Contributed By Hogan Lovells International LLP (Sydney)
The combination of a tightening global regulatory environment, a slowdown in China, political uncertainty arising out of Brexit, and the continued impact of US trade tariffs have all resulted in a contraction of the syndicated loan market in Australia and the Asia Pacific region in 2018, continuing into 2019.
However, excluding China and Japan, Australia is ahead of every other jurisdiction in Asia in terms of overall loan volume. The syndicated loan market in Asia Pacific (excluding Japan) dropped by 12.7% for the first eight months of 2019 compared with the same period in 2018, with Australia's volume falling by 24.9%.
The high-yield market (particularly in the USA and, more recently, Europe) has played a significant role in expanding the sources of funds available for financing acquisitions in Australia, particularly for large US and European corporate borrowers and private equity firms that have a strong track record and established relationships with investors in those markets.
This has had a natural flow-on effect on the terms and structures used in the Australian market, and Australian law-governed and AUD-denominated Term Loan B facilities (funded primarily by private debt funds and Australian pension/superannuation funds) are now being seen on a regular basis.
The Australian domestic corporate bond market is also continuing to evolve, providing an alternative source of funds for corporate issuers as yield-hungry investors look to alternatives amid low interest rates.
There has been a significant growth in alternative credit providers in the Australian loan market – typically private debt funds and now, increasingly, Australian pension/superannuation funds lending directly into deals, consistent with the process of disintermediation being seen in the USA and Europe. This has resulted in the importation of terms from the US and European markets, including "covenant-lite" structures. These structures are considerably more borrower-friendly than those that were previously available in the Australian bank-dominated financing market, which typically require quarterly testing of financial covenants; conversely, the "covenant-lite" regime typically only tests financial covenants at the time additional indebtedness is incurred or when dividends are paid.
The use and popularity of unitranche deals are increasing in Australia – typically provided by debt funds and institutional lenders in the middle market space to facilitate leveraged buy-outs where longer-term capital and higher levels of leverage are desired. The term debt provided by the unitranche investors is typically secured by the same assets as the revolving working capital facilities and hedging provided by traditional banks, but with the latter on a super-senior basis whereby the proceeds of the enforcement of security are applied first to repay the revolver and swap-providers before the term-lenders.
Prepaid interest rate caps are also being used instead of secured interest rate swaps. These are popular with unitranche investors as there are no swap liabilities that rank ahead of them in an enforcement scenario.
"Fronted bank guarantee" facilities (structured like a typical bank guarantee or a letter of credit facility) are emerging, under which insurance companies or other sureties take the credit risk on a borrower default. This frees up bank capacity to provide credit in other forms and provides an additional source of funding support from the insurance market.
The banking industry in Australia continues to be under intense scrutiny as regulators try to keep up with global standards, and various recommendations of the recent Banking Royal Commission are implemented. Key priorities are as follows.
New APRA Prudential Standards for ADIs Managing Liquidity Risks
The Australian Prudential Regulation Authority (APRA) responded to the Basel Committee's new banking stability measures, by releasing a draft prudential standard and practice guide in September 2016. The changes commenced on 1 January 2018 and require authorised deposit-taking institutions (ADIs) to use more stable sources to fund their activities. The changes follow consultation by APRA on the net stable funding ratio and liquid assets requirement for foreign banks.
Insolvency Law Reform
In September 2017, the Federal Government introduced "safe harbour" defences to personal liability of directors in relation to insolvent trading, where the directors take a course of action that is reasonably likely to lead to a better outcome for the company and its creditors (such as implementing a restructuring plan). Further, in July 2018, the Federal Government introduced a stay on the enforcement of ipso facto clauses – ie, enforcement by reason only of an event of default comprising a company entering into voluntary administration or receivership, or commencing a scheme of arrangement. This does not apply to certain types of agreements or agreements entered into before 1 July 2018. These reforms are aimed at encouraging the preservation and turnaround of enterprise value in distressed businesses and may lead to greater engagement by the secondary debt market.
A foreign lender proposing to provide financing to a company in Australia may be subject to various Australian regulatory authorisation and licensing regimes. While the provision of a single loan to an Australian company will not generally result in a requirement to register or obtain authorisations or licences, the rules are complex and the totality of the lender's proposed Australian business, as well as the nature of the borrower, will need to be considered.
Foreign Company Registration
A company incorporated outside of Australia that is “carrying on a business” in Australia must be registered with Australia’s corporate regulatory body, the Australian Securities and Investments Commission (ASIC). The meaning of “carrying on a business” is broad. As a starting point, a company will generally be considered to be carrying on a business in Australia if it has a place of business, establishes or uses a share transfer or registration office, or deals with property in Australia. Registration with ASIC involves completion of various forms and the payment of a fee. Foreign companies registered in Australia are also subject to some other local filing and conduct requirements.
Financial Services Regulation
A person who carries on a financial services business in Australia is generally required to hold an Australian Financial Services licence (AFSL) and is subject to additional conduct requirements. A financial service will include dealing in a financial product, providing financial product advice, making a market for a financial product or providing a custodial or depository service. It does not matter whether these activities are conducted outside Australia – the regulatory regime will apply if there is sufficient connection to Australia. The AFSL regime covers a wide range of financial products. While the provision of a credit facility and holding security are generally excluded from the AFSL regime, the issuance, arrangement or acquisition of a derivative, swap or deposit product in Australia will be captured.
If an entity intends to carry on a banking business in Australia, it will need to be approved as an authorised deposit-taking institution (ADI) by the Australian Prudential Regulation Authority (APRA) before it can do so. Even if the entity only contemplates lending in Australia, it may still need APRA authorisation to use the terms “bank”, “banking”, “credit union” or similar expressions in the conduct of that business. A foreign ADI's operations will be subject to conditions imposed by APRA upon authorisation.
Otherwise, foreign entities looking to carry on a banking business in Australia may set up a local subsidiary or provide those services through a local branch. Where a local branch is established, it will generally only be authorised to provide wholesale services. Conduct and disclosure requirements are more onerous where services are provided to retail clients.
Consumer Credit Regulation
Licensing under Australian consumer credit legislation is required where a foreign entity is providing financing to individuals for personal, domestic or household purposes.
Australian anti-money laundering and counter-terrorism financing (AML/CTF) legislation imposes various requirements on certain entities (including banks and other financial services providers) in the conduct of any business that has a geographical link with Australia. If services are provided at or through a permanent office in Australia, this geographical link will be established.
In order to comply with the AML/CTF requirements, the entity must establish a risk assessment and management programme to comply with the legislation. The programme will need to include customer identification and verification procedures as well as monitoring and reporting protocols in respect of transactions and suspicious matters. Enhanced customer due diligence is required for "politically exposed persons" and for counterparties in prescribed countries (currently Iran and the Democratic People's Republic of Korea). An AML report must also be submitted annually to the Australian Transaction Reports and Analysis Centre (AUSTRAC).
