Last month, the High Court finally laid to rest the concerns surrounding the Octaviar cases. In Public Trustee of Queensland v Fortress Credit Corporation (Aus) 11 Pty Ltd [2010] HCA 29 French CJ, Gummow, Hayne, Kiefel and Bell JJ unanimously dismissed the appeal with costs, and upheld the decision of the Queensland Court of Appeal.¹ This put an end to the confusion which surfaced after the first instance decision of McMurdo J.²
Background
In our publications dated 14 April 2009 and 5 October 2009, we summarised McMurdo J's first instance decision, and the subsequent findings of the Queensland Court of Appeal.
In summary, Octaviar granted a fixed and floating charge (Charge) to Fortress over all of its present and future property 'as security for the due and punctual payment and satisfaction of the Secured Money'. This was to guarantee Castles' (a subsidiary of Octaviar) indebtedness to Fortress under the 'Castles Agreement'.
'Secured Money' was defined as 'all money, obligations and liabilities of any kind that are or may in the future become due, owing or payable… by [Octaviar to Fortress Credit] under or in relation to a Transaction Document].'
The term 'Transaction Document' was not defined in the Charge, but in a facility agreement. The Charge provided that '[t]erms not otherwise defined in this [Charge] have the meaning given in the Facility Agreement'. The definition of 'Transaction Document' included 'each other document which [Octaviar and Fortress] agree in writing is a Transaction Document for the purposes of [the Facility Agreement].'
Octaviar provided a guarantee to Fortress in respect to obligations of one of its subsidiaries, Young Village Estates Pty Ltd (YVE Guarantee). On 22 January 2008, Fortress and Octaviar signed a document (Agreement) which recorded their agreement that 'the YVE Guarantee is a Transaction Document for the purposes of the Facility Agreement'. On this basis, Fortress claimed that money owing under the YVE Guarantee was secured by the Charge.
The first instance decision
It was submitted by Fortress that where the parties to a charge agree that it will secure a certain liability, together with any other liability as they might later agree will be secured by it, then any such later agreement would neither create a charge, nor vary the existing charge. This would mean that these changes would not have to be registered under sections 263 or 268 of the Corporations Act 2001 (Cth) (Act).
The submission was not accepted. Instead, the Court held that an essential element by which a charge is defined is the obligation or liability which it secures. The Agreement by increasing the liability of the Charge affected the terms of the Charge, even though it did not change the terms of the Charge. This in turn, created a variation that evoked the ASIC notification