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Contract Law News August 2012

Before you enter into a guarantee update your knowledge on how the new Personal Property Securities Act affects your obligations

In the past we have provided articles and information on the Personal Property Securities Act [PPSA], which came into force earlier this year. As previously outlined, the PPSA requires the registration of a security interest in any personal property which secures the performance of an obligation, including obligations created through loan agreements. This registration of the security interest is required to prevent the lender losing priority to other registered security interests over the same property. Lenders who have not registered their security interest in the guarantor’s personal property [the guarantor may also be the borrower] may be at risk of the guarantee being discharged before the debt is repaid in the following circumstances:

  1. A variation is made to the principal loan agreement without the guarantor’s consent; or
  2. Assignment of the loan contract is made without the guarantor’s consent; or
  3. The security interest over the property of the guarantor is not registered on the PPSR (the Personal Property Securities Register)

Where a loan agreement is substantially changed, it will be necessary for the lender to have the express prior consent of the guarantor. Alternatively, lenders may include clauses within the loan agreement to protect their right to make simple variations that will not substantially affect the guarantor’s obligations. In either circumstance, it is important that consent is obtained prior to any variation, to prevent the discharge of a guarantor’s liability prior to the repayment of the debt. Generally, an assignment of a loan agreement without a guarantor’s consent, had little effect on the guarantor’s liability. However, under the PPSA, any assignment of a security interest needs to be registered by lodging a finance change statement to protect that  security interest. It may also be wise to obtain pre-consent or express consent relating to any such assignment. Finally, there will be no protection of a lender’s security interest in the guarantor’s personal property where this is not registered on the PPSR and this may prevent a lender from recovering the full sum of guaranteed monies. For guarantors who may be entitled to claim from a borrower following default by the borrower under the loan agreement, a failure by the guarantor to register a security interest on the PPSR over the borrower’s property may prevent the guarantor from being able to recover monies from the borrower. This is because if the security interest has not been registered on the PPSA the guarantor will not have priority over other registered interests. In summary, as with all other arrangements in which some form of security is involved, it is important to register this interest on the PPSR to protect the relevant party.

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