Security, guarantees and the law: what a lender can take, and when

Next update. The Reserve Bank's next decision on the cash rate is due on 3 November 2026. We will update the rates and figures in this article after it.

Every loan is a promise to repay. Security is what stands behind it: an asset the lender can sell, or a person who has agreed to pay if the borrower does not. Most of the time it is never used. But it is fixed on the day the loan is signed, it shapes the price, and if the business gets into difficulty it decides who controls what happens next and who absorbs the loss.

This sixth part of The architecture of lending explains mortgages over land under the law of New South Wales, security over everything else a business owns under one federal Act and one national register, and guarantees, which turn a company's debt into a director's. It then follows a loan from a missed payment to a sale, with a model of who is paid from the proceeds. Part 5 covers how lenders set covenants and watch loans, and Part 7 how borrowing can be structured. The legal points are simplified and current at 12 October 2026, with the Act and section or the Code paragraph named for each rule and lenders' terms quoted from their own pages with the date we saw them; the readings under each exhibit are general observations, not steps for any particular loan.

Minimum notice a Code bank gives a small business of a missed payment before it demands full repayment or enforces

30 days

Banking Code of Practice, paragraph 82

Share of banks' non-performing business loans that were well secured, June 2026

Over 50%

RBA Financial Stability Review

Approximate share of companies entering insolvency in 2024‑25 that owed nothing to secured creditors

70%

RBA Financial Stability Review

Why security changes the price, and the outcome

A secured lender has a claim on particular assets that ranks ahead of the borrower's other creditors. An unsecured lender has only a claim against the borrower, and in an insolvency it ranks behind the priority claims, such as employees' unpaid wages, superannuation and leave (Corporations Act s 556),^9,10 and then in line with the other ordinary unsecured creditors: suppliers, landlords and the tax office. Security does not make a borrower more likely to repay, but it changes what the lender loses if the borrower does not.

Lenders think about that loss in three parts: the chance of default, the amount owed at default, and the share of it the lender fails to recover. Security works on the third. Part 1 shows how the three combine into an expected loss and into the capital a bank must hold, and how both reach the interest rate.

Two published sources show the effect. Under APRA's standardised approach to credit risk, an unrated loan to a small or medium business carries a risk weight of 75% or 85%; secured by commercial property whose own cash flows do not repay it, such as premises the business occupies, the weight is the lower of 60% and the borrower's own weight, so 60% here, but only while the loan is no more than 60% of the property's value (Part 1 has the full table).¹¹ Prices follow. The Commonwealth Bank (CommBank) advertises on its business overdraft page, current at 9 October 2026, variable rates from 15.05% a year unsecured and from 9.00% secured, and notes that rates depend on "loan amount and type of security".¹² A starting rate is not what any particular business will pay, and the two products differ in more than security: an unsecured overdraft is smaller, costs more to serve and goes to different borrowers (Part 1 sets out the parts of a rate). But the gap of just over six percentage points shows how far a lender's published price can move when it has an asset to sell.

None of this makes a weak loan good. APRA requires a bank to assess credit risk "primarily on the strength of a borrower's repayment capacity" and not to place "undue reliance on collateral" (APS 220, paragraph 42).¹³ Security is the lender's second way out, behind the borrower's cash flow. A lender that has to use it has already been wrong once.

The Reserve Bank's October Financial Stability Review shows what security does when loans fail. A loan is non-performing when the borrower is 90 days or more past due, or unlikely to pay in full (APS 220, paragraph 13).¹³ In June 2026, over 50% of banks' non-performing business loans were "well secured", in the Review's definition: the bank judged that the fair value of the collateral, after the costs of taking possession of it and selling it, covered the balance, including interest and fees.¹ The term comes from APRA's credit risk standard (APS 220, Attachment B).¹³ Yet around 70% of the companies that entered insolvency in 2024-25 had no debt owing to secured creditors, "the type of debt most likely to be owed to banks".² Security does not decide whether a business fails. It decides who carries the loss. Where a bank holds good security, its loss is limited to any shortfall; where nobody does, the loss falls on the unsecured creditors.

Threefold Capital interpretation

What a lender can take as security, where it is recorded and how it is enforced

What is secured	The usual form	Where it is recorded	How the lender enforces it	What can rank ahead of it
Land in NSW	A registered mortgage	The land register (Torrens title)	Sale under the power in s 58 of the Real Property Act, after a written notice under s 57	Interests registered before it, or given priority over it
A company's business assets	A general security agreement over all present and after-acquired property	The PPSR	A receiver appointed under the agreement	Earlier perfected interests, purchase money interests, and priority claims such as employee entitlements on circulating assets
A vehicle or item of equipment	A chattel mortgage, or a hire purchase or lease under which the financier owns it	The PPSR	Taking and selling the item, under the contract	Usually nothing, if the financier funded the purchase and registered in time
A person's promise	A guarantee, sometimes backed by a mortgage over the guarantor's home	Not registered, unless backed by a mortgage	A demand, then the courts; a Code bank enforces the borrower's security first	Not applicable: a guarantee is a personal promise

NSW law for land. What applies to a particular loan depends on its documents.

Land in New South Wales: the register is the title

Land in NSW is held under the Torrens system of the Real Property Act 1900 (NSW), in which the register is the title. Section 42 makes the registered proprietor's estate paramount: except in case of fraud and a short list of exceptions, the proprietor holds the land subject to the interests recorded on the folio and "absolutely free from all other estates and interests that are not so recorded".³ Lawyers call this indefeasibility, and it is why a lender registers. Outside those exceptions, a registered mortgage is protected against unrecorded claims, and a buyer or a later lender can rely on what the register shows. The protection is not complete. It does not cover fraud, and a mortgagee that did not take reasonable steps to confirm the mortgagor's identity before lodging can have a forged mortgage cancelled by the Registrar-General (s 56C).¹⁷ That last rule is why lenders verify identity before a mortgage is lodged.

