Negative pledge/restrictive covenants

Unclear, and unlikely.

A negative pledge covenant is an undertaking not to take certain action, typically not to grant further security or incur further financial indebtedness.

Provided that a negative pledge covenant grants no interest in personal property – there is no collateral – there should be no security interest.

Some negative pledge or restrictive covenants may in certain limited circumstances be characterised as something more than a mere contractual right, termed “equities”. It is unclear but equities probably cannot be ruled out from being security interests if they grant an interest in personal property and secure obligations.

Options (call or put)

Unclear, and unlikely.

Options can, depending on the circumstances, be characterised as something more than mere contractual rights, termed “equities”.

Depending on the circumstances, options cannot be ruled out from being security interests if they grant an interest in personal property and secure obligations.

Pre-emption rights –

contractual, or arising under company constitutions

Unclear and very unlikely.

Pre-emption rights typically protect existing share, security or other interest holders from being diluted if more shares/securities/interests are issued in the future, by giving existing share/security/interest holders the right to participate rateably in further share/security/interest issues.

Alone, contractual pre-emption rights appear very unlikely to be security interests. Likewise, pre-emption rights arising under company constitutions seem very unlikely to be security interests.

If coupled with other transactions, particularly to secure obligations, then express contractual pre-emption rights granted to (say) a shareholder under a shareholder’s agreement or joint venture agreement may, depending on the circumstances, secure obligations, in which case they should be closely considered for whether they constitute a security interest.

Given that the PPSA definition of security interest was amended before commencement to be the grant of an interest in (not in relation to) personal property, pre-emption rights are very unlikely to be security interests.

Repos

(repurchase transactions)

Possibly, if it grants an interest in personal property to secure an obligation – PPSA section 12(2)(k).

A repo transaction may be a security interest because it is an outright transfer (usually of bonds or other securities) in exchange for the payment of cash. A repo can be the equivalent of a loan secured by a mortgage over securities.

Rights of first refusal

Unclear and very unlikely.

Rights of first refusal are typically rights granted to another under a contract to have the first right to buy or otherwise take an interest in property should it be sold or disposed of in the future. Rights of first refusal are typically characterised to be a "weaker" right than an option.

If rights of first refusal are coupled with other transactions, they may, depending on the circumstances and the property in question (it would need to be personal property), secure obligations.

Given that the PPSA definition of security interest was amended before commencement to be the grant of an interest in (not in relation to) personal property, rights of first refusal are very unlikely to be security interests.

Swap/Derivative transactions

Possibly, but only if the transaction grants an interest in personal property to secure an obligation – PPSA section 12(1) and 12(2)(l).

So-called “close out netting” arrangements, which are a key feature of derivatives documented on ISDA terms, are not security interests (PPSA section 8(1)(e)). The general view in Australia appears to be that the "close out netting" exception to security interests should take a swap or derivative transaction outside of the PPSA.

Swaps and derivatives themselves are unlikely to be security interests, but given that they are documented on market-standard terms, being the master agreements published by ISDA, it should be remembered that their terms will usually include a flawed asset arrangement.

The ISDA Master Agreement provides for a flawed asset arrangement (clause 2(a)(iii)), which may be a security interest – PPSA section 12(2)(l).

Other elements of a swap or derivative transaction that could also be security interests include cash or securities posted as collateral or other security interests granted under either (A) certain credit support annexes (CSA) which accompany derivative transactions, or (B) in connection with “counterparty credit risk delinking criteria” specified by rating agencies upon a swap counterparty becoming subject to a rating downgrade (these criteria are sometimes included into swap transactions entered into by rated parties by being incorporated into the Schedule to the ISDA Master Agreement).

“Step-in” rights in relation to contracts.

Unlikely, but depends on content.

Project financings, property financings and large structured financings often include what are termed “step-in rights” in respect of important contracts, to allow a financier taking security over the contract to “step-in” to the contract upon enforcement, and take over the grantor’s position under the contract.

Step-in rights often take the form of a tri-partite agreement between the financier, and the parties to the underlying important contract over which the financier takes security (for example, a coal supply agreement between a coal mining company which has borrowed money from a bank, and a coal buyer). Upon a default by say the coal mining company in the example, the financier would pre-agree with the coal buyer that the financier or their receiver can step-in to the coal supply contract and perform it without the coal buyer being able to terminate the contract or call a default.

Step-in rights under tri-partite agreements effectively grant rights in relation to other contracts (personal property) as part of a security package to secure lending to one of the contract parties (the coal mining company in the example).

Step-in rights (depending on how they are structured) are unlikely to be security interests. Arguably, they are an interest in relation to personal property (contracts) which secure obligations, but the definition of security interest under the PPSA is narrower than that – security interests must grant an interest in personal property.