Secured Appointments
What are secured appointments?
A creditor that holds a security over an asset is known as a secured creditor or mortgagee. In appropriate circumstances, they may exercise this security and appoint someone to take control of that asset and sell it. Appointments of people to realize assets under a security are known as secured appointments. The wording of the security and the nature of the assets will determine whether the person is appointed as a Receiver, a Receiver and Manager or an Agent for the Mortgagee in Possession.
The general term under the Corporations Act for someone appointed over secured assets owned by a company is a controller. For convenience, the term controller will be used in this Fact Sheet to describe all people appointed over assets under a security, whether owned by a company or not.
Why appoint a controller?
Secured creditors will appoint a controller when the debtor is in default of the finance agreement (they have not been paid) and they wish to take action under their security to get their money back.
What law governs controllers?
This depends on whether the assets are owned by a company or a person/people.
1. If the assets are owned by a company, the appointment will be governed by the Corporations Act. This Act regulates the powers, rights and obligations of the controller and of the directors of the company that owns the assets.
2. The Bankruptcy Act does not govern appointments made over assets owned by individuals. These appointments are governed by various non-insolvency laws in each state, like the Property Law Act and Acts governing Bills of Sale, etc.
Who can be a controller?
Only registered liquidators can be appointed as controllers to assets owned by a company under the Corporations Act. Anyone can take appointments under securities that are not governed by the Corporations Act.
How do you appoint a controller?
A controller is usually appointed by a simple deed of appointment. Before making an appointment, the creditor should check that they have made all demands required under their security and taken all steps to allow them to validly appoint a controller. If they have not taken all necessary steps, the appointment may be challenged and overturned.
Who does a controller act for?
A controller acts solely for the creditor that appointed them. They do not act for any other party, though the controller may have to deal with other secured creditors who have higher ranking securities over the same assets. They do not act for the benefit unsecured creditors.
What is a controller appointed over?
They are only appointed over assets, and not the company or the person that owns the assets. Their rights are limited to dealing with the assets listed in the security and covered by the appointment. The secured assets may include a business, in which case the controller may have the right to trade and realize the business as a going concern. They do not act as liquidators or bankruptcy trustees.
What do controllers do?
Controllers have the powers that are set out in the security documentation and the relevant Acts. All controllers will:
(a) gather in and realize the assets that are covered under the security;
(b) pay any employee entitlements that have priority under the Corporations Act (if applicable); and
(c) pay money to the secured creditor.
What can unsecured creditors do?
There is no requirement for controllers to report to unsecured creditors. Controllers regulated by the Corporations Act are only required to take a few actions that provide information to unsecured creditors. They are:
(a) advertise their appointment;
(b) lodge a report under section 421A of the Corporations Act with the ASIC; and
(c) lodge receipts and payments every 6 months with the ASIC.
Controllers not governed by the Corporations Act are not required to make any information available to the unsecured creditors.
Do controllers pay dividends to unsecured creditors?
No. Apart from some employee entitlements that have priority under the Corporations Act, the controller does not have the authority to pay money to unsecured creditors.
What about employee entitlements?
The Corporations Act provides that some employee entitlements will have priority over the secured creditor. The priority is limited to monies realized from the sale of assets covered by a floating charge. Monies that are realized from the realization of fixed assets are not covered by these provisions.
There are no such priority provisions outside appointments governed by the Corporations Act.
What are floating and fixed assets?
Floating assets are assets that do not maintain the same identity throughout their life. Their exact identity will change with the conduct of the business. An examples is stock on hand, that changes as sales and purchases are made. The term floating assets comes from the floating charge, signifying that the charge floats over the top of the assets until such time as it is activated and then falls to capture those exact assets owned by the debtor at that time.
Fixed assets continue with exactly the same identity throughout their life. Examples of these assets are plant and equipment, land and buildings, motor vehicles, items as plans and patents, etc.
How does a secured appointment end?
The appointment is a contractual arrangement and ends by the controller executing a deed of resignation, or by the secured creditor executing a termination notice. There is no requirement for a Court Order or other formal process to end an appointment. But the appointment of the controller may end if the Court orders that the appointment is not valid for any reason.
Who pays the controller?
The secured creditor pays the controller. The security documentation will usually allow the secured creditor to recover those costs from the assets under the charge.
For more detailed information:
Disclaimer
The enclosed information is of necessity a brief
overview and it is not intended that readers should rely
wholly on the information contained herein. No warranty
express or implied is given in respect of the information
provided and accordingly no responsibility is taken by
Worrells or any member of the firm for any loss resulting
from any error or omission contained within this
fact sheet.
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Last Updated: 30.1.2008