A mortgage gives the lender, the mortgagee, a right to have the land sold if the borrower, the mortgagor, defaults. The power of sale is in s 58, and s 57 sets the procedure: a default, a written notice complying with s 57(3) served on the mortgagor, and the default continuing after service for the period the Act requires (s 57(2)). Before NSW Land Registry Services will register a transfer under the power, the mortgagee must show that the notice was served, and prove the default.⁴ Those are the formal steps between a default and a sale.

Several lenders can hold mortgages over the same land, and a second mortgage is repaid only from what the first leaves. Registered mortgages rank in the order of their registration unless the mortgagees agree a different order between themselves, and the register shows what that means. When a mortgagee sells under its power, the proceeds go first to the costs of the sale, then to its own debt, then to the mortgages behind it in order of priority, and any surplus to the mortgagor (s 58(3)). NSW Land Registry Services removes from the title the selling mortgage and "any mortgage that does not have priority over the subject mortgage", along with equitable charges and writs recorded after it, while dealings with priority over it, and current leases, stay.⁴ A first mortgagee's sale therefore clears a second mortgage from the title whether or not it has been repaid; the second mortgagee is paid from what is left after the costs of sale and the first mortgage, and keeps an unsecured claim against the borrower for any shortfall. If the second mortgagee sells, the first mortgage stays on the title.

In practice a second mortgage needs the first mortgagee's consent, since a first mortgage usually prohibits further security without it, and the consent commonly comes with a deed of priority that caps the amount for which the first mortgage ranks ahead: the principal and an agreed allowance for interest and costs. Beyond the cap the first mortgagee ranks behind the second, which is the second mortgagee's protection against a slow sale or a further advance. Part 4 sets out how much lenders advance against property, which decides how much room each mortgage has.

Caveats. A person with an unregistered claim to an interest in land can protect it with a caveat, which NSW Land Registry Services describes as "a form of statutory injunction provided for under the Real Property Act 1900". A caveat "prevents the registration of dealings and/or plans" that would affect the claim, and "Only those claiming an eligible estate or interest in the land can record a caveat on title."¹⁸ A lender's caveat rests on whatever interest its documents give it, usually a clause in the loan or guarantee charging the borrower's or guarantor's land; a creditor whose only right is to be repaid has none. Some lenders' terms provide for it. Prospa's page (last modified 25 June 2026) says "If a customer defaults under their loan, we may register on the PPSR and/or register a caveat."¹⁹

The Act balances the caveator's protection against the owner's. A registered proprietor can apply for a lapsing notice under s 74J, and the caveat lapses 21 days after it is served unless the caveator obtains a Supreme Court order extending it within those 21 days; a caveat affecting a mortgage, lease or charge is lapsed on the application of the mortgagee, lessee or chargee instead.^18,20 Under s 74P, a person who lodges a caveat "without reasonable cause", or refuses to withdraw one when asked, must compensate anyone who suffers financial loss as a result.⁵

Priority notices. A priority notice does the opposite job, holding the register still for a dealing that is on its way, such as a mortgage due to settle: for 60 days from lodgment the Registrar-General must not register a dealing it does not list without the consent of the person who lodged it (s 74W), and competing notices rank in the order they were lodged.²¹

Business assets: the PPSA and the PPSR

A business's assets other than land and fixtures, from vehicles and equipment to stock and intellectual property, are personal property under the Personal Property Securities Act 2009 (Cth). Its register, the PPSR, is the national record of security interests in personal property, and it "doesn't include land or fixtures".¹⁵

The Act works in three steps. A security interest attaches when the grantor has rights in the collateral and value is given (s 19), becomes effective against others through possession, control or a written agreement signed or adopted by the grantor (s 20), and is perfected when it is also registered on the PPSR or the lender holds the collateral (s 21).¹⁴ Perfection decides rank. In the PPSR's summary of the default rules in s 55, "A 'perfected' security interest normally has priority over an 'unperfected' one", and perfected interests rank "from earliest registration date to latest".⁷

General security agreements. A general security agreement takes a company's personal property as a whole. Registered against the "all present and after-acquired property" class, it covers all the personal property the grantor has an interest in when the registration is made and afterwards; the Act recognises an agreement that says so (s 20).^14,22 Stock bought next year is covered without a new document. One can come with a loan otherwise described as unsecured: ANZ's page for unsecured business loans (modified 8 October 2026) says that for loans between $200,000 and $500,000 a business may need to provide one.²³

Two things can still rank ahead of it. The first is the priority the Corporations Act gives employee entitlements over circulating assets, the stock and receivables a company can deal with in the ordinary course of business without the lender's consent (s 433 where a receiver is appointed, s 561 in a liquidation; "circulating asset" is defined in s 340 of the Personal Property Securities Act).^14,9,10 From their sale, ASIC says, a receiver pays its own costs and fees, then "certain priority claims, including employee entitlements", and only then the secured creditor.¹⁶

The second is purchase money. A purchase money security interest secures all or part of the price of the collateral, or value given so that the grantor can acquire it (s 14).¹⁴ An equipment financier can hold one, and so can a supplier selling stock on retention of title terms. A perfected purchase money interest "takes priority over a perfected security interest that is not a PMSI",⁷ even an earlier one, if it is registered in time: before the grantor takes possession of inventory, and within 15 business days for other goods (s 62(3)(b)).^24,25 That is how a supplier's claim to last week's stock can outrank a bank's general security registered years before.

