DEBT FINANCE
 S 124(1): A company has the power to borrow in the same
way as an individual, and the power to:
 (b) issue debentures;
 (e) give security by charging uncalled capital;
 (f) grant a floating charge over its property.
 S 198A(2) [RR] gives directors the power to borrow and
charge the company’s assets.
 S 113(3): A propriety company must not engage in any
activity that would require disclosure to investors under Ch
6D  cannot issue shares or debentures to a large number of
people.
DEBENTURES
 Handevel v Comptroller of Stamps: A debenture is a
document issued by a company acknowledging the debt it
owes.
 S 9: “debenture” means a chose in action that includes an
undertaking by a company to repay, as a debt, money
deposited with or lent to the company.
 The chose in action may (but need not) include a charge
over the company’s property to secure repayment of the
money.
 “debenture” does not include:
 Undertakings to repay money where the lender
deposits or lends the money in the ordinary course
of its business;
 Undertakings to repay money where the company
receives the money in the ordinary course of its
business, that isn’t part of a business of borrowing
money and providing finance.
 Undertakings by an Australian ADI to repay money
deposited with or lent to it in the ordinary course of
its banking business; and
Public issue of debentures
 The company may raise loan capital, by issuing debenture
stock certificates to investors which evidence the
indebtedness of the company to the certificate holders.
 If convertible debentures/notes, LR 7.1 may apply.
Fundraising disclosure requirements in Ch 6D
 Since the s 92(3) definition of “securities” includes
debentures, a person making public offers of debentures or
distributing application forms for public debenture offers
must lodge with ASIC a disclosure document for the offer (s
727)  disclosure requirements in Ch 6D apply  under s
260FA, Ch 2L provisions apply to the company.
Requirement for trust deed and trustee
 S 260FA: Before a company makes an offer of debentures
that needs disclosure to investors under Ch 6D, the company
must:
 enter into a trust deed that complies with s 260FB; and
 appoint a trustee that complies with s 260FC.
 S 260FB: The trust deed must provide that:
 (a) the right to enforce the company’s duty to repay;
 (b) any charge or security for repayment; and
 (c) the right to enforce any other duties that the company
and any guarantor have;
are held in trust by the trustee for the benefit of the debenture
holders.
 Pt 2L.2: Borrower’s duties. (s 260GB)
 Pt 2L.3: Guarantor’s duties. (s 260HB)
 Pt 2L.4: Trustee’s duties. (s 260JA)
Description of debentures in the disclosure document
 S 260GH(2): The company may only describe the debenture
as a “mortgage debenture” if:
 repayment of money deposited or lent under the
debenture is secured by a first registered mortgage given
to the trustee over land vested in the company or
guarantor; and
 the total debt secured by the mortgage does not exceed
60% of the land’s value.
 S 260GH(3): The company may only describe the debenture
as a “debenture” if repayment of money deposited or lent
under the debenture is secured by a charge in favour of the
trustee over tangible property of the company or guarantor
that is sufficient to meet repayment obligations under the
debenture.
 S 260GH(1): In any other case, the company must describe
the debenture as an “unsecured note”.
COMPANY CHARGES
 S 9: “Charge” means a security over property for repayment
of a debt. It includes mortgages and charges in the strict legal
sense.
Fixed charges
 A Fixed charge attaches to specific property (which may
include future property).
 The company cannot dispose of the fixed charged assets
without the lender’s consent. (the acquirer is not free of the
charge)
Floating charges
 Illingworth v Houldsworth: A Floating charge floats above a
class of property, and does not attach to specific property
within the class (“crystalise”) until some future event occurs.
 Reynolds Bros v Esanda: Until the charge crystallises, the
company may create legal interests in floating charge assets
by dealing in the ordinary course of business.
 Hart v Barnes: A charge labelled as “fixed” is nevertheless
floating if the parties intended the company to continue
dealing with the charged assets without the lender’s consent.
 Courts will look at the substance, not labels.
Dealing with floating charge assets in the ordinary course of
business
 Reynolds Bros v Esanda: Transactions are within the
ordinary course of business if they are made for the purpose
of maintaining the company as a going concern (even if it is
exceptional in nature).
