Security agreement — the essentials

Legal practitioners need to have a good understanding of what is a security agreement, the general rules about security agreements, and matters relating to the form of security agreements. This guidance note explains these matters, and includes practical tips such as the identification of certain property by serial number in security agreements, how to obtain a copy of the relevant security agreement, and how to provide a copy of the security agreement, if requested.

See Security agreement — the essentials.

General security agreement and specific security agreement

Generally, a general security agreement, or a GSA, is used when a secured party wishes to take an interest over all of the grantor’s personal property as security for payment or performance of an obligation. “All of the grantor’s personal property” would include, for example, tangibles such as goods, and intangibles such as intellectual property. This document is often in deed form, and may therefore be called a general security deed, or GSD.

Generally, a specific security agreement, or a SSA, is used for securing an interest in various types of collateral that is “personal property” to which the Personal Property Securities Act 2009 (Cth) (PPS Act) applies (such as serial numbered collateral like motor vehicles, and goods), and “other property” that is personal property outside the scope of application of the PPS Act. Again, this document is often in deed form, and may therefore be called a specific security deed, or SSD.

This guidance note provides an overview of the GSA and the SSA, with practice tips to aid legal practitioners when drafting or reviewing these documents.

See General security agreement and specific security agreement.

Drafting security agreements

It is useful for legal practitioners to be aware that, while an agreement may not be strictly necessary, it is highly desirable. This is explained in this guidance note.

This guidance note also contains specific drafting tips regarding:

• • personal property under the National Credit Code (NCC), which is contained in Sch 1 of the National Consumer Credit Protection Act 2009 (Cth);
• • personal property not under the NCC;
• • default;
• • contracting out of the PPS Act’s enforcement provisions; and
• • confidentiality.

A checklist accompanies this guidance note. Titled “Checklist for drafting and reviewing security agreements”, when preparing or reviewing a security agreement, legal practitioners should consider the matters in this checklist.

See Drafting security agreements.

Selected key concept — grant of security

There are a number of key concepts that are relevant in all security agreements, including both a GSA and a SSA. One of these key concepts is the grant of security. Under the PPS Act regime, an entity who is a borrower or debtor is said to grant a "security interest" instead of what use to be referred to as the granting a "charge". This entity who is providing the security interest is now called the “grantor”, and is much less likely to be called the “chargor”.

This guidance note explains the provisions in a security agreement regarding the grant of security. These provisions are sometimes called the “security clause”. Examples as well as practice tips are provided to help legal practitioners apply the knowledge in practice.

See Selected key concept — grant of security.

Selected key concept – restrictions on dealing with the collateral

Another key concept that is relevant in security agreements is the restrictions on dealing with the collateral. As a start, legal practitioners need to have a good understanding of the meaning of “collateral”:

• • Collateral is personal property offered up by a grantor as security for a debt or other obligation owed to sellers, financiers or other secured parties.
• • Collateral is personal property that has a security interest attached to it.

A secured party will not want a grantor to have the ability to deal with the collateral. As such, a secured party will usually not permit a grantor to do, or to agree to do, things such as sell, assign, transfer, lease, licence, or part possession with the collateral. This guidance note explains the important concept of restrictions on dealing with the collateral by way of, among other things, practical examples.

See Selected key concept — restrictions on dealing with the collateral.

Other undertakings concerning the collateral

An undertaking is a promise by a party to another party to do or not to do certain things.

In a security agreement, a secured party will generally require a grantor to promise not to deal with the collateral, unless:

• • the grantor has the secured party’s prior written consent; or
• • the dealing is expressly permitted by the relevant loan or facility agreement or by another finance or transaction document.

It is common for a security agreement (whether a GSA or a SSA) to contain a number of other undertakings concerning the collateral. This guidance note provides examples of these undertakings, and explain what they mean. A focus is placed on undertakings regarding maintaining the collateral, which is usually driven by the secured party who will want the collateral maintained by the grantor in a manner that reasonably preserves the secured party’s interests in the property.

See Other undertakings concerning the collateral.

Other rights and powers to support security

This guidance note considers two matters regarding the use of a power of attorney when taking personal property security or when drafting a GSA or a SSA. These 2 matters are:

• • the use of a power of attorney where the grantor appoints the secured party to be its attorney so the secured party can perfect its security interest with respect to “controllable” collateral by control; and
• • the use of a power of attorney where the grantor appoints the secured party to be its attorney with the power, after an event of default has occurred, to action certain matters.

This guidance note also recaps important PPS Act concepts including perfection, and in particular, perfection by control.

See Other rights and powers to support security.