Timing. Where the grantor is a company, two deadlines apply. A security interest registered more than 20 business days after the security agreement, and less than six months before the company's insolvency begins, vests in the company unless the time for registration is extended (Corporations Act ss 588FL and 588FM); the PPSR's guidance is to register "Within 20 working days after they sign the security agreement", or "More than 6 months before they start insolvency".^6,10 And a security interest still unperfected when the company's winding up is taken to have begun "vests in the grantor immediately before" that event (s 267), leaving the lender unsecured;²⁶ the section is headed "winding up or bankruptcy etc." and is not limited to a winding up.¹⁴ The PPSR's own warning is that an unregistered secured party whose customer becomes insolvent "will likely be an unsecured creditor".²⁷ ASIC notes that a liquidator appointed to a company in receivership "will review the validity of the security interest".¹⁶

Reported data

The rules that decide whether security over business assets holds

Rule	Where	What it says
Attachment	PPSA s 19	The interest can be enforced against the grantor only once it has attached: the grantor has rights in the collateral and value is given
Effect against others	s 20	The lender needs possession, control, or a written agreement signed or adopted by the grantor that describes the collateral or covers all present and after-acquired property
Perfection	s 21	Attached, effective against others, and registered on the PPSR (or the collateral held by the lender)
Default priority	s 55, as the PPSR summarises it	Perfected beats unperfected; perfected interests rank by registration date, unperfected ones by attachment date
Purchase money	ss 14 and 62	Finance for the price ranks ahead of earlier interests in the same goods if registered before possession of inventory, or within 15 business days for other goods
A company grantor	Corporations Act s 588FL; PPSR guidance	Register within 20 business days of the agreement, or more than six months before insolvency starts, or the interest can vest in the company
Insolvency	PPSA s 267	An interest unperfected when the company's winding up begins vests in the company; the section is not limited to a winding up
Land	PPSR	The register does not cover land or fixtures

A summary. Each rule has conditions and exceptions not shown here.

Where the security sits

A small business borrowing can combine all three kinds of security. In the illustration below, a director owns two companies: a trading company, which borrows, and a property company, which owns the premises and leases them to it. The lender takes a general security agreement over the trading company, a guarantee from the property company backed by a mortgage over the premises, and the director's personal guarantee. The property company borrows nothing, but its premises stand behind the loan.

The same three layers appear in lenders' published terms. CommBank's page for its Lease Doc loan, for a commercial property held by a company or trust set up only to hold it, lists a "First-ranking registered mortgage over the investment property", a "General security instrument over the borrower" and a "Director guarantee" (page seen 12 October 2026).²⁸ There the property company is the borrower, but the layers are the same.

Illustrative model

Where the security sits in a small business borrowing

Arrow: from one party to the other, as its label saysDashed line: a promise, not money

A diagram of four parties: Director, Owns both companies; Property company, Owns the premises; Trading company, The borrower. To one side: Lender. How they connect:

How they connect

1. 1Director to Trading company Owns 100%
2. 2Director to Property company Owns 100%
3. 3Lender to Trading company Loan, with a general security agreement
4. 4Property company and Lender (dashed line) Guarantee, with a registered mortgage
5. 5Director and Lender (dashed line) Personal guarantee
6. 6Trading company to Property company Pays rent

A hypothetical structure. Only the trading company owes the loan; the property company and the director have promised to pay it if the trading company does not. A lender taking a mortgage from the property company usually takes a general security agreement over it too, so the rent is caught as well as the land.

Guarantees: how a company's debt becomes personal

A company's debts are its own. A guarantee is how they become someone else's by agreement: the guarantor promises that if the borrower does not pay, the guarantor will, up to whatever the guarantee covers. The Banking Code defines a guarantor as an individual who gives "a guarantee and/or indemnity to secure a Loan" made to another individual or a small business.⁸

The reasons lenders ask directors for one are easy to see from the other side of the table. A small company's assets may not cover the loan. A director with money at stake has every reason to keep the company paying and to raise problems early. And the director's resources become part of the credit decision: the Code lets a bank, "Where reasonable to do so", rely on "the financial resources of third parties available to you", including directors and guarantors, and says it owes a guarantor the same duty to assess the borrower's capacity to repay (paragraphs 78 and 79).⁸ APRA requires banks to "appropriately evaluate the level of coverage being provided in relation to the credit quality of the guarantor and legal enforceability of the guarantee" (APS 220, paragraph 53).¹³

A loan described as unsecured can still come with one. Westpac's unsecured business loan page (last modified 29 May 2026) says "For corporate borrowers, director guarantees may be required",²⁹ ANZ says a personal guarantee "may still be required from all company directors",²³ and Prospa says "we take a personal guarantee from directors, shareholders or persons actively engaged in the management of the business".¹⁹ Unsecured, on these pages, describes the company's assets, not the director's.

What the Code requires. For guarantees of loans from Code banks, Part B6 of the Code sets the rules. Under paragraph 102 the guarantee "will be limited to" either "a specific amount and/or category of amounts", such as all amounts owing under a named loan plus interest and recovery costs, or "the value of a specified property or other assets"; the guarantor can later write to limit it further, though the bank need not agree if the new limit would not cover what the borrower already owes or the bank is obliged to make further advances (paragraph 116). Its terms must say prominently that the guarantor should get independent advice, can refuse to sign and can limit their liability, and whether it "may cover future credit facilities and variations of the existing Loan" (paragraph 103). The bank must give the guarantor the proposed loan contract, any related credit report and the borrower's recent financial statements (paragraph 105), and will not accept the guarantee "until the third day after" the guarantor has them (paragraph 112).⁸

The Code is written for the guarantor who knows least about the borrower: a parent, a spouse, a friend. Directors get less of it. A director may decline the documents and may choose to sign before the three days are up, and the bank "will not influence your choice" (paragraphs 108 and 113). A sole director, a director of "a company that has only one director" that is to be the borrower, is outside the documents, the meeting without the borrower and the waiting period altogether (paragraphs 105, 111 and 113).⁸ In a one director company, the director who signs gets the limit, the notice, the right to withdraw and the order of enforcement, and little else.