 *R (seller of agricultural equipment) agreed to sell E’s
tractors as agent & earn commission.
 *R then granted Bank a floating charge over all its
assets.
 *R breached its agreement with E when it sold E’s
tractors & failed to account to its principal.
 *To reduce this debt, R transferred ownership of 10
tractors to E.
 The transfer of tractors was intended to keep R in
business as a going concern  transfer was within R’s
 DEBT FINANCE
ordinary course of business  Bank did not have title to
the 10 tractors.
 Torzillu v Brynac: The following are not in the ordinary
course of business:
 A scheme to favour particular persons over other
creditors; and
 A disposal of a company’s business as a preliminary step
in ceasing business.
 *Bank held floating charge over B’s assets.
 *B agreed to sell its “wholesale camping & leisure
goods division” (the most profitable division) to T.
 *Directors of B and T knew that B was in financial
difficulty.
 *Bank appointed receivers and managers.
 By carving out the viable portion of B under threat, the
agreement was intended to end B’s business in a way
that best benefits the directors & particular creditors 
its purpose was not to keep B in business  it wasn’t in
the ordinary course of business  title did not pass to T.
 But where severance of part of a business is considered
necessary for the orderly conduct of the business for its
survival, it may be in the ordinary course of business.
Crystallisation
 Govt Stock Investment Co v Manila Railway Co: A floating
charge crystallises (ie. attaches to specific property; becomes
a fixed charge) when:
 the company ceases to be a going concern; or
 the charge holder intervenes by enforcing the charge (eg.
when company defaults).
 Fire Nymph Products v The Heating Centre: Automatic
crystallisation may occur on any event that the company and
chargee had agreed on. It’s a matter of contract between
chargor & chargee.
 *Finance Co lent $ to THC secured by a floating charge
over all its assets.
 *The debenture agreement provided for automatic
crystallisation upon the borrower dealing with assets
other than in the ordinary course of business.
 *FN (supplier) knew that THC (retailer) would default &
go into receivership.
 *FN agreed to buy back all units it previously supplied
to THC.
 *THC defaulted & Finance Co appointed receivers to
THC.
 THC’s business was to sell the units, not to return them
to manufacturer + the agreement was intended to allow
FN to recover money from an insolvent debtor 
agreement not in ordinary course of business  floating
charge crystallised immediately before the agreement 
title did not pass to FN.
Consequences of improper dealing with charged
assets
 Vibex Industries v Gaylor: A company’s improper disposal
of charged assets does not invalidate the disposal (in the
absence of fraud), but the acquisition is subject to the
chargee’s equitable rights (if acquired with notice).
 *V granted to the Bank a fixed charge over specific
assets & a floating charge over all other assets.
 *Under the debenture agreement:
 If V deals with a major part of its undertaking
without Bank’s consent, the floating charge
becomes fixed immediately and automatically.
 V cannot deal with floating charge property except
in the ordinary course of business.
 *V sold 2 of its businesses to its directors.
 *Directors then on-sold the businesses to other parties.
 Sales of the businesses were not in ordinary course of
business + were without consent  Floating charge
crystallised automatically.
 Crystallisation assigns the floating charge assets to the
bank in equity, while legal title remained with the
company  company can still assign legal title to others.
 Although V was contractually obliged to obtain consent
to assign charged property, the transfers were still valid
 purchasers acquired legal title of the assets subject to
the equitable rights of the bank.
 Purchasers had notice of breach of the floating charge 
not bona fide purchasers for value without notice 
bank can take control of the assets.
REGISTRATION OF COMPANY CHARGES
 S 262(1): Charges that must be registered with ASIC are:
 (a) floating charges, including crystallised ones (s 9);
 (b) charges on uncalled capital;
 (c) charges on call on shares made but not paid;
 (d) charges on personal chattel, including unascertained
and future ones;
 (e) charges on goodwill, patent, trademark, copyright or
registered design;
 (f) charges on book debts;
 (g) charges on marketable securities (debentures, shares,
bonds) …;
 (h) liens or charges on crops or wool, or stock
mortgages;
 (i) charges on negotiable instruments (bills, cheques,
promissory notes).
