a notice of objection, the collateral must either be sold or leased – the secured party cannot retain or purchase the collateral. The secured party is however, entitled to request the objector to provide proof of their security interest.

Importantly, a secured party may only purchase collateral:

  • By public sale; and
  • By paying at least the market value at the time of the purchase.

A secured party who proposes to dispose of collateral (including by purchasing it) must give the notice to the grantor and any higher priority secured party.

The notice must:

  • Contain the name of the secured party giving the notice; and
  • Contain a description of the collateral; and
  • State that the secured party proposes to dispose of the collateral, unless an obligation secured by the security interest is performed or an amount paid, within 10 business days after the notice is given; and
  • State that the notice is given for the purposes of this Act; and
  • If the secured party is proposing to dispose of the collateral by purchase:
  • Contain details of rights of objection; and
  • Contain the address to which a notice of objection may be given under section 137; and
  • Any matters required by the regulations.

Notice to the grantor or higher priority parties is not required if:

  • The secured party believes on reasonable grounds that the secured party was induced to enter in the relevant security agreement by fraud; or
  • The secured party believes on reasonable grounds that the collateral might perish within 10 business days after the date the collateral is seized; or
  • The secured party believes on reasonable grounds that there will be a material decline in the value of the collateral if it is not disposed of immediately after the day the collateral is seized;
  • The secured party believes on reasonable grounds that the expense of preserving the collateral is disproportionately large in relation to its value; or
  • The collateral is foreign currency; or
  • The collateral is to be disposed of in accordance with the operating rules of a clearing and settlement facility.

Collateral disposed of by the secured party (including by purchasing it) is acquired free of all security interests and the interest of the grantor.

Retaining collateral

Alternatively, a secured party may elect to retain seized collateral if:

  • The secured party gives notice; and
  • No notice of objection is given to the secured party.

Notice must be given to:

  • The grantor; and
  • Another registered secured party; and
  • If the retaining party is a PMSI holder – any other lower priority secured parties registered in the collateral.

The secured party must give notice at least 10 business days before the first steps are taken to retain the collateral.

A notice must be given in the approved form and must:

  • Contain the name of the secured party giving the notice; and
  • Contain a description of the collateral; and
  • State that the secured party proposes to retain  the collateral, unless an obligation is performed or an amount paid, secured by the security interest, within 10 business days after the notice is given; and
  • State the obligation to be performed, or the amount of payment required, before the day specified in accordance with paragraph (c), to satisfy the obligation secured by the security interest in the collateral; and
  • Contain details of rights of objection; and
  • Contain the address to which a notice of objection may be given;
  • Any matters required by the regulations

If notice is given and no notice of objection is given to the secured party, 10 days after the notice is given, the secured party may take steps to transfer title to it. When title does in fact pass, the secured party takes title free from the interests of the grantor.

Redemption of collateral

A secured party or grantor may redeem collateral by paying the amount secured by the obligation together with any enforcement expenses. A grantor has priority for this purpose.

A debtor may also reinstate a security agreement by paying the amounts in arrears (not including an acceleration clause) together with any enforcement costs. A security agreement may only be reinstated once.

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