Some protections reach every guarantor. A guarantor can withdraw before the bank provides credit, or afterwards if the signed loan differs materially from the proposed loan they were shown (paragraph 122), and end their liability by paying the lower of what the borrower owes and the guarantee's limit (paragraph 123). A Code bank will not enforce security the guarantor has given until it has enforced the borrower's (paragraph 124). Nor will it enforce a judgment against the guarantor unless it has done that and, in addition, the borrower has left a judgment unpaid for 30 days after written demand, cannot be found or is insolvent (paragraph 125). There are exceptions (paragraph 126).⁸

A guarantee given for one loan can end up standing behind others. If its notice says it may cover future credit, new loans and changes can fall within it up to its limit (paragraph 119), and raising the limit needs the guarantor's written acceptance (paragraph 120).⁸ An unlimited guarantee of all money the company owes, now and later, which the Code does not let a Code bank take from an individual guarantor but other lenders may ask for, reaches every debt the company has with that lender. Formal insolvency can pause one. During a voluntary administration, ASIC says, a creditor holding a personal guarantee from the company's director "cannot act under the personal guarantee without the court's consent" (Corporations Act s 440J),^30,10 and during a small business restructuring, "A creditor cannot enforce any personal guarantees held against a director" without leave.³¹

Reported data

What the Banking Code gives a guarantor, and how much less it gives a director

Protection	Paragraph	Not a director	A director	A sole director
A limit to an amount, a category of debts or the value of a property	102, 116	Yes	Yes	Yes
A prominent notice: advice, the right to refuse and to limit, and any cover of future credit	103	Yes	Yes	Yes
The loan contract, credit report, recent accounts and two years of demand history	104, 105	Yes	Yes, but may decline them	No
A meeting with the bank without the borrower present	109 to 111	Yes	No	No
Three days before the bank accepts the guarantee	112, 113	Yes, unless legal advice is confirmed	May choose to sign sooner	No
Copies of demands on the borrower, within 14 days	115	Yes	Yes	No
Withdrawal before credit is provided, or after it if the signed loan differs materially	122	Yes	Yes	Yes
The borrower's security enforced before the guarantor's	124 to 126	Yes, with exceptions	Yes, with exceptions	Yes, with exceptions

For individuals guaranteeing a loan from a Code bank to an individual or a Small Business. Not a director means, for example, a relative or friend of the borrower; the Code treats trustees, partners and guarantors of asset finance separately. A sole director is a director of a borrowing company that has only one director.

A director's exposure beyond the guarantee

A guarantee is the exposure a director agrees to. The Corporations Act and the tax law add others that no director signs for.

Directors owe duties of care and diligence (s 180), of good faith in the company's interests and for a proper purpose (s 181), and not to misuse their position or company information (ss 182 and 183).^32,33 When money is short, the duty that matters is the duty to prevent insolvent trading in s 588G. A company is insolvent "when it cannot pay its debts when they are due" (the test is in s 95A), and before it takes on a new debt a director must consider whether there are reasonable grounds to suspect it is, or will become, insolvent.^34,33 The duty "applies even if you are the only director and shareholder".³⁵ ASIC describes the compensation a director can be ordered to pay as "potentially unlimited", with civil penalties of up to the greater of 5,000 penalty units or three times the benefit obtained and detriment avoided, and, if dishonesty is involved, criminal penalties of up to 2,000 penalty units, five years' imprisonment or both.³⁴

The law also offers a way through. The safe harbour in s 588GA may protect a director from liability for insolvent trading, though not from the other duties. It covers a director who, after starting to suspect insolvency, begins "developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator", for debts incurred in connection with that course of action.³⁴ It "only applies if you continue to meet your core duties as a director", which include "keeping proper records and ensuring employee entitlements and tax reporting are up to date".³²

Tax is separate again. The Commissioner of Taxation can issue a director penalty notice under s 269-25 of Schedule 1 to the Taxation Administration Act 1953 "for your company's unpaid debts". ASIC's guidance is to "immediately seek professional advice", because failing to take appropriate steps within the period the notice allows can lead to recovery action against the director personally; the period, the steps that end the penalty and the debts a notice can cover are set by the Act.³⁴

Threefold Capital interpretation

Four ways a company's debts can reach its director

Route	The law	When it can arise	What is at stake	What reduces the exposure
A personal guarantee	The guarantee; for Code banks, Banking Code Part B6	The company does not pay and the lender calls on the guarantee	Up to the guarantee's limit, or everything it covers if there is none	A limit agreed at the start; a Code bank must limit the guarantee (paragraph 102)
Insolvent trading	Corporations Act s 588G	The company takes on a debt when there are reasonable grounds to suspect it is, or will become, insolvent	Compensation that ASIC calls potentially unlimited, civil penalties, and criminal penalties if dishonest	A course of action begun early that is reasonably likely to lead to a better outcome (safe harbour, s 588GA), with records, employee entitlements and tax reporting up to date
A director penalty notice	Taxation Administration Act 1953, Schedule 1, s 269-25	The Commissioner issues a notice for the company's unpaid debts	Recovery action against the director personally	Advice taken at once, and the steps the Act allows within the period the notice gives
A breach of duty	Corporations Act ss 180 to 183	A failure of care and diligence or good faith, or misuse of position or information	Compensation, civil penalties and disqualification	Staying informed, acting in the company's interests and keeping proper records

General information. Each route has conditions, defences and exceptions not shown here.

