Registering a charge over your own company for money the company owes to you is a great way of protecting the company and your investment in it.

Many small companies are funded from money invested by the directors, or by directors leaving their salaries or other payments in the company. This creates a debt of the company, in favour of the directors. If so, an important part of asset protection is to register a charge over the company, to secure the company’s debts in favour of the directors.

What is a registered charge?

It is like the company giving the directors a mortgage over all of the company’s assets. This means that, if anything goes wrong with the company, the directors will be entitled to get their money back out of the company, as a priority creditor, provided that certain formalities are followed.

The advantages of a registered charge.

The Corporations Act sets out the order in which a liquidator must distribute any money received from the company or creditors. Secured creditors with a registered charge are near the top of the list.

No-one plans for their company to be insolvent. Similarly, no-one plans to have a car accident, but wearing a seatbelt is still a good idea.

If your company ends up in liquidation, the liquidator will be looking to see if they can claim any money from directors. There are multiple ways a liquidator can sue directors, including suing them for money they have taken from the company, or suing them for the debts owed to creditors incurred while the company was insolvent.

If that happens, and there is a valid, registered charge in favour of the director, there is little point in the liquidator suing if the director has a right to receive the proceeds of any money the liquidator might recover.

Also, when a company goes into liquidation, the liquidator usually tries to recover any money paid to the directors within the previous 4 years. It is a defence to prove that the company was solvent at the time of the payment, but this is often difficult. However, if the money was repayment of a debt secured by a registered charge, then the payment is not considered to be a preference and the liquidator cannot recover that payment from the director.

When a creditor threatens to take winding up proceedings, informing them that there is a registered charge in favour of the directors often takes the wind out of their sails.

How do you register a charge?

The process is that a charge document is prepared, signed by the directors, and it is then registered in the Personal Property Security Register (PPSR). A small registration fee is payable.

We generally prepare “all moneys” charges. This means that the document applies to whatever money is owing to the director at any time. If there is a repayment, or if there is further money owed, there is no need for a new document to be registered.

Once the charge is in place, it can stay with the company forever, and will provide security for whatever the company may owe the directors now, or at any time in the future. Having a registered charge is a good insurance policy for the future.

When should you register a charge?

A charge registered less than 6 months before the commencement of the winding up proceedings is invalid against the liquidator. Even if it is registered before that, it may be set aside if the company was insolvent at the time.

The obvious lesson  is that you should register the charge now, then put it in the bottom drawer, hoping you will never need it. However, if the dark clouds of insolvency appear, it will be very comforting to have it available and the earlier it was registered, the better.

For more information, please Tim Somerville or Andrew Somerville.

For more information, contact us on 9923 2321 or email us at asomerville@somervillelegal.com.au