Financial Sector (Collection of Data) Act 2001 ("FSCODA")
Certain registration and reporting requirements apply to lenders under FSCODA, depending on whether the scale and nature of a lender's activity in Australia meet certain thresholds. The requirements are complicated but, generally speaking, if 50% of a lender's assets in Australia consist of debts due from the provision of finance, the lender will be required to register with APRA and report as required under FSCODA.
While foreign lenders may need to consider whether the nature of their operations in Australia require them to be registered as a foreign company with ASIC, to be approved or authorised by APRA, or licensed under the AFSL regime or consumer credit legislation, there are generally no restrictions on the provision of loans by foreign lenders.
Guarantees and security may be provided to foreign lenders. In taking or enforcing security over Australian assets, a foreign lender should consider whether Foreign Investment Review Board (FIRB) approval is required.
The foreign investment rules generally require foreign entities that acquire a “substantial interest” in Australian assets to notify FIRB and obtain FIRB approval. The threshold for mandatory notification has recently been increased from 15% to 20% (and goes up to 40% where the interest is held together with unrelated foreign entities). Various monetary thresholds also apply for certain types of assets.
An interest in Australian assets includes a security interest in those assets. Ordinary financiers can generally rely on the “moneylender” exemption to FIRB notification and approval requirements. Amendments under the Foreign Acquisitions and Takeovers Regulation 2015 broadened the concept of a "moneylender" so that it now covers entities other than traditional banks; security trustees and subsidiaries of moneylenders can now rely on this exemption. The rules are different on enforcement of security for foreign government investors. The term "foreign government investor" is broadly defined and can include foreign governments or separate government entities, or corporations in which a foreign government or separate government entity holds an interest of at least 20%. Such investors will now only qualify for the moneylender exemption if they comply with certain time requirements in relation to the disposal of the secured property. Where the foreign government investor is an ADI or a subsidiary of an ADI, the exemption will apply if the interest is disposed of (or a genuine sale process has commenced) within 12 months of the acquisition of the interest. For non-ADIs, the time period is six months.
Australia does not have any general foreign exchange controls. However, the Reserve Bank of Australia (RBA) and the Department of Foreign Affairs and Trade (DFAT) may impose sanctions restricting foreign currency transactions with certain foreign countries and their nationals. If the proposed recipient of a payment under a financing arrangement is on the sanctions list, RBA or DFAT approval will be required before that payment can be made.
There are no restrictions on the use of proceeds from loans or debt securities, other than the restrictions imposed contractually under the loan or bond documentation.
Agency and trust concepts are well-recognised in Australia and are commonly used in syndicated financing transactions.
Agents will generally act in a non-fiduciary capacity, manage the facility, and operate as the main point of contact for the borrower and the lenders. In syndicated deals or transactions involving multiple financing arrangements, security is generally held by a security trustee on trust for the relevant financiers. The security trust deed will set out enforcement mechanics and a waterfall for the distribution of enforcement proceeds.
Under Australian law, debt can be either assigned or novated. Assignment will only transfer the rights of the lender in respect of the debt, and is only used where a facility is fully drawn and there is no obligation to provide funding in the future. A novation of debt results in a transfer of both the rights and the obligations of the lender.
Assignments can generally be effected without the consent of the borrower. Novations generally require some involvement from the borrower, though the agent is usually authorised to sign transfers on behalf of the borrower on syndicated deals. Finance documents, however, typically include restrictions on assignment or novation, unless the transfer is to an affiliate or another lender, or takes place post-default. Transfers to competitors may also be prohibited.
Security interests (and corresponding registrations) will need to be transferred to the incoming lender on bilateral secured deals. On secured syndicated transactions, the new lender will need to accede to the security trust arrangements as a beneficiary. Accession mechanics can be built into the transfer document or set out in a separate accession deed.
Sub-participation is also permitted under Australian law. With sub-participation, the original lender remains as lender of record, while economic risk and, typically, some or all of the decision-making power shifts to the incoming lender. Sub-participation arrangements do not generally require notice to, or the consent of, the borrower unless sub-participation is specifically prohibited.
There are no restrictions on debt buy-back by a borrower or sponsor under Australian law. However, loan documentation may prohibit an obligor or its affiliates from becoming lenders, or disenfranchisement provisions may prevent them from having a vote in any decision-making by the lenders.
In Australia, provisions dealing with “certain funds” are required for takeovers of listed public companies. Under the Corporations Act 2001, there must be a firm commitment of adequate funding in respect of a bid, and a reasonable expectation that the funding will in fact be available.
Certain funds provisions are also standard in non-public company deals in the Australian market where sponsors demand the same certainty of funding in connection with their financing arrangements. Sponsors can often gain an advantage over other bidders by presenting an offer on a certain funds basis, with few conditions. Vendors also impose certain funds requirements on bidders to minimise the risk of a transaction falling over due to lack of funding.
Under certain funds provisions, lenders cannot refuse to fund unless certain specified defaults (relating to the bidder and its holding company and not the target) have occurred. These defaults are typically linked to the failure to obtain approvals in respect of the transaction, the breach of major representations (status, power, authority, enforceability and legality), the breach of major undertakings (negative pledge provisions and restrictions on disposals, distributions, financial indebtedness and guarantees) and fundamental defaults (non-payment, insolvency, illegality and unenforceability).
Parties generally move forward with an acquisition on the basis of certain funds provisions contained in credit-approved commitment letters and detailed long-form term sheets. However, full documentation is often agreed and signed in advance of launching a bid where the post-bid timetable is short.
Details of external funding arrangements in respect of a takeover of a public listed company, together with any restrictions on the availability of that funding, must be disclosed in a bidder's statement lodged with ASIC. In addition, the Takeovers Panel may require evidence of a reasonable expectation of sufficient funding in any review of a public acquisition.
Unless a concession or exemption applies, interest withholding tax is generally levied at a rate of 10% on payments of interest (or amounts in the nature of, or as a substitute for, interest) made by Australian borrowers to foreign lenders. Exemptions commonly relied upon by offshore financiers include:
The public offer exemption provides more flexibility and liquidity. If a financing is Section 128F-compliant, the exemptions will apply irrespective of who the lenders are or where they are domiciled. In contrast, double tax treaty concessions are personal to a particular qualifying lender from a particular jurisdiction.
Stamp duty on security interests was recently abolished in the last Australian jurisdiction that imposed it (New South Wales). Apart from interest withholding tax, there are no other taxes, duties or similar charges that apply.