 S 262(2): Charges on land do not have to be registered with
ASIC.
 If a registrable charge is not registered:
 the chargee generally loses to registered charges (s 280);
 if the company is wound up or has an administrator
appointed within 45 days of its creation – the charge is
void (s 266).
Registration procedure
 When a company creates a registrable charge [s 263(1)] or
acquires property subject to a registrable charge [s 264(1)], it
must lodge within 45 days:
 a notice in the prescribed form setting out details of the
charge; and
 a copy of the document creating the charge.
 S 265(2): ASIC must enter in the “Australian Register of
Company Charges”:
 the time when the notice of charge was lodged; and
 the main particulars of the charge.
 S 265(3): When s 265(2) is complied with, the charge is
deemed to be registered from that time entered in the
Register.
 DEBT FINANCE
INVALIDATION OF CHARGES
Non-registration of registrable charges
 S 262(11): Failure to lodge a notice of the charge does not
invalidate the charge.
 S 266: Where a company does not lodge a notice of charge
within 45 days of creating a registrable charge, and the
company is in liquidation, has an administrator appointed, or
executes a deed of company arrangement; then the charge is
void as against the liquidator, administrator or deed’s
administrator  chargee becomes unsecured creditor.
Charges in favour of officers
 S 267(1): A charge is void if:
 (a) a company creates a charge in favour of an officer or
his associate; and
 (b) the officer takes steps to enforce the charge within 6
months of its creation without Court leave under s
267(3).
 S 267(2): “Take a step in enforcing the charge” includes:
 (a) appointing a receiver under powers conferred by the
document creating the charge; and
 (b) assuming control of property for the purposes of
enforcing the charge.
 S 267(3): Leave of the court may be granted on application
by the officer if:
 (a) the company was solvent when the charge was
created; and
 (b) it is just & equitable to enforce the charge.
 Re The 21st Century Sign Co
 *Company granted secretary a floating charge over
assets for a loan.
 *4 months later, secretary demanded payment but the
company failed to comply.
 *Secretary then gave notice that the charge had
crystallised & appointed a receiver.
 The notice was a step in enforcing the charge + prior
leave of the court was not obtained  charge was void
under s 267(1).
Floating charges created 6 months before winding up application
 S 588FJ(1)-(2): A floating charge created during the 6
months ending on “relation-back day” is void as against the
liquidator, except so far as it secures:
 (a) advance payment to the company, or at its direction,
as consideration for the charge;
 (b) interest in such advance;
 (c) liability under a guarantee or other obligation
undertaken for the benefit of the company;
 (d) amount payable for property or services supplied to
the company;
 (e) interest on the amount so payable.
 S 588FJ(3): The floating charge is not void if the company
was solvent when the floating charge was created.
 S 9: “relation-back day” is the date of application for
winding up.
PRIORITIES OF CHARGES
 S 130(2): Lenders are taken to have notice of information in
the “Australian Register of Company Charges”.
 S 279(2): ss 280-282 are subject to variations in priorities of
charges due to:
 (a) any express or implied consent given by the holder of
a charge which would otherwise be entitled to priority;
or
 (b) any agreement between chargees.
Registered v Registered
 S 280(1)(a): A prior-RC has priority over a subsequent-RC
over the same property, unless:
 the subsequent-RC was created before the prior-RC was
created; and
 the holder of the prior-RC had notice of the subsequent-
RC when the prior-RC was created.
 S 279(3): A prior-registered floating charge is subordinate to
a subsequent-registered fixed charge created before
crystallisation, unless:
 (a) the creation of the fixed charge breached a provision
of the document creating the floating charge; and
 (b) notice of this provision was lodged before the
creation of the fixed charge.
Registered v Unregistered
 S 280(1)(b)-(c): A registered charge has priority over an
unregistered charge on the same property, unless:
 the unregistered charge was created before the registered
charge was created; and
 the holder of the registered charge had notice of the
unregistered charge when the registered charge was
created.
 S 278(1): “unregistered charge” means a registrable charge
under s 262 that hasn’t been registered.