Default and notice under the Banking Code

What counts as a default is set first by the loan documents. For a small business borrowing from a Code bank, the Code also limits what the bank can do about one. The 2025 Code has applied since 28 February 2025, and the Code banks include ANZ, CommBank, NAB and Westpac.^36,37 A business is a Small Business under the Code by three tests, on turnover, full-time equivalent staff and total debt including undrawn limits; Part 4 sets them out.⁸ The Banking Code Compliance Committee investigates alleged breaches; individual complaints go to the bank and then to AFCA.³⁷ A lender that has not adopted the Code is bound by its documents, the general law and statute: the unfair contract terms rules in the Australian Securities and Investments Commission Act 2001, under which an unfair term in a standard form small business loan is void and can attract a penalty (s 12BF),³⁸ and the same Act's prohibition on unconscionable conduct in connection with financial services (s 12CB).³⁹ Consumer credit under the National Credit Code has rules of its own, set out in Part 2.⁴⁰

Missed payments. A Code bank will give a small business "no less than 30 Days' notice of the payment failure before we make a demand for full repayment or take Enforcement Proceedings" (paragraph 82). Days are calendar days, and enforcement proceedings include exercising a power of sale and appointing receivers or administrators (Part E). If the arrears, and any later payment that falls due in the notice period, are paid within it, the bank will not demand full repayment or enforce for that non-payment (paragraph 83). The notice can be shorter, or there can be none, if the borrower or a guarantor is insolvent or the bank needs "to manage a material and immediate risk" (paragraph 84), and an overdraft or on-demand facility may need none (paragraph 85).⁸

Other defaults. In a standard form small business loan, the bank can act on a default other than non-payment only if it is one of the events in paragraph 87, set out below, and is material, or likely to have a material impact on repayment, on the bank's security or on its legal or reputation risk (paragraph 90). It must give notice of the grounds and "no less than 30 Days' notice of the Default" to remedy it, where that is possible (paragraph 88).⁸

Covenants. Financial covenants, such as a minimum interest cover, may be a default trigger in a standard form small business loan for property development and listed kinds of specialised lending, such as construction finance and invoice discounting (paragraph 91); in our reading of paragraphs 87 and 91 together, not in other standard form small business loans. Negotiated and larger facilities are outside this, and covenant defaults are usual there. An event of default based on "unspecified material adverse changes" is not allowed at all (paragraph 92).⁸ Part 5 explains how covenants are set and watched.

Expiry. If a loan is not fully repaid by regular instalments over its term, as with an interest-only facility, and the business is not in default, a Code bank must give at least three months' notice that it will not extend the loan (paragraph 93), and need not extend it on the same terms (paragraph 94).⁸

Reported data

What a Code bank can treat as a default in a standard form small business loan

Event	Paragraph
The borrower or a guarantor becomes insolvent, bankrupt, or enters administration or another insolvency process	87(a)
Another creditor takes enforcement proceedings against the borrower or a guarantor	87(b)
Early repayment is required, or action taken on a default, under another facility with the same bank	87(c), (d)
The bank believes on reasonable grounds that the law has not been complied with	87(e)
Information given was materially incorrect or misleading	87(f)
The loan is used for a purpose the bank did not approve	87(g)
Assets are dealt with in breach of the loan	87(h)
Financial information the agreement requires is not provided	87(i)
A licence or permit needed to run the business, or required insurance, is not kept up	87(j), (k)
Ownership, management control, status, capacity or composition changes without consent	87(l), (m)
A financial covenant is breached: permitted as a trigger in property development and specialised lending; in our reading, not elsewhere	91
An unspecified material adverse change: not allowed	92

Defaults other than missed payments. Each event must also be material, or likely to have a material impact, before the bank can act (paragraph 90).

Financial difficulty. Part D of the Code applies to small businesses as well as individuals. It asks a customer in difficulty to contact the bank "as soon as possible" (paragraph 167), commits the bank to work towards "a sustainable solution" (paragraph 175), and to say in writing whether it will help, and why (paragraph 184). Where restoring the position is unlikely, the help it describes includes "giving you time to sell your property". Part D does not, in its own words, stop a bank from enforcing while it considers a request, though the bank will not sell the debt to anyone else while it is actively considering the customer's financial situation (paragraph 190).⁸ The hardship rules of the National Credit Code, which Part 2 describes, apply to consumer loans, not to a business loan.

Inside the bank. APRA's standard requires a workout program kept apart "from the area that originated the exposure" (paragraph 80), aimed at recovering "as much of an exposure as is reasonably achievable within the requirements established by law" (paragraph 81).¹³ The people who approved a loan are not meant to be the people who decide what happens when it goes wrong; Part 5 describes the reviews that come before that point.

From a missed payment to a sale

A missed payment rarely leads straight to a sale. In our view most problem loans at banks are resolved before enforcement: by a variation, such as a period of interest only or a longer term; by a standstill agreement that trades time for more reporting or more security; by a refinance elsewhere; or by a sale the owner runs with the bank's consent and to a timetable. Part D of the Code and paragraph 175 are the framework for that. Enforcement is the path when those fail or the borrower stops engaging, and the timeline shows it with its minimum notice.

Threefold Capital interpretation

From a missed payment to a sale: the steps and the minimum notice

1. Day 0

   A payment is missed

   The loan is past due from the day an amount due is not paid in full (APS 220, paragraph 13). A breach other than non-payment can be acted on only if it is listed in paragraph 87 of the Code and is material (paragraph 90).⁸

2. When the bank writes

   Notice of the default

   For a missed payment, no less than 30 days' notice before a demand or enforcement (paragraph 82); paying the arrears within that time stops both (paragraph 83). For a default that can be remedied, notice of the grounds and at least 30 days to remedy it (paragraph 88).⁸ Over land, the same letter usually also serves as the written notice the Real Property Act requires before a power of sale (s 57),⁴ and the default must then continue for the period the Act sets, so the two periods run together rather than one after the other.