While statutory protections against excessive interest rates and other unfair contract terms apply to natural persons, corporate borrowers do not have the benefit of these protections. Interest rates do not have to reflect the actual cost of funding applicable to the lender – a risk premium or margin can be built into interest payable under the financing arrangements. Where a default interest rate or late payment fee is excessive, it may be found to be a penalty under common law. Charges that are not commensurate with a genuine pre-estimate of actual provable loss are liable to be set aside.
Most assets are available as collateral to support financial obligations. Where the consent of a counterparty is required for security over contractual rights, those rights are usually excluded from all-asset security until consent is obtained. The grantor will typically be required to use reasonable endeavours to obtain that consent within a reasonable time. Other property may need to be carved out of the security where specific statutory restrictions apply, or where adverse consequences flow from the provision of security over those assets and which outweigh the benefits of inclusion of those assets in the security package.
General security agreements usually cover all present and after-acquired property of a grantor, including real property and personal property. Lenders generally prefer all-asset security as it provides greater optionality on enforcement. All-asset security allows a receiver and manager to be appointed to trade a company during enforcement, to maximise value. Lenders with all-asset security will also not be subject to the statutory moratorium on enforcement, which arises upon the appointment of a voluntary administrator, if that security is enforced within 13 business days of notice of the appointment.
Real Property Security
If the security package includes material freehold or leasehold real property interests, a registered real property mortgage should be taken out.
Security interests in land are governed by the legislation of the state or territory in which the property is located. Under each of these statutory regimes, real property mortgages are required to be in writing and must adequately identify the land subject to the mortgage and the secured debt. The mortgage must also be in the form of the National Mortgage Form and comply with various formalities relating to execution and other matters. Formalities can vary between jurisdictions.
Although there is no absolute requirement to register a real property mortgage, there are significant benefits in doing so. In the absence of fraud, a registered real property mortgage will generally defeat all unregistered interests and will benefit from a statutory “first in time” priority regime in relation to other registered interests.
To register, the mortgage must be lodged via e-conveyancing (which has become standard, or mandatory in some jurisdictions) through a provider (eg, PEXA), together with the associated certificates of title and a fee (which varies between jurisdictions but is generally between AUD100 and AUD200, including GST). Some jurisdictions may also require formal verification of the identity and authority of the mortgagor at the time of execution of the mortgage.
Personal Property Security
The Personal Property Securities Act 2009 (PPSA) came into effect in 2012 and revamped Australia’s personal property security regime. The PPSA has broad application to all types of property other than land and fixtures (although it will have some application in respect of leases) and certain statutory licences (including mining and petroleum tenements and water licences). The PPSA also does not apply to liens, charges and interests arising by operation of statute or general law.
The PPSA applies to all interests in personal property that, in substance, secure the payment or performance of an obligation. It does not distinguish between property that is owned by the grantor and property that is merely in its possession. A number of non-traditional security interests generally associated with asset financing arrangements now fall within the ambit of the PPSA, including retention of title arrangements, commercial consignment arrangements and leases, and bailments of personal property for a term of more than two years. Suppliers and lessors must now register on the Personal Property Securities Register (PPSR) to protect their ownership interest under these types of arrangements. These security interests (with some exceptions) are generally considered to be “purchase money security interests” (PMSIs), and are afforded “super-priority” over most other security interests. To achieve PMSI status and elevated priority, the registration must clearly state that the security interest is a PMSI and must be made before or at the time the grantor obtains possession of inventory, or within 15 business days of possession of other collateral.
There are three ways to perfect a security interest under the PPSA: by taking physical possession of tangible collateral, by asserting control over certain types of intangible collateral and space objects, or by registration of an electronic financing statement on the PPSR. While perfection by control offers the greatest protection, the most common way to perfect is by registration. A registration fee (ranging from AUD6 to AUD115 including GST, depending on the duration of the registration) is payable. While registration can be undertaken relatively quickly and easily, secured parties may also need to comply with certain timing requirements. The security interest must generally be registered within 20 business days of entry into the security agreement, unless it is otherwise perfected; failure to do so may result in the extinguishment of the security interest on insolvency.
Ensuring that a security interest is described in accordance with the PPSA requirements is essential to protecting that security interest. Certain classes of assets may or must be described by serial number on the PPSR. Aircraft objects and consumer property must always be described by serial number, while commercial serial-numbered property maybe described by serial number. If a serial number is incorrect or missing, a buyer or lessee will take that property free of the security interest. A security interest may also be defective (and therefore ineffective) if certain prescribed registration requirements are not met, or if the registration is "seriously misleading", which will be the case if a search of the register (using appropriate parameters) would not disclose the registration.
Floating charges are permitted – assets that were previously classified as “floating charge” assets (eg, inventory, stock, receivables, cash and bank accounts) are now known as “circulating assets”. The grantor of a security interest over circulating assets can generally deal freely with those assets, unless the secured party exerts control over those assets (eg, by requiring the proceeds of receivables to be deposited to a bank account controlled by the secured party). Banks and other authorised deposit-taking institutions are deemed to have control over bank accounts held with them. Where bank accounts are not held by the secured party, an account control agreement is generally required to give the secured party control of those bank accounts and to regulate priorities between the secured party and the account bank.
Limited specific security agreements may be taken where security is only required in respect of certain assets (eg, shares or cash deposits). If limited security is contemplated, lenders often require a supplemental “featherweight” charge over all of the other assets of the company, in order to minimise the risk of the statutory moratorium on enforcement applying on insolvency. Featherweight security “floats” over the assets and does not attach or prevent the company from dealing with the assets until it becomes enforceable upon the appointment of a voluntary administrator. Recourse under featherweight security may also be limited to a nominal amount.
Downstream, upstream and cross-stream guarantees may be provided by an Australian company, provided there are no restrictions to do so in the company's constituent documents. Two pertinent issues must be considered. First, in accordance with the prohibition on financial assistance in Australian Corporations Law, it must be considered whether or not the guarantee constitutes financial assistance (discussedbelow in 5.4 Restrictions on Target). Second, company directors fulfilling their duties to the company should closely consider whether or not the transaction is sufficiently beneficial to the company (discussed below in 5.5 Other Restrictions). Particular attention to these issues should be given in upstream and cross-stream guarantees.
Australian companies may provide guarantees and security in respect of the obligations of other members of their corporate group, but a company’s constituent documents may limit its ability to do so. There are also a number of statutory provisions that might restrict the provision of a guarantee or security, including restrictions on the provision of financial assistance, corporate benefit rules and prohibitions on related party benefits.
