Securing Unsecured Debt: Key Strategies and Pitfalls to Avoid
For many businesses, offering credit or goods and services on payment terms is a necessary part of doing business — but it also introduces risk. If that debt is unsecured, your chances of recovering the full amount drop significantly when things go wrong. From unpaid invoices to complex insolvency proceedings, knowing the difference between secured and unsecured debt and how to shift from one to the other is vital.
In this article, we’ll break down what unsecured debt is, how to secure it, and what happens if you don’t, particularly in instances where an external administrator is appointed.
What is Unsecured Debt?
Unsecured debt is money owed that isn’t backed by any specific asset or collateral. If the debtor defaults, you don’t have an automatic right to seize property or equipment to recoup what you’re owed.
Common examples of unsecured debt include:
Unpaid invoices or trade credit
Credit card debt
Personal loans (without security)
Unsecured business finance
Because there’s no asset tied to the debt, unsecured creditors are often last in line when a company enters liquidation or voluntary administration. That’s why it’s critical to take proactive steps to improve your position early, before signs of financial distress emerge.
Can Unsecured Debt Be Secured?
Yes. In certain cases, you can turn an unsecured debt into a secured debt, either from the outset of a contract or later down the line. But some specific legal steps and timeframes do need to be followed.
Build Security Clauses Into Your Agreements
The easiest way to protect yourself is by including security clauses (also known as charging clauses or retention of title clauses) in your contracts or credit applications. These clauses grant you the right to register a security interest over certain assets (e.g. goods supplied, equipment leased, or other property).
This ensures you’re no longer just an unsecured creditor — you become a secured party under the Personal Property Securities Act 2009 (Cth) (PPSA), giving you legal priority over unsecured claims.
Don’t Forget the PPSR
Even with a solid clause, your security means little unless it’s registered correctly on the Personal Property Securities Register (PPSR) — and within the required timeframes.
Late or non-registration can cause your interest to vest in the grantor under PPSA section 267, and it can also be void against a liquidator under section 588FL of the Corporations Act if it isn’t registered within 20 business days of attachment (or at least 6 months before the company enters external administration, i.e. the “critical time”).
You can register and search via the government PPSR.
Retrospective Security — Is It Too Late?
If you didn’t secure the debt at the start, there’s still a potential opportunity to fix that — provided the debtor agrees. For example, you might enter into a General Security Agreement (GSA) after the debt arises. A GSA is a written security agreement under PPSA that grants a security interest over some or all of the grantor’s present and after-acquired property (often called “ALLPAAP”). It replaces fixed and floating charges and must be in writing and registered on the PPSR to hold up in an external administration.
But this is risky territory. If the debtor goes into administration within 6 months of registration, you may face challenges under section 588FJ of the Corporations Act, which allows a liquidator to set aside the security if it disadvantages other creditors.
Why It Matters During External Administration
When a company enters external administration (including voluntary administration, liquidation, or receivership) the stakes get much higher.
Priority and Payment
Secured creditors get paid first from the sale of secured assets. Unsecured creditors are generally paid last, and often receive only cents in the dollar — if anything at all.
Vesting and Avoidance Risks
As outlined above, your security interest can “vest” in the company (i.e. become invalid) if not registered in time. This is usually within 20 business days of the agreement being made, or 6 months before the company enters administration. This applies even if your contract gave you rights, as without proper registration, they may be lost.
The Importance of Documentation
To enforce a security interest, you’ll need a written security agreement that clearly describes the collateral and the rights it grants you. Generic invoices or verbal agreements won’t cut it.
Final Thoughts: How a Lawyer Can Help You Secure Unsecured Debt
At Gear & Co Lawyers, we work with businesses across Queensland to review their contracts, register security interests, and navigate disputes with debtors, all before external administration becomes a reality.
Whether you’re chasing unpaid invoices, trying to secure an old debt, or concerned about your rights in a liquidation scenario, we’ll help you act quickly and strategically to improve your position.
You can also learn more about your options in our articles on What to Do if You’re an Unsecured Creditor, Understanding Voluntary Administration and Defending an Unfair Preference Claim.
If you’re unsure where to start or want to understand your rights as an unsecured creditor, contact Gear & Co Lawyers on (07) 3209 2547 or info@gearandco.com.au.
While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed. This publication is intended to provide only general information on matters of interest. It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice. You should seek legal or other professional advice that is specific to your circumstances.
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