When you’re building a small business or startup, cash flow is everything.
Sometimes you’ll need to borrow funds, take on an investor, or give a supplier comfort that they’ll get paid. And sometimes the other party will ask for “security” - a legal right they can rely on if things go wrong.
One term you might hear in that context is an equitable charge. It can sound technical, but the basic idea is straightforward: it’s a way to “charge” (secure) an asset or a fund in equity, even if it’s not created as a formal legal mortgage or registered security interest.
In this guide, we’ll break down what an equitable charge is in Australia, how it works in practice, and what you should watch out for before you agree to one (or rely on one). This article is general information only and isn’t legal advice.
What Is An Equitable Charge?
An equitable charge is a type of security interest recognised by equity (the principles courts use to achieve fairness), rather than depending solely on strict “legal title” concepts.
In practical terms, an equitable charge means:
- you (the debtor/grantor) agree that certain property, rights, or a particular fund will be “set aside” as security for a debt or obligation; and
- the other party (the creditor/chargee) gets a right to be paid from that asset/fund if the obligation isn’t met.
Unlike some mortgages or fixed charges, an equitable charge usually does not involve transferring legal title. It may arise from:
- the wording of a contract (even if it doesn’t use formal “charge” language),
- a promise or undertaking to secure a debt against an asset, or
- conduct and circumstances that a court considers sufficient to create equitable rights.
It also sits within the broader concept of equitable interests - rights recognised in equity that can exist alongside (or even affect) strict legal ownership in certain circumstances. If you’re dealing with layered rights in assets or funds, it’s worth understanding how equitable interests work generally, because an equitable charge is one common way those rights show up in business transactions.
What Can Be “Charged”?
An equitable charge can apply to different types of property, including:
- specific assets (for example, equipment, stock, receivables, or IP in some cases);
- a class of assets (for example, “all present and after-acquired property” - though that starts looking like a broader security arrangement);
- proceeds or a fund (for example, a particular payment you’re expecting to receive, or settlement proceeds); and
- future property (property you don’t yet have, but expect to acquire).
That flexibility is part of why equitable charges can be attractive - and also why you should be careful with the drafting and the commercial implications.
How Does An Equitable Charge Work In Practice?
Most small businesses encounter an equitable charge in one of two ways:
- You grant one (for example, as part of a loan, supplier arrangement, or settlement of a dispute).
- You receive one (for example, you’re the creditor and you want security from a customer, distributor, or borrower).
The key point is that an equitable charge gives the chargee a right that can be enforced through the courts - typically by seeking orders that the charged asset/fund be applied towards the debt.
Common Contract Language That Creates An Equitable Charge
You might see clauses that say things like:
- “The borrower charges in favour of the lender all of its rights, title and interest in as security for the secured obligations.”
- “The parties agree that the creditor has a charge over the proceeds of until the debt is satisfied.”
- “The debtor undertakes to hold for the creditor and applies them towards payment of the debt.”
Even where the clause doesn’t use perfect “charge” wording, a court may still find an equitable charge exists if it’s clear there was an intention to create security over identified property.
Equitable Charge vs Mortgage vs General Security
It helps to separate these concepts:
- Mortgage: often involves security over land (and an associated transfer/registration framework), but depending on the context the term can also be used for security over other types of property. In practice, mortgages tend to be more formal and commonly tied to real property.
- Equitable charge: security recognised in equity; often used for personal property or funds, and may be created by contract and intention, even without the same formalities as some mortgages.
- General security: a broad security covering most or all of a business’s assets. In Australia, this is commonly documented as a general security agreement and is often registered so priority is clearer.
From a risk perspective, the big practical question is often not “what label did we use?” but:
- does it create a security interest that needs registration, and
- where do you sit in the priority order if the business becomes insolvent?
When Might Your Business Use An Equitable Charge?
For startups and growing businesses, an equitable charge usually comes up when:
- you’re raising finance quickly and the lender wants security;
- you’re negotiating extended payment terms and a supplier wants comfort;
- you’re settling a dispute and one side needs assurance that payment will be made; or
- you’re working with a counterparty that doesn’t have much asset backing (so you want some security over something identifiable, like receivables).
Example: Charging Receivables Or A Particular Invoice
Let’s say your business is owed a large invoice from a customer, but you need working capital now. A financier may agree to advance funds on the basis that the financier has an equitable charge over that receivable (and potentially the proceeds when it’s paid).
This can work well commercially - but the legal effectiveness often depends on how clearly the receivable is identified, and whether the arrangement should also be registered to protect priority.
Example: A Startup Loan With Security Over IP Or Equipment
A lender may be willing to offer a better deal if the loan is secured. Sometimes that security is documented as a charge over key assets like equipment, or in some structures, rights relating to IP.
If you’re borrowing, it’s worth taking a step back and asking: is this a limited charge over specific assets, or is it effectively a “whole-of-business” security? That distinction affects flexibility later (for example, future fundraising, selling assets, or entering new finance arrangements).
In many cases, this is documented alongside (or inside) a broader secured loan agreement, so the commercial terms and the security provisions operate together.