Under Section 260A of the Corporations Act 2001 (Corporations Act), Australian companies are generally prohibited from providing financial assistance (such as a guarantee or security) in connection with the direct or indirect acquisition of their own shares or shares in their holding company. Lenders providing acquisition finance or refinancing and looking to take guarantees and security from target companies need to be mindful of these restrictions. While the validity of a transaction is not affected by a contravention of the financial assistance provisions, any person involved (other than the company itself) in the contravention may be subject to civil liability, and to criminal liability where the breach is dishonest. Liability may also extend to a lender.
There are a number of specified exemptions set out in the Corporations Act, although these exemptions rarely apply in practice. Financial assistance is also permitted if there is no material prejudice to the company or its shareholders or creditors. Lenders will generally be reluctant to rely on this exemption, and will usually insist upon the financial assistance being “whitewashed” or pre-approved by shareholders in accordance with Section 260B of the Corporations Act. This requires a general meeting and either (i) a special resolution (75%) of the shareholders (excluding the person acquiring the shares) or (ii) a unanimous resolution to approve the financial assistance, lodgement of the shareholder approval documents with ASIC, and a mandatory 14-day waiting period before financial assistance can be provided. For acquisition financings, a condition subsequent is usually included, which requires guarantees and securities to be provided by target companies within 30-45 days of financial close. This allows the new shareholder to approve the financial assistance, and gives the company sufficient time to comply with the whitewash procedures.
In considering whether to provide a guarantee or security, the directors of a company will need to be comfortable that the transaction is sufficiently beneficial to the company itself – the directors may consider direct benefits (the ability to utilise the underlying facility) and indirect benefits (continued support from group members). A company’s constitution may provide that it may act in the best interests of its holding company, which assists if there is any doubt as to corporate benefit. If sufficient corporate benefit is not established, unanimous shareholder approval ought to be obtained.
Related Party Benefit
Chapter 2E of the Corporations Act 2001 also contains restrictions on public companies granting financial benefits to related parties, unless a special majority (75%) of the shareholders have approved the transaction and the benefit is given within 15 months of that approval. The most common exemptions include arms-length transactions and transactions between entities within a wholly-owned corporate group.
Real property security may be released by lodgement of the prescribed discharge form at the land titles office in the state or territory in which the property is located (through PEXA where mandatory). Each Australian jurisdiction has its own prescribed forms, as well as formalities to be observed in the completion and lodgement of those forms. A discharge may operate as a full release of all titles subject to the mortgage, or as a partial release of only some of the titles. A registration fee (which varies between jurisdictions but is generally between AUD100 and AUD200, including GST) is payable.
A written deed of release is generally entered into to release personal property from security. This can be executed as a deed poll, allowing third parties (such as purchasers or senior financiers) to rely on that release. The deed of release may relate to all of the assets subject to the security interest, or to some assets only. The deed of release will normally include an undertaking by the secured party to remove or amend registrations on the PPSR. For consumer property and serial-numbered goods, a financing change statement discharging or amending the registration must be lodged within five business days of payment of all secured amounts. For other property, the market position is that registrations are to be removed or amended within ten business days. A grantor or any other interested person can also apply to the registrar to have a registration amended or removed if it has been made in error, or if it no longer secures any financial obligations.
Priority between two unregistered mortgages will generally be governed by the common law. The earlier mortgage will generally prevail (with certain exceptions). Where there are two or more registered mortgages over the same land, priority is governed by the relevant real property legislation, and the mortgage registered first will generally have priority, regardless of whether or not the mortgagee has notice of a prior unregistered security interest over the land. Priority may be restricted in respect of advances made after a mortgagee had notice of a subsequent security interest.
The PPSA default priority rules generally provide that:
However, a security interest that is perfected by control prevails over all other security interests in the same collateral. In addition, a PMSI gives its holder “super-priority” over other security interests, except those perfected by control.
The priority given to a security interest will apply to all advances (including future advances) secured by that security interest.
Certain claims may have priority over PPSA security interests, including liens arising by operation of law, some statutory charges and preferred claims on insolvency. In addition, the new financial collateral regime (implemented by way of amendments to the Payment System and Netting Act 1988in response to proposed changes to margining requirements for certain derivative transactions) overrides the priority regime under the PPSA. This regime gives super-priority to security interests over financial property held by derivative transaction counterparties under a close-out netting contract, and allows immediate enforcement of collateral arrangements on insolvency.
Where collateral is located outside of Australia, the laws of that jurisdiction may affect priorities.
Lenders are generally free to contractually subordinate debt or regulate the priority of their security interests.
The subordinated lender will usually undertake not to make demands or claims against the debtor until such time as the senior lender has been paid in full. Contractual subordination may be combined with a declaration of trust in favour of the senior lender in respect of unauthorised receipts and/or a requirement to turn over those receipts to the senior lender. In addition, a subordinated lender may assign its claim or its right to receive a dividend on insolvency to the senior lender.
Priority deeds generally regulate the priority of and enforcement rights in respect of security interests. The senior lender will typically have the right to control enforcement and block the junior lender from enforcing its security in certain circumstances. Enforcement proceeds will typically be applied to the senior lender’s debt ahead of the junior lender’s debt, although a senior lender may agree to give priority to the junior lender in respect of particular assets or to cap its first priority debt at a specified amount.
An intercreditor agreement generally combines subordination and priority mechanics. Where there is a common pool of security, intercreditor arrangements can be incorporated into the security trust arrangements.
A lender to a parent company will be structurally subordinate to the creditors of a subsidiary, as the assets of the subsidiary must be used to satisfy claims of its creditors before being upstreamed to the parent company. Transactions with different layers of debt can take advantage of structural subordination by positioning senior debt at the operating company level and junior debt at the holding company level.
Secured creditors can generally enforce security interests immediately upon an event of default under the finance documents. Court action is not required. However, for enforcement of real property securities, a court order for possession against the mortgagor or occupant may be required.
Methods and Procedures
Subject to the underlying finance documents, a formal acceleration notice or demand may need to be served on the grantor before security can be enforced. Some Australian jurisdictions also require service of a statutory notice before a power of sale can be exercised (particularly for real property and consumer transactions).
Two of the most common methods of enforcement are:
The receiver or agent may be appointed by a simple deed of appointment executed by the secured lender. The receiver or agent will generally require an indemnity from the secured lender for costs and expenses – in practice, however, these are usually paid out of realisation proceeds.
A receiver has all the powers given to a secured party under the security agreement (which will usually include a power of sale) and under the Corporations Act 2001.These powers generally cover all rights necessary to preserve, manage and dispose of secured assets for the benefit of the secured lender.
The Personal Property Securities Act 2009 (PPSA) contains a separate enforcement regime for security over personal property. Parties may contract out of this regime. If a secured creditor enforces security under the PPSA enforcement regime, it is required to act honestly and in a commercially reasonable manner. This obligation does not apply where the secured creditor appoints a receiver.