3. At least 30 days later

   Demand for full repayment

   If the arrears are still unpaid, or the default not remedied, the bank can demand the whole loan. Less notice, or none, is allowed on insolvency or to manage a material and immediate risk (paragraphs 84 and 89), and an overdraft or on-demand facility may need none (paragraph 85).

4. After the notice periods expire and a demand is unmet

   Enforcement begins

   Over land in NSW, the mortgagee can exercise its power of sale (s 58), itself or through a receiver appointed under the mortgage.⁴ Over business assets, the lender appoints a receiver under its security agreement, and must act fairly when using insolvency practitioners (paragraph 99).⁸

5. Months

   The property is marketed and sold

   A mortgagee selling land, or a receiver, must take reasonable care to sell for not less than market value, or for the best price reasonably obtainable (Conveyancing Act 1919 (NSW) s 111A; Corporations Act s 420A).^17,16 APRA has banks assume a marketing period of up to 12 months when valuing property security (APS 220, Attachment A).¹³

6. After the sale

   The proceeds are paid out and any shortfall pursued

   The proceeds go to the costs of the sale, then the first mortgagee, then the second, and any surplus to the borrower (s 58(3)); mortgages behind the selling one come off the title. A Code bank enforces the borrower's security before a guarantor's, and a judgment against a guarantor only as paragraphs 125 and 126 allow.⁸

The periods are the Banking Code's minimums for small business customers of Code banks, in calendar days. Other lenders, larger businesses and consumer credit follow other rules, and the loan documents always matter.

Over land, a mortgagee sells under its power of sale once the s 57 notice has run. Over business assets, the lender appoints a receiver under its general security agreement, to collect and sell "enough of the secured assets to repay the debt owed to the secured creditor". The receiver's "principal duty is to the secured creditor", it must take reasonable care to sell "for not less than market value" or, where there is none, for "the best price reasonably obtainable" (Corporations Act s 420A), and it has "no obligation to pay any other unsecured creditors for outstanding pre-appointment debts". The directors stay in office, with powers that depend on the receiver's.^16,10 Paragraph 99 of the Code deals specifically with appointing as receivers accountants who have investigated the business.⁸

Receivers, administrators, liquidators and restructuring

A secured creditor appoints a receiver itself, under its security. The other processes are usually the directors' choice, although a court can order a liquidation. ASIC counted 14,153 companies entering external administration for the first time in 2025-26, a count of formal appointments rather than of closures.⁴¹ Most are small businesses; Part 3 gives the profile.

Voluntary administration is "designed to resolve the company's future direction quickly".³⁴ While it runs, unsecured creditors cannot enforce their claims without the administrator's consent, and "except in limited circumstances, secured creditors cannot enforce their security interest in the company's assets".³⁰ The circumstance that matters most to a lender is the decision period: a secured party with security over all or substantially all of the company's property may act within a period that ends 13 business days after it is given notice of the appointment (Corporations Act s 441A, with the period defined in s 9),^33,10 which is why lenders prefer a general security agreement to security over particular assets. At a second meeting, within 25 business days, creditors decide whether to return the company to its directors, accept a deed of company arrangement, under which it pays all or part of its debts and is then free of them, or wind it up.³⁰ Small business restructuring, open to companies with liabilities of no more than $1 million, keeps the directors in control while a registered liquidator helps them put a plan to creditors within 20 business days; the plan is accepted if a majority in value of the affected creditors who respond support it.³¹ In a liquidation, a registered liquidator takes control to wind up the company's affairs, and priority creditors such as employees are paid before other unsecured creditors (s 556).^9,34,10

Reported data

Four insolvency processes, side by side

Feature	Receivership	Voluntary administration	Small business restructuring	Liquidation
Purpose	To collect and sell enough of the secured assets to repay the secured creditor	To decide the company's future quickly	To let an eligible small company agree a plan with its creditors	To wind up an insolvent company's affairs for its creditors
Who starts it	A secured creditor whose security allows it, or a court	The directors, a secured creditor with security over all or substantially all of the property, or a liquidator	The directors, if liabilities are no more than $1 million and employee entitlements due are paid	The directors and shareholders, or a court on an application
Who is in control	The receiver, of the secured assets; the directors stay in office with reduced powers	An independent registered liquidator, as administrator	The directors, with a registered liquidator as restructuring practitioner	An independent registered liquidator
Other creditors	No obligation on the receiver to pay unsecured creditors' earlier debts	Unsecured claims frozen; secured creditors cannot enforce except in limited circumstances; no acting on a director's guarantee without the court's consent	Claims frozen without consent or leave; no enforcing personal guarantees against a director without leave	Priority creditors such as employees are paid before other unsecured creditors
Timing	Until enough of the secured assets are sold	Meetings within 8 and 25 business days, or 30 around Christmas or Easter	A plan within 20 business days, extendable by up to 10	Until the company's affairs are wound up

Summaries of ASIC's descriptions. Each process has conditions and exceptions not shown here.

Who is paid from the sale

To show priority in money, we built a model of one hypothetical property: a trade distributor's warehouse, with a market value of $2,000,000. The first mortgagee is owed $1,300,000, including accrued interest and the charges the loan documents add to the debt. A second mortgagee, say a private lender that funded an expansion, is owed $300,000, and unsecured creditors are owed $250,000. Costs of the sale itself, the agent, the lawyers and any receiver, take 5% of the price, which is light if a receiver is appointed. The scenarios differ in how far below market value the warehouse sells, and in whether a director has guaranteed the first loan, up to $500,000.

