The Federation Press

Invalidation of Securities upon Insolvency

Overview

This title is a systematic and critical examination of the many and varied statutory provisions which may operate to invalidate securities taken by credit-providers when a borrower runs into financial difficulties. The book contains practical advice and commentary, having been written by a leading insolvency practitioner with over 20 years experience in the area, first as a Chartered Accountant and registered liquidator and later as a partner in a major Australian legal firm.

It is particularly topical in the current climate of rising interest rates with lenders anxious to ensure that securities taken by them remain intact if their borrowers default. On the flip-side of the coin however, where a borrower does fall into financial difficulties, a bankruptcy trustee or company liquidator will scrutinise the legislative provisions for ways to have the securities declared void.

The author analyses significant parts of the law in this area, which have never been coherently dealt with elsewhere, and makes a conscious effort to review both the legislative provisions and the more recent judicial pronouncements. He finds what he believes are numerous anomalies or “loop holes”.

An important book for: practitioners (both accountants and lawyers practising in the insolvency field), banks and other credit-providers who have a financial stake in ensuring that securities taken by them are not disturbed upon the insolvency of their customers; drafters of commercial legislation dealing with insolvency issues; and scholars interested in the subject of insolvency generally.

Reviews

“This book is part of the Australian Legal Monographs, a series of short legal treatises ...
The author is a well-known insolvency practitioner. ...
The book provides a good analysis of the relevant legislative provisions under the Corporations Law and the Bankruptcy Act 1966 (Cth), both current and prior to recent amendments. ... The general layout ... is good, the table of contents is clear and the subject heading references provide a useful guide throughout the text.
The author examines in detail many of the difficult issues of statutory construction amd the practical legal consequences of invalidation provisions. This involves a detailed analysis of the relevant statutory provisions, and highlighting gaps and apparent anomalies in the legislation.
...
There is a very good analysis of the question whether the various statutory provisions under the law which invalidate securities as against a liquidator, administrator of the company, or the Deed’s administrator, have any application where the property the subject of the security is realised by the creditor prior to the appointment of the liquidator or administrator of the company.
... The author suggests that some of the current invalidating statutory provisions may now have retrospective effect (namely, ss267, 566 and 588FF of the Corporations Law), whilst noting the introduction of s588FJ(6) to reverse the effect of Mace Builders in respect of floating charges. The author provides a very useful and insightful analysis of the question of retrospective invalidity, an issue not often considered by other commentators.
Although the book is a specialised work, it is a useful contribution to the legal analysis of the vulnerability of securities upon insolvency. This will always be a topical area.” - NSW Bar News, Summer 2000/2001

“If you work or even touch on securities in your practice, you would be unwise not to study this very newly published book as I feel that all of us can learn something new from it, even those who have been working in the field for many years.” - Law Society of Tasmania Newsletter, 2001

“It is precisely because of the complexity and lack of previous comprehensive review in this area that the book is so useful. It should especially assist practitioners who regularly advise lenders taking securities but have limited insolvency law experience.
The book is a useful checklist of legislative provisions which may invalidate securities ...
[It also] contains detailed analysis of the background law on securities and and the ranking of creditors on insolvency and of each relevant legislative provision. The analysis highlights the technicalities and deficiencies in the legislation which result in preference to secured creditors contrary to the clear policy behind [it].” - Proctor (Queensland Law Society), April 2001

“There is much need for a comprehensive and up-to-date textbook on this subject. It is constantly arising in practice. ...
The work deals with the legislative provisions which may invalidate a security on the insolvency of the debtor. ...
I found much of the book interesting and useful. It includes a treatment of many of the recent and not so recent Australian cases ...
... I found this book clear and easy to understand and use. It is well indexed and easy to find one’s way around.
The treatment of the cases is sufficiently detailed to enable a reader to know whether the case is relevant to a particular problem and whether it needs to be read in full. It also gives a concise statement of the principles for which the case stands. Yet the book does not descend into being merely a digest of relevant decisions and losing sight of the theoretical principles that run through the subject.
The author devotes some space to criticising the illogicality and inconsistency of some decisions, particularly on Corporations Law and Bankruptcy Act matters (in his two longest chapters). But there is no harm in that. Many practitioners who have wrestled with them will thoroughly agree with the criticisms. The book would be of interest to lawyers practising in insolvency, banking, consumer credit, securities or general commercial law.” - Law Institute Journal (Vic), July 2001

“Dr Hamilton shows a great deal of original thought, uniqueness and clarity of thought. The book is written in exemplary legal writing style.” - Alternative Law Journal , Vol 27( 1), Feb 2002

Table of Contents

Definitions and the Pari Passu Rule

Introduction
The rationale behind the avoidance provisions
The legislative deficiencies
The meaning of “securities”
Over what property may a security interest be given?
Security interests in other jurisdictions
The meaning of “insolvent”
Presumptions of insolvency
Conclusion

Corporations Law

Position before the Corporate Law Reform Act 1992
Position subsequent to the Corporate Law Reform Act
The new provisions
Sections 266 and 267 of the Corporations Law
Romalpa clauses and registrable charges
The interaction between the voidable transaction provisions and duties of directors
Jurisdictional considerations
Provisions which avoid charges under the Corporations Law: The effect on secured creditors and receivers
Conclusion

Bankruptcy Act

The current legislation
Sections 120, 121 and 122 of the Bankruptcy Act 1966 before amendment
Time limitation provisions
Bankruptcy Legislation Amendment Bill 1995
Bankruptcy Legislation Amendment Bill/Act 1996
Conclusion

Other Invalidating Legislation

Introduction
Sections 228 and 229 of the Property Law Act 1974 (Qld)
Proposed amendments to personal property securities legislation
The Consumer Credit Code
The Trade Practices Act 1974 (Cth)
Contracts Review Act 1980 (NSW)

Common Theme - Summary of Legislative Deficiencies

Is there a common theme with the avoidance provisions?
Corporations Law
Provisions which avoid charges under the Corporations Law: The effect on secured creditors and receivers
Bankruptcy Act
Other invalidating legislation
Summary

Of interest...