Restrictions and Concerns
Both receivers and mortgagees in possession are under a statutory duty to take all reasonable care to sell the secured assets for not less than market value or, if there is no market value, for the best price reasonably obtainable in the circumstances. This duty places an emphasis on the process undertaken to sell the assets, rather than the actual price achieved. Generally, it requires receivers and mortgagees to consider (and obtain expert advice on,where appropriate) the value of the assets, the appropriate market, the extent of marketing and the method of sale.
On appointment of a voluntary administrator, there is an immediate moratorium on enforcement action against the company, which includes a moratorium on commencing or progressing legal proceedings, exercise of rights by lessors or owners of property used by the company, and enforcing security, unless the administrator consents or the court grants leave. There is a further stay on the enforcement of ipso facto rights which arise by reason only of the company entering into certain insolvency proceedings, or the company's financial position, for agreements entered into after 1 July 2018 (or variations to pre-1 July 2018 agreements entered into before 1 July 2023) that are not syndicated loans, bonds or promissory notes. However, neither the moratorium nor the stay apply to a secured creditor with security over "the whole or substantially the whole" of the company's assets where the creditor either appoints a receiver over the secured property within 13 business days of notice of appointment or enforced its security before the administration.
A security interest will vest in a corporate grantor on the appointment of a liquidator or voluntary administrator if it is unregistered or not registered within the required timeframe.
A guarantee can usually only be enforced where the principal debtor is in default. In most cases, subject to the terms of the guarantee, separate demands must be issued to the principal debtor and the guarantor.
During a voluntary administration, in addition to the moratorium that applies to all creditors, there is a moratorium on enforcement of personal guarantees given by directors for a company's debts.
To enforce an unsecured debt, the lender may commence court proceedings for payment of the debt, or issue a statutory demand , whereby a company is deemed insolvent and winding up proceedings may be commenced if the demand is not satisfied or an application to set it aside is not made within 21 days of service.
There is a moratorium on an unsecured creditor commencing or continuing proceedings against a company in liquidation without leave of the court.
A choice of foreign law and submission to a foreign jurisdiction will generally be recognised and upheld by Australian courts, as long as it is made in good faith and is not contrary to public policy. Waivers of sovereign immunity are also generally upheld.
Australian laws (insofar as they relate to perfection, priority and vesting of the security on insolvency) will continue to apply to security interests over Australian assets despite a choice of foreign law in the security instrument.
Certain foreign judgments can be enforced by registration under the Foreign Judgments Act 1991. This regime is based on reciprocity, and accordingly only foreign judgments by courts or countries listed in the accompanying regulations may be registered. For example, US judgments cannot be registered under this legislation.
If a foreign judgment is covered by the legislation, the registration process is largely administrative. Subject to the satisfaction of certain evidentiary requirements, the judgment creditor can register the foreign judgment without commencing fresh proceedings. The process requires an application to court for enforcement, which can be made ex parte. The judgment debtor can apply to have a registration set aside on the basis of denial of natural justice, fraud, or satisfaction of the judgment.
The foreign judgment must be a final (non-interlocutory) money judgment issued within the six-year period prior to the application for registration. Once registered, it has the same force and effect as a judgment issued by the court in which it is registered.
There is also scope for enforcing foreign judgments (including default or summary judgments) at common law if the Foreign Judgments Act 1991 is unavailable.
Generally, foreign lenders may enforce their rights in the same manner as a local lender.
In certain circumstances, approval from the Foreign Investment Review Board may be required before enforcement. Approval is generally not required where security is held solely as security for a commercial loan entered into in good faith and in the ordinary course of a moneylending business and the lender complies with certain time requirements in relation to the disposal of that interest.
The main rescue or reorganisation procedures in Australia are deeds of company arrangements (DOCA) and, less commonly, creditors' schemes of arrangement. A company need not be insolvent for such a "scheme" to be commenced, although DOCAs can only be entered into following voluntary administration.
Voluntary Administration and Deeds of Company Arrangement
If the directors of a company form the view that the company is insolvent or likely to become insolvent, the directors may appoint a voluntary administrator to the company. Voluntary administrators may also be appointed to the company by a secured creditor or liquidator of the company.
Voluntary administration is a formal process by which administrators must, in five to six weeks (subject to extension by the court or creditors), investigate the company's affairs and report to the creditors. That report may present a DOCA proposal to creditors.
A DOCA requires the approval of a majority of the company's creditors in number and value. It is a binding agreement between a company and its creditors.
A DOCA is a flexible restructuring tool which may facilitate a rescue/reorganisation of a company by effecting, for example, a sale of the company's business/assets, a compromise of debts or, subject to leave of the court and a waiver from the companies regulator, transfers of share capital from existing shareholders without their consent (if such shares are considered to be of no value).
A DOCA cannot prevent a secured creditor from realising or dealing with its security interest, unless the secured creditor votes in favour of it or the court orders otherwise.
Creditors' Schemes of Arrangement
Schemes allow a company to enter into court-approved arrangements that compromise or rearrange the rights of creditors.
Schemes can be initiated outside of a formal insolvency appointment, allowing the directors to retain control of the business. However, proposing a scheme will often constitute an event of default under finance documents. No moratorium on enforcement is available to the company where a scheme is proposed.
A scheme requires two court applications (to approve the calling of creditor meetings and to approve the scheme) and also requires the involvement of the regulator. Accordingly, schemes are typically more expensive than DOCAs and take longer.
Schemes can affect rights against third parties (including guarantors), whereas DOCAs can only compromise claims against the company.
Schemes creditors are organised into "classes" where rights are sufficiently similar to enable the creditors to consult on common interests. A scheme must be approved by a majority in number and 75% in value of each class of creditors. As a result, schemes can bind or "cram down" dissenting secured creditors without their consent.
Outside of DOCAs and schemes, a company's ability to reorganise or restructure will be subject to the co-operation of creditors and other stakeholders (eg, by way of a standstill while the company explores options). Recently introduced safe harbour laws may offer some protection to directors from liability for debts incurred by an insolvent company (ie, for insolvent trading) if the directors seek to develop rescue or reorganisation option(s) that are reasonably likely to lead to a better outcome for the company.
Insolvency processes can impact a lender's rights to enforce its loan, security or guarantee in the following ways.
There is a statutory moratorium on the enforcement of security during voluntary administration. The moratorium does not prevent a secured creditor from enforcing its security if it has security over the whole or substantially the whole of the company's assets and enforces the security within 13 business days. Following a voluntary administration of the company, the company may enter into a deed of company arrangement (DOCA). The DOCA cannot compromise a secured lender's rights to enforce its security unless the secured lender votes in favour of the DOCA (or the court orders otherwise).