The market value is the valuation the loans were made against. A mortgagee selling under its power of sale must take reasonable care to sell for not less than market value, or for the best price reasonably obtainable (Conveyancing Act 1919 (NSW), s 111A), and a receiver has the same duty (Corporations Act s 420A),^17,16 but market value at the time of sale can be well below an earlier valuation: the market may have weakened, the building may need work, a tenant may have left. The discounts stand for that gap. They are assumptions, not estimates of what forced sales achieve.

Illustrative model

Model: who is paid when a secured property is sold

Four scenarios for one hypothetical property with two mortgages. Choose one, or move the controls: the sale price, the costs, what each creditor is owed and the director's guarantee.

Sold at market valueSold 20% below valueSold 35% below value35% below, with a guarantee

Without JavaScript the model shows one scenario: Sold 20% below value.

The sale

Market value of the property

$2,000,000

−+

Sale price below market value

20%

−+

Costs of the sale and enforcement, share of the price

5.0%

−+

What is owed

Owed to the first mortgagee, with interest and costs

$1,300,000

−+

Owed to the second mortgagee

$300,000

−+

Owed to unsecured creditors

$250,000

−+

The guarantee

Director's guarantee of the first loan, up to

$0

−+

Left after costs $1,520,000first mortgagee repaid 100%

First mortgagee recovers

100%

Second mortgagee recovers

73%

Unsecured creditors could recover

0%

Called on the director's guarantee

$0

From a sale at $1,600,000, costs take $80,000. The first mortgagee is paid $1,300,000 before the second mortgagee receives anything, and unsecured creditors only from what is left.

A sale up to 31.6% below market value would still repay the first mortgagee in full. The second mortgagee has less room: 15.8%.

A secured lender that is not repaid in full can still claim the shortfall from the borrower, as an unsecured creditor.

Who is paid from the sale

1. Sale price, against market value$1,600,000 of $2,000,00080%
2. Costs of sale and enforcement$80,000, paid first
3. First mortgagee$1,300,000 of $1,300,000100%
4. Second mortgagee$220,000 of $300,00073%
5. Unsecured creditors$0 of $250,0000%
6. The owner$0, what is left

PaidOwed but not paid

The order never changes; only the money does. Sold at market value, the mortgagees are repaid and the surplus goes to the company, which can pay its unsecured creditors in full and keep $50,000. Sold 20% below, for $1,600,000, costs take $80,000, the first mortgagee is repaid in full and the second receives $220,000 of the $300,000 it is owed. Sold 35% below, for $1,300,000, the first mortgagee receives $1,235,000, $65,000 short, and nobody else receives anything. With a director's guarantee of the first loan, the lender calls on it for that $65,000, which becomes a debt the director owes personally.

Illustrative model

Who is paid from the sale, in each scenario

Line	Sold at market value	Sold 20% below value	Sold 35% below value	35% below, with a guarantee
Sale price below market value	0%	20%	35%	35%
Director's guarantee of the first loan, up to	$0	$0	$0	$500,000
Sale price	$2,000,000	$1,600,000	$1,300,000	$1,300,000
Costs of sale and enforcement	$100,000	$80,000	$65,000	$65,000
Left after costs	$1,900,000	$1,520,000	$1,235,000	$1,235,000
Paid to the first mortgagee	$1,300,000	$1,300,000	$1,235,000	$1,235,000
First mortgagee recovers	100%	100%	95%	95%
Paid to the second mortgagee	$300,000	$220,000	$0	$0
Second mortgagee recovers	100%	73%	0%	0%
Left for unsecured creditors	$250,000	$0	$0	$0
Unsecured creditors recover	100%	0%	0%	0%
Left for the owner	$50,000	$0	$0	$0
Called on the guarantee	$0	$0	$0	$65,000

Market value $2,000,000. Owed to the first mortgagee $1,300,000, to the second $300,000 and to unsecured creditors $250,000. Costs of sale and enforcement are 5% of the price. The mortgagee pays only the mortgagees; what is left for unsecured creditors and the owner is shown as a liquidator would distribute it.

The model leaves out four things that change real outcomes: the borrower's other assets, which could repay more; the priority some debts have by law in a liquidation, such as employee entitlements (s 556); time; and the fact that on a mortgagee's sale the surplus after the mortgages goes to the borrower (s 58(3)), so the unsecured creditors in the model are paid as they would be if the borrower were then wound up. A sale takes months, and the interest and costs that build up on the first mortgage meanwhile come out of what is left for everyone below it. The next table puts a value on that.

Illustrative model

What each change costs the two mortgagees, from a sale 20% below value

Change	First mortgagee	Second mortgagee
A sale a further 5% below value	$0	−$95,000
A sale a further 10% below value	$0	−$190,000
Costs of sale two points higher	$0	−$32,000
Interest and costs add $100,000 to the first mortgage	+$100,000	−$100,000
A market value $200,000 lower	$0	−$152,000

Changes in what each mortgagee receives, against the sale 20% below value.

How we read it

What follows is our interpretation of how security can be agreed and managed.

The security deserves as much attention as the rate

The rate is paid every month; the security matters only in a bad year, but then it decides almost everything.

Security matched to the risk. A lender asking for a mortgage, a general security agreement and an unlimited guarantee for a loan that one of them would cover is asking for more than the risk requires. Each extra layer costs nothing to give in a good year and a great deal in a bad one. The useful question is which layers the lender needs to be well secured on a sensible downside, and which are there because the standard documents include them.

