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Lending Recovery

What is a controller?

The term controller is given by the Corporations Act to anyone who takes possession of assets of a company under a charge securing those assets to a creditor. These appointments may take the form of receivers, receivers and managers, agents for the mortgagee in possession, or mortgagees in possession. The term controller is used in this FAQ to designate anyone appointed over assets, whether company assets or not, and under any form of security.

Who may appoint a controller?

Any creditor that has a valid security over assets owned by someone else can appoint a controller to take possession of those assets. The appointment must be made under the terms of the security. Usually there must be a default by the debtor and certain steps must be taken before the creditor will have a right to appoint a controller.

How and when can a controller help?

A controller can be appointed over assets, but usually only after a default in the terms of the agreement, and where the security allows such an appointment. A default usually occurs when a demand for repayment has been unsatisfied. The controller will be able to take possession of the secured assets, realize them, and pay these monies to the secured creditor in satisfaction of their debt.

What should I do before I lend money?

Lenders should do at least three things before lending money:

1. Assess the borrower's ability to repay the loan and interest. It is pointless lending money to someone that cannot repay it.
2. Prepare appropriate loan and, if appropriate, guarantee documentation. These documents will be the best evidence of the agreement if there is a dispute.
3. Consider whether you insist on a security and whether the assets offered as security are sufficient to cover the loan and potential enforcement costs.

What are the major problems with lending money?

The most common problems encountered when trying to recover loans are:

(i) Insufficient loan documentation to prove that a debt exists, or when and under what circumstances it is to be repaid.
(ii) Insufficient security documentation to be able to identify and collect assets covered under the security.
(iii) Security documentation not being properly registered and therefore unenforceable.
(iv) The value of assets secured being less than the amount of the loan.
(v) Proper default procedures not being followed before the appointment of the controller and invalidating the appointment.

Do I need to register my charge?

Generally speaking unregistered charges are enforceable if an external administrator has not been appointed. In most circumstances, registered charges will have a priority over unregistered charges, even when the registered charges were taken out at a later date. It is advisable to register any charge immediately upon execution to protect it against later charges.

Unregistered charges are likely to be unenforceable against a liquidator, administrator and a trustee in bankruptcy. The Corporations Act sets out what types of charges over company assets must be registered and the relevant state's Bills of Sales Acts also sets out the requirements for securities over non-corporate assets.

Does a controller deal with unsecured creditors?

No. The only requirement for a controller over company assets is to lodge a report with the ASIC. It is common for controllers to keep unsecured creditors informed from time to time. However, the controllers role is purely to benefit of the secured creditor. They are legally not concerned with unsecured creditors or their debts.

How does a controller sell property?

A controller has a statutory obligation to try to get market value for a property. Properties are usually offered to the market by way of a marketing program followed by an auction or tender process, but all forms of sale are permissible.

Can a liquidator void a charge?

There are a few circumstances where a charge will not be enforceable against a liquidator:

(a) where the charge is not registered;
(b) where the charge is taken out within 6 months of the liquidator's appointment and covers existing debts;
(c) where the granting of the charge gave a creditor preferential treatment to that creditor, or where the granting of the charge was uncommercial.

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: 14.1.2008