There is a stay on commencement or continuance of any proceedings to recover unsecured debt while the company is in liquidation or voluntary administration, unless the consent of the liquidator or administrator or leave of the court is obtained. A lender is prohibited from enforcing a personal guarantee given by a director in relation to the company's debts during voluntary administration. This does not apply during liquidation.
For agreements entered into after 1 July 2018 (or variations to those agreements entered into before 1 July 2023), there is a stay on enforcement of ipso facto rights which arise by reason only of the company entering into voluntary administration or receivership, or commencing a scheme of arrangement process. There are a number of exceptions to the ipso facto stay.
A liquidator (but not a voluntary administrator) can apply to court to set aside certain transactions entered into by the company prior to insolvency, including the grant of a security interest. Transactions that may be challenged include unfair preferences, uncommercial transactions, unfair loans and unreasonable director-related transactions, if they took place within certain timeframes preceding the appointment of a liquidator or administrator. Time limits vary depending on the nature of the transaction and whether the counterparty is a related party. For an unfair preference or uncommercial transaction, the company must have been insolvent at the time of the transaction, or become insolvent as a result.
Security Granted Shortly Before an Insolvency Process
Security over "circulating assets" (eg, receivables/inventory) may be void against a liquidator if it secures “old money” (advances made prior to the grant of security) and the security was granted less than six months before appointment of a liquidator or voluntary administrator. This does not apply if the company was solvent immediately after granting the security.
Additionally, a security interest over personal property will vest in the company on liquidation or voluntary administration if it is unregistered, or if it was not registered within the statutory timeframe upon insolvency.
Creditors are generally paid on a pari passubasis. However, certain classes of creditors have statutory priority over others.
Where assets are subject to perfected security, the security holder will receive payment in priority to unsecured creditors and other debts. However, the liquidator or administrator will have a lien in relation to fees and expenses incurred in getting in, protecting and realising the assets. Certain unpaid employee entitlements rank ahead of a holder of security over circulating assets.
If a secured creditor suffers a shortfall after realisation of the secured assets, it may prove as an unsecured creditor for the balance of its claim.
The Corporations Act 2001 sets out a number of payments required to be made in priority to the company's unsecured debts and claims in liquidation, in the following order:
Unsecured creditors then receive payment on a pari passu basis. Shareholders only receive payment if there are sufficient assets to pay all creditor claims in full.
There is no concept of equitable subordination in Australia.
The appointment of a voluntary administrator poses a risk to lenders, given the statutory moratorium on enforcement of security, unless the security covers the whole or substantially the whole of the company’s assets and is enforced within 13 business days of notice of the appointment.
This may be an area of particular risk for the growing number of US-style asset-based lending arrangements that rely on specific limited security. As these lenders don’t have security over all of the company's assets, they cannot enforce their security following the appointment of a voluntary administrator without the consent of the administrator or leave of the court. This administration risk can be addressed by supplementing the specific limited security with a “featherweight” security interest over all of the company's assets.
A lender with security over personal property must register its interest on the personal property securities register within certain timeframes; otherwise, their security will vest in the company on appointment of a voluntary administrator or liquidator.
Proceeds of circulating assets may also be used to satisfy unpaid employee entitlements ahead of secured creditors.
Insolvency also poses more general risks to a lender in relation to loss of value where assets cannot be sold as a going concern.
Project finance continues to be important in Australia with particular interest and focus on transportation and energy initiatives. This has been evidenced in the 2019-20 Federal Budget, which commits AUD100 billion in funding over ten years to improve a broader range of connectivity infrastructure assets. In addition, Australia has increased commitments to defence spending and energy with ample opportunity for domestic and international private sector participation in major Australian projects.
Funding sources continue to diversify – alongside traditional commercial lenders, overseas institutional investors, pension funds, domestic superannuation funds and private debt funds continue to increase their participation in Australian projects. On refinancings, sponsors also continue to tap into the US private placement market and the Japanese samurai loan market to achieve tenor.
Australia's public-private partnership (PPP) framework is robust, delivering both economic and social infrastructure projects.
Under the National PPP Policy Guidelines, PPPs in Australia operate under a recommended framework for the investment, procurement and delivery stages, with some states and territories adding supplementary requirements, and project-specific requirements as necessary.
Projects that require major long-term capital investment can be delivered efficiently under a PPP model. Design, construction, maintenance and operation are typically bundled together in one project document, with the government awarding a concession to the private sector for 25-30 years. In social infrastructure projects, the government retains control of operations while the private sector is responsible for maintenance. At the end of the concession, the asset is usually handed back to the government or re-tendered. The private sector usually funds the project, although government funding may be available for some large-scale projects.
The primary objective of PPPs is to achieve value for money. Risk is allocated to the party best able to manage it. Government will usually accept risks in relation to accuracy of performance specifications, access to site, environmental or planning approvals and native title claims.
Procurement is typically by way of competitive tender, carried out in accordance with strict probity requirements. PPPs do, however, increase the likelihood of disputes between government and private sector and are susceptible to external factors, such as policy change.
Federal, state and territory governments are now experimenting with adjustments to typical funding models. For example, the Australian government will use an innovative PPP funding arrangement to deliver the Inland Rail Project, leveraging private sector expertise to design, build and maintain only the most technically complex sections of the project.
Federal and state governments continue to affirm their commitments to PPPs by developing standardised project documents and PPP toolboxes for use in these types of arrangements.
Projects in Australia require a raft of approvals under federal, state and territory laws, including planning, environmental, and workplace health and safety legislation. These approvals will typically be prerequisites to project finance. As part of the approval process, the project company is often required to establish and maintain programmes designed to minimise the project’s impact on the environment and contribute to community enhancements.
Foreign entities investing in or financing projects in Australia may also be caught by the Foreign Investment Review Board (FIRB) approval requirements. Any foreign involvement in critical state or territory-owned infrastructure assets is subject to FIRB review. Foreign investment in sensitive industries such as telecommunications, banking, transport, defence and security may also be subject to additional notification requirements or approvals under separate legislation.
There are now specific FIRB approval requirements for land used in connection with wind or solar power stations in Australia. Generally speaking, Australian land which contains a developed wind or solar power station on the surface is categorised as "developed commercial land" (rather than "vacant commercial land"), which means that a higher FIRB reporting threshold applies (provided that the investor is not a foreign government investor). However, land which contains a developed wind or solar power station on the surface, but is predominantly used for "primary production" will be categorised as agricultural land and a lower threshold will apply (unless the proposed foreign investor already owns or operates a wind or solar farm or is a foreign government investor). Other thresholds apply for the acquisition of undeveloped wind or solar farms on Australian land.