A limit on a guarantee. The Code requires a guarantee to be limited, and the category chosen matters (paragraph 102).⁸ In our model, a guarantee of up to $500,000 was called for $65,000. A limit set by reference to the shortfall a lender could plausibly face, rather than to the whole debt, seems to us a reasonable request, and the response says something about how the lender sees the risk. ASIC's guidance to directors in difficulty is to take care before accepting new finance, "especially if personal guarantees or other personal security is required".³⁵

What is cross-collateralised. A guarantee from a related company, or security for all money owed now and later, ties assets and loans together, so a problem in one part of a group reaches the others. Some of that is the price of borrowing; some of it is habit. The links the lender really needs are worth settling before signing.

How security comes off. Security is easy to give and slow to recover. An agreement at the start on when a guarantee falls away or a property is released, for example once the loan falls below an agreed share of its value or after a run of clean payments, costs little to ask for and is much harder to obtain later. When a loan is repaid, the registrations should go too: for vehicles and other goods with serial numbers, the PPSR's timing rules give the secured party five business days after its interest is no longer perfected, "usually when the debt is repaid".⁶

The options narrow as time passes

The Code's notice periods are floors, and a business that waits for them to run has already lost most of its choices. In our view, the time between the first sign of trouble and the lender's demand is when a borrower in difficulty still has real choices, and every option in this article narrows as it passes.

Part D asks a business in difficulty to contact the bank "as soon as possible", and the help it describes includes time to sell the property, which keeps the sale and its terms in the owner's hands.⁸ Safe harbour, small business restructuring and a director penalty notice all reward the same thing: acting before the position is fixed, with records, employee entitlements and tax reporting kept up, and within whatever period a notice allows.^32,31,34 ASIC puts it plainly: "Acting early gives you more options to get your company back on track and avoid more serious consequences."³⁵

One more observation, from the lender's side of the table. A lender that hears about a problem from the borrower, early and with a plan, is dealing with a customer. A lender that finds out from a missed payment is dealing with a default, and from then on its process, its workout team and its documents take over.

Conclusion

Security is agreed in good times and used in bad ones, and its terms decide who controls a business in difficulty and who carries the loss. In NSW a registered mortgage is protected by the register itself and sold under a statutory power after a formal notice and a further period of default. Over everything else a business owns, the Personal Property Securities Act ranks claims by perfection and timing, and lets purchase money jump the queue. A director's guarantee makes the company's debt personal, and the Banking Code, which protects most guarantors with information and time, gives directors less of it, and a sole director less again.

When a loan goes wrong, the Code sets the floor for a Code bank and a small business: 30 days' notice of a missed payment, a closed list of other defaults, no general material adverse change clauses, and three months' notice before a loan that is not in default, and not fully repaid by its instalments, is not renewed. Most problem loans, we believe, are resolved before that floor is reached. When they are not, the securities take over, and our model shows how quickly a weak sale uses up the cushion beneath the first mortgagee: the owner's equity, the unsecured creditors, the second mortgage and, in the end, the director's guarantee. In our view, two things change the outcome more than anything that happens after a default, and both are settled long before any sale: what the security covers, and how early the borrower acts.

Method and sources

Cut-off. Legislation, regulatory guidance, codes and lenders' published terms as they stood on 12 October 2026.

Sources. We use the primary source for each rule: the Real Property Act 1900 (NSW) in AustLII's consolidation and, for s 56C and for s 111A of the Conveyancing Act 1919 (NSW), the 2009 amending Act as made; the Personal Property Securities Act 2009 and the Corporations Act 2001 on the Federal Register; APRA's standards APS 112 and APS 220; the Banking Code of Practice 2025; and the guidance of NSW Land Registry Services, the PPSR and ASIC. Data on non-performing loans and insolvencies come from the Reserve Bank and ASIC. Lenders' terms are quoted from their own pages, with the date each shows or the date we saw it; they are that lender's terms, not market norms.

Where we relied on official guidance. Where we could not read a provision in full, we rely on the official guidance named: the PPSR for the registration deadline against a company and the default priority rules; the Federal Court's judgments for ss 62(3)(b) and 267(2) of the Personal Property Securities Act and s 12CB of the ASIC Act; ASIC for a receiver's duty on sale, the pause on a director's guarantee in an administration, the priority of employee entitlements, unfair contract terms and director penalty notices; and NSW Land Registry Services for the notice before a mortgagee's sale. For the Corporations Act we read the definition of the decision period and the headings of the sections cited, not their full text. The Real Property Act's time limit for the notice before a sale, and the Taxation Administration Act's for a director penalty notice, are not reproduced.

Our calculations. The gap between CommBank's advertised starting rates for its unsecured and secured business overdrafts is 15.05% less 9.00%, or 6.05 percentage points. Every figure from the model is written in by the build from the model itself.

The model. The property and its creditors are hypothetical. Costs of sale and enforcement are 5% of the price, and the discounts below market value are assumptions. The model pays the first mortgagee, then the second, and treats what is left as available to the company's unsecured creditors before the owner, as a liquidator would distribute it after employee entitlements and costs, which the model leaves out, as it does the borrower's other assets and the time a sale takes. The mortgagee itself pays only the mortgagees and hands the surplus to the company. The model assumes a guarantor can pay what is called. It is written twice, once to produce the figures on the page and once to recalculate them as the controls move, and the two are tested against each other on every scenario and thousands of other settings.

Labels. Reported data: figures or rules published by the source named. Threefold Capital interpretation: our reading of the evidence. Illustrative model: hypothetical figures or a hypothetical structure. Forward-looking scenario: a planning case, not a forecast; none is used here.

Limitations. The law is simplified, and it changes. Land law differs between States, and this article uses New South Wales. The Banking Code's commitments apply only to Code banks and to customers within its definitions. Nothing here is legal advice; in any particular case the documents and the facts decide.

Corrections. If you see an error, please tell us at threefoldcapitalau@gmail.com. We correct published articles and record what changed at the top of the page.