Why Equitable Charges Matter: Priority, Insolvency, And Control
An equitable charge can be valuable security - but it’s not just a “paper promise”. It can have real consequences for how your business operates and what happens if something goes wrong.
1) Priority: Who Gets Paid First?
If your business becomes insolvent (or if a counterparty you’re dealing with becomes insolvent), priority becomes crucial. In simple terms, “priority” is about who gets paid first from available assets.
Depending on the circumstances, an equitable charge may:
- rank behind other secured creditors who have registered interests,
- be vulnerable if it should have been registered but wasn’t, or
- lead to disputes about what, exactly, was charged (and whether the asset/fund was sufficiently identified).
This is one of the biggest reasons we usually recommend getting the security structure and documentation right early - especially if the charge is meant to protect significant value.
2) Control And Restrictions On Your Business
Even if the charge is “equitable” (rather than registered as a mortgage or recorded as a PPSR registration), the underlying contract may restrict what you can do. For example, you might be required to:
- keep the charged asset insured,
- not sell or transfer the charged asset without consent,
- deposit certain proceeds into a nominated account, or
- give reporting and access rights to the chargee.
These restrictions can be manageable, but they can also become painful later - particularly when you’re trying to move quickly on a pivot, raise capital, or sell part of the business.
3) Enforcement: What Happens If You Default?
If you don’t meet the secured obligations, the chargee may be able to take enforcement action. The exact enforcement route depends on the documentation and the nature of the charged property, but it may involve court orders requiring the asset or fund to be applied to the debt.
For many founders, the surprise is that enforcement doesn’t only happen at the “end” of a business. It can also happen during a temporary cash-flow crunch, when you’re still actively trading.
Do You Need To Register An Equitable Charge On The PPSR?
For most Australian small businesses, the most important practical question is: does your equitable charge need to be registered?
In Australia, many security interests over personal property (not land) fall under the Personal Property Securities Act framework, and are recorded on the PPSR (Personal Property Securities Register).
If your equitable charge is a “security interest” under that framework, registration can significantly affect:
- your priority against other creditors, and
- what happens if the grantor becomes insolvent.
Why Registration (Or Lack Of It) Can Make Or Break Priority
If a security interest should be registered but isn’t, you may face real risks - particularly if the grantor becomes insolvent or if another creditor registers first. In some cases under the PPSA, an unperfected security interest can also vest in the grantor company on insolvency, meaning the secured party may lose the benefit of the security (even if the contract says it exists).
That’s why, when you’re the secured party, it’s often sensible to think about whether you should register a security interest rather than relying on the contract alone.
And if you’re granting the security, you should understand what’s being registered and how it may affect your ability to deal with your assets in the future (including future finance rounds).
Practical Tip: Do A PPSR Search Before You Take Security (Or Buy Assets)
Whether you’re lending money, taking security, or buying business assets, it’s often wise to check what security interests already exist.
A quick PPSR check can help you identify existing registrations that could impact the value of the asset or your ability to enforce your rights.
This is especially relevant for startups buying second-hand equipment, vehicles, or acquiring assets from another business - because you don’t want to inherit a problem you didn’t price in.
What Legal Documents Should You Review (Or Put In Place)?
Equitable charges rarely exist in isolation. They usually sit inside (or alongside) the contracts that set the commercial deal.
Depending on your situation, the documents you might need include:
- Loan Agreement: sets out repayment, default, and enforcement terms (often supported by security provisions, especially for a secured loan agreement).
- General Security Agreement: if the creditor wants security over most business assets, a general security agreement may be more appropriate than a narrow equitable charge (and can be registered for priority).
- Shareholders Agreement: if founders are contributing funds and taking security-like protections, it’s often better to clearly document decision-making and protections in a Shareholders Agreement rather than relying on informal promises.
- Company Constitution: your Company Constitution can affect how your company can grant security, approve transactions, and manage internal decision-making (which matters when security is being negotiated under time pressure).
- Terms And Conditions / Payment Terms: if you’re trying to reduce non-payment risk from customers (instead of taking security), clear Terms of Trade can help set expectations around payment timelines, interest, recovery costs, and what happens if a customer doesn’t pay.
Not every business will need all of these documents at once. The right approach depends on what you’re securing, who the counterparty is, and how much risk you’re taking on.
But as a general rule: if a deal is important enough that someone is asking for an equitable charge, it’s important enough to ensure the key documents are consistent, enforceable, and aligned with how you actually run the business.
Key Takeaways
- An equitable charge is a form of security recognised in equity, giving a creditor rights over an asset or fund without necessarily transferring legal title.
- Equitable charges often arise through contract wording and intention, so clarity in drafting (what is charged, when enforcement applies, and what happens on default) is critical.
- For small businesses and startups, the biggest practical risks are priority (who gets paid first) and enforceability if the other party becomes insolvent.
- Many security interests over personal property may need to be recorded on the PPSR to protect priority, and failing to register can have serious consequences (including, in some cases, vesting on insolvency under the PPSA).
- Equitable charges usually sit alongside other documents (loan terms, security agreements, shareholder arrangements), so it’s important the whole set of documents works together.
If you’d like a consultation on equitable charges, security arrangements, or registering security on the PPSR, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