Australian tax law will often drive the structure of a project finance transaction – it shapes the investment vehicle and debt structure, and can also influence enforcement strategies. Key considerations are Australia's thin capitalisation rules (which disallow interest deductions for highly geared entities, thereby restricting international enterprises from shifting profits overseas by debt-loading Australian subsidiaries), landholder duty and capital gains on disposals. Foreign lenders may also be subject to interest withholding tax. However, most project finance transactions can take advantage of “public offer” exemptions. No mortgage duty is payable in Australia, but project transactions may attract stamp duty liability in some jurisdictions on an acquisition of "new rights".
Apart from ordinary course corporate and security registrations, there is no separate requirement to register project finance transactions. However, government bodies participating in PPPs are subject to freedom of information legislation, so redacted versions of the project documents are usually available to the public, either on the government’s website or via specific requests.
The regulation of projects in Australia is multi-layered, with federal, state or territory and local governments all having oversight.
The federal government designs and implements Australia's infrastructure, transport and regional development policies and programmes, and facilitates projects throughout Australia. The Infrastructure and Project Financing Agency established in July 2017 takes a lead role in guiding federal investment in infrastructure and other projects. Other federal government funding initiatives encourage private sector investment in Australian projects.
Participation in these initiatives is generally subject to strict eligibility criteria, although a wide range of projects may benefit from this concessional funding.
Infrastructure Australia, an independent statutory body, provides research and advice to industry and government, and administers the Australia Infrastructure Plan (a rolling 15-year plan) and Priority List, setting out a pipeline of nationally significant infrastructure projects.
Each of the federal, state and territory governments also have a centralised PPP Authority, usually connected to its treasury department responsible for procurement, together with the government department responsible for the project. Under the National PPP Policy Guidelines, PPP investment decisions must be supported by a business case, considering the impact of the project on the public and key stakeholders, addressing project objectives and scope, providing financial and risk analysis, and setting out a procurement strategy. Regardless of delivery model, project cost and risk transfer will be balanced against project objectives and required outcomes.
Ongoing reporting requirements also apply to owners and operators of critical Australian infrastructure assets under the Security of Critical Infrastructure Act 2018. The Critical Infrastructure Centre maintains a register of these details. Domestic and foreign holders of interests of 10% or more (alone or combined with associates), or interests that allow the holder to influence or control critical infrastructure assets, will be caught by the reporting requirements. There is a "moneylender" exemption.
Oil and Gas
The majority of Australia's oil and gas industry lies more than three nautical miles offshore in Commonwealth waters and is regulated by the federal government. Each state and territory (other than the Australian Capital Territory) has its own legislation regulating petroleum activities in its waters and onshore.
The primary federal legislation is the Offshore Petroleum and Greenhouse Gas Storage Act 2006(Cth), administered by:
The power sector is divided between the east and west coasts of Australia. The eastern and southern states of Australia are governed by the National Electricity Market (NEM) framework. In addition, each participating state and territory has its own electricity regulations. The Northern Territory has adopted an amended NEM framework but is not hooked into the National Electricity Grid. Electricity in Western Australia is regulated through a separate framework – the Wholesale Electricity Market.
Renewable energy projects in Australia will generally be subject to the Federal Renewable Energy (Electricity) Act 2000 and Renewable Energy (Electricity) Guidelines 2000. Regulators and government agencies include:
Separate guidelines also apply to wind farms.
Exploration and production of minerals in Australia is mainly regulated under state and territory legislation. Compliance with key Commonwealth laws, including the Environmental Protection and Biodiversity Conservation Act 1991, and the Native Title Act 1993 is also required. There are no restrictions on the types of entity that can hold reconnaissance, exploration and mining rights, however acquisitions of certain interests may require FIRB approval.
Project financing in Australia is generally undertaken on a limited recourse basis. Lenders and investors typically rely exclusively on the revenue stream from the project to cover operational expenses, service debt and provide a return on investment. Project finance is “off-balance sheet” with little or no recourse to the sponsor. As recourse is limited to the project assets, there is a greater focus on risk identification and allocation in project finance transactions than in general corporate finance transactions. A careful analysis of construction, operational and revenue risks must be conducted to ensure appropriate allocation between the stakeholders.
A special purpose vehicle (SPV) is usually established to implement the project. By structuring the SPV appropriately, the project sponsors can ringfence project assets and liabilities, shielding the sponsors from liability if the project fails and insulating the project assets against sponsor insolvency. The SPV is generally a limited liability company, although unincorporated joint ventures, trusts or partnership arrangements can also be used. Tax considerations, required returns and ease of divestiture will often influence the nature of the SPV.
Stapled unit trust structures are also prevalent. Under these structures, asset trusts are established to hold real property assets separately as passive investments, leased or licensed at market value to the project company or an operational trust. These structures were attractive to offshore investors as they allow the pass-through of income. However, these tax benefits were removed by the Federal Government in April 2019.
A financial model is imperative to assess the economic viability of the project. The model will generally dictate the debt capacity of the project, although leverage will vary widely depending on the nature of the project, its bankability and the financial strength of its sponsors.
Project finance documentation will typically include negative pledge provisions, project undertakings, control over revenues, cash flow waterfalls and restrictions on distributions to sponsors and other leakage.
The funding profile ultimately adopted should optimise the cost of finance for the project. Senior debt, which typically offers a lower cost of finance in exchange for reduced risk, generally comprises the largest source of funding for the project. The balance of the financing package is generally provided by way of mezzanine funding, equity and (if available) government grants or concessional funding.
In Australia, senior project debt is primarily provided by domestic and international commercial banks, although multilateral development institutions, export credit agencies (ECAs), superannuation funds and private debt funds provide alternative sources of finance. Where a project fits into their mandate, ECAs can plug funding gaps through direct loans and transfer of risk through guarantee and insurance products.
There is a growing trend, particularly in the renewable energy sector, for mezzanine funding to be provided higher up the corporate chain than senior debt funding, enabling sponsors and lenders to take advantage of structural subordination to avoid complex intercreditor arrangements.
For mature transactions, sponsors look to the international and domestic capital markets (including the US private placement market) for refinancings in order to achieve tenor. Some sponsors are taking advantage of the Japanese samurai market in Australia, allowing sponsors to diversify their funding sources, expedite funding, obtain guaranteed pricing and stretch tenors.
Australia's export of natural resources has remained steady despite continuing volatility in commodity prices. Export volumes have grown in 2018-19 (driven primarily by LNG exports and iron ore). There has also been significant growth in lithium mining projects. However, a slowdown is expected over the next five years as demand for coal and iron ore reduces and international trade tensions continue to cause disruption.
Through 2019 we have seen gains in the Australian gold sector. The low trading value of the Australian dollar (by historical standards) has helped. It is expected that Australia's gold mines will produce an estimated 10.7 million ounces by the end of 2019 – the equivalent of about AUD19.2 billion on the current market.