Unregistered v Unregistered
 S 281(b): An unregistered charge has priority over another
unregistered charge on the same property that was created
later.
Unregistrable v Registered
 United Builders v Mutual Acceptance: A prior unregistrable
charge has priority over a subsequently-created registered
charge.
Floating v Fixed
 A company which has given a floating charge, may grant a
later fixed charge on the same assets that has priority over the
prior floating charge if it was granted in the ordinary course
of business – subject to provisions contained in the document
creating the floating charge.
Note: Notice = actual knowledge.
 DEBT FINANCE
ENFORCEMENT OF LENDER’S CHARGE
 A secured creditor enforces a charge by appointing a receiver
and manager.
 Pt 5.2: Receivers:
 Have the power to take control of charged assets
according to the debenture terms (s 420);
 Must take reasonable care to sell property at or more
than market value (s 420A);
 Must lodge reports (s 422).
 2 issues can interfere with the floating charge holder’s claim:
 A supplier’s claim under a retention of title clause; and
 Employees’ claims.
Retention of title clauses
 Title usually passes on delivery.
 Retention of title clause: A contractual term which provides
that ownership of goods does not pass to the buyer until the
goods are paid for.
 In the absence of such clause, the seller would stand in line
as a creditor with no rights to the goods.
Ordinary retention of title clause
 Aluminium Industries v Romalpa
 *Contract for sale of aluminium foil contained a clause
that “title in the goods remains with supplier until they
have been paid for”.
 *Retailer sold some of the foil to 3rd parties.
 The clause made the retailer a bailee of the foil, until
payment occurred.
 Unsold foil could be repossessed by supplier.
 Retailer had fiduciary obligation to account to the
supplier for the proceeds of the sold foil.
separate account), the retention of title clause protects the
proceeds. It is not a registrable charge.
Payment of certain debts in priority to claims under
floating charges
 S 433(3): A receiver must pay, out of the property coming
into his hands, the following debts accrued – in priority to
any floating charge claim:
 (a) first, any insurance expenses pursuant to s 562(1);
 (b) next, reasonable fees of the auditor;
 (c) next, any employee entitlements (eg. wages, super,
leave & retrenchment payments) pursuant to ss 556(1)
(e), (g) or (h) or 560.
 S 556: Priority payments.
 S 561: Priority of employees’ claims over floating charges.
Consequences of avoiding employee entitlements under s 433(3)
 Lumsden v Long
 The receiver is under a personal obligation to pay
priority creditors (incl. employees) out of property that
came into his hands on appointment  Avoidance of
employee entitlements under s 433(3) makes the receiver
personally liable to the employees.
 But a receiver is a trustee of the company property 
Receiver has a right of indemnity out of company
property for liabilities under s 433(3) [So the liquidator
holds those assets required to extinguish the s 433(3)
liability, on constructive trust].

All accounts clause + Proceeds clause

 Chattis Nominees v Norman: A seller may provide to retain
ownership in goods supplied until all supplied goods have
been paid for.
 Chattis Nominees v Norman: A seller may further provide
that it can, if the buyer defaults in payment, recover the
proceeds of the resold goods (only if the proceeds are to be
kept in a separate account in trust).
 *CN (manufacturer) supplied NR (retailer) with
furniture.
 *CN’s invoice contained a clause that “ownership in
such goods is retained by CN until payment is made for
the goods & all other goods supplied by CN. If such
goods are sold by NR prior to payment & they become
constituents of other goods, then the proceeds of sale is
property of CN”.
 *NR was liquidated/wound up.
 Regular dealings + no objection by purchaser  the
clause contained in supplier’s invoices is a term of each
contract.
 The clause did not create a charge over supplied goods.
 Unsold goods? “All accounts” Romalpa clause  CN
retained title in the unsold goods.
 Sold goods? No provision that NR must keep the
proceeds separate from its other funds in trust for CN 
parties did not intend any more than a debt  NR not
entitled to proceeds of sold goods.
 Associated Alloys v Metropolitan Engineering: If the parties
create a binding trust (by requiring that proceeds be kept in a