Oil and gas exports in 2019-20 are expected to reach a record AUD285 billion, with a number of new Australian LNG export projects coming on line.
Offshore mining is subject to federal regulation, while state and territory legislation governs onshore mining activity. Similar legal and administrative frameworks have been adopted in each Australian jurisdiction.
Mining legislation generally deals with the transfer of minerals and other natural resources to the private sector through the grant of prospecting, exploration, mining and retention and other miscellaneous licences, and any conditionality (including payment of royalties) associated with those entitlements. The licensing regime provides a measure of certainty as to entitlement to deposits, provided that licence conditions are complied with. In addition, each state and territory maintains a register of mining interests. Transfers or dealings in respect of mining entitlements are not usually effective until they are formally registered. Ministerial consent is typically required for security over, or transfers of, mining entitlements. Operational activities are also regulated. State agreements may impose additional conditions on large mining projects, or provide concessions from legislation to incentivise activity.
Hydraulic fracturing (ie, "fracking") continues to be controversial. Fracking laws vary across jurisdictions and can be inconsistent. There appears to be a shift in perspective, however, with the Western Australian and Northern Territory Governments recently lifting the moratorium on the use of fracking.
Federal legislation (which overrides state and territory legislation to the extent of any inconsistency) will have an impact on onshore mining activities in Australia – native title, environmental, general corporate, competition, trade practices, foreign investment and taxation legislation will all typically apply.
Each state and territory government demands royalty payments as consideration for the right to extract and remove minerals. Royalties are typically calculated on the net value of production. In addition, a non-final 10% withholding tax is chargeable on the purchase price of any mining, quarrying or prospecting assets payable to a foreign resident.
The only export controls in relation to mining refer to diamonds or nuclear materials (ie, uranium), where prior certification or approval is required.
Oil and Gas
Transfer of minerals and other natural resources to the private sector is also regulated through the grant of various types of licences (similar to mining). As mentioned under 8.4 The Responsible Government Body, above, the regulatory framework governing a specific petroleum exploration will depend on whether it is onshore (state) or offshore (federal).
A register of titles is maintained in each jurisdiction. Acquisitions of interests, transfers and other dealings in titles all require ministerial approval. Titles are usually subject to conditions, including minimum expenditure commitments.
While a raft of Commonwealth legislation and regulations will apply to petroleum activities, there are no separate export approvals required for the export of petroleum projects, including LNG.
A petroleum resource rent tax is levied on the profits generated from the sale of marketable petroleum commodities. The 10% purchase price withholding referred to above applies equally to acquisitions of petroleum assets by foreign residents.
The Australian Domestic Gas Security Mechanism limits exports or requires LNG projects to find new gas resources if there is a shortage in domestic gas supplies. The relevant minister is responsible for deciding whether or not a shortfall exists. In 2018, the minister declined to make this decision after key producers covenanted to ensure that enough gas would be available to supply domestic markets.
In addition, LNG projects in Western Australia (the country's largest producer of LNG) are required to reserve 15% of production from each LNG export project for domestic use. They are also responsible for securing the necessary infrastructure to comply with that obligation.
Projects in Australia are subject to environmental and workplace health and safety (WHS) regulation at both the federal and state or territory level. The project documentation will typically allocate responsibility for compliance throughout the life cycle of the project, with risk typically passing to the contractor during construction and to the operator or other service provider during operation. On PPP projects, government may retain responsibility for pre-existing or migrating contamination, while the private sector bears the risk of any contamination it causes or of which it should reasonably have been aware.
While the states and territories generally have jurisdiction over land use and environmental protection, the Federal Environmental Conservation and Biodiversity Act 1999 will apply on projects with national significance. Bilateral agreements between the federal, state and territory and local governments can simplify the approvals process on these types of projects.
Statutory authorities or agencies (such as the NSW Environment Protection Authority) manage compliance and impose sanctions for contravention. Environmental impact assessments are generally conducted in respect of a project, and approvals often require environmental minimisation, mitigation and management plans to be established.
Lenders will also generally require compliance with voluntary international environmental and social standards, such as the Equator Principles and the International Finance Corporation Environmental and Social Performance Standards. The project deed will often also set out additional criteria to be met.
Civil and criminal penalties apply for breaches of environmental legislation. Lenders may also be liable, depending on the level of their involvement in project operations. Queensland has the most onerous regime.
Workplace Health and Safety
The states and territories have jurisdiction in relation to WHS matters, although most legislation is based on the federal government’s Model Work Health and Safety Act(other than Victoria and Western Australia). Statutory authorities administer the legislation, and non-compliance may result in civil or criminal penalties. Certain projects may also be subject to additional health and safety legislation (eg, dangerous goods and radioactive substances legislation). Codes of Practice sit alongside the statutory framework.
There is increasing interest in Islamic financing structures, with financial institutions (including National Australia Bank and Westpac) actively enhancing their capacity to provide Shari'a-compliant products and services. A number of smaller specialist providers also operate in the Australian market. Demand is increasing and is projected to grow, although regulatory ambiguities and tax treatment pose significant challenges. The federal government expressed an interest in taking steps to better accommodate Islamic finance, but no formal action has yet been taken. In the meantime, highly structured hybrid arrangements (combining conventional and Islamic financing) are used to deliver Shari'a-compliant products and services.
Australia does not have a specific regulatory framework; however, Islamic financing arrangements are subject to the same laws and regulations that apply to traditional lending. Regulatory reform is required to establish a platform that takes into account different legal and accounting structures employed in Islamic financing arrangements, and to develop appropriate standards for managing risk and operational activities.
Taxation laws present the biggest challenge. A number of adverse tax consequences flow from Islamic financing structures, particularly asset-based structures where assets change hands several times over the course of a transaction. These structures may be subject to double taxation, capital gains tax, transfer tax, stamp duty and goods and services tax.
In 2016 the Federal Government announced its intention to change the tax treatment of asset-backed financial structures. These changes were originally intended to apply from mid-2018, but no legislation has been enacted to date.
Transactions can be structured to comply with key Islamic legal principles. Institutions offering Islamic finance and their customers generally rely on support from Shari'a supervisory boards (onshore and offshore) and Islamic finance scholars to evaluate products and structures and audit Shari'a-compliance.
There is no regulatory guidance – however, the insolvency or restructuring treatment of the claims of sukuk holders may depend on if the instrument is asset-backed and if the instrument is perceived as debt (in which case the sukuk holder will be a creditor of a company) or equity (in which case the sukuk holder may only be entitled to a dividend in insolvency proceedings after all creditors are paid in full).
There have been no recent notable cases regarding Shari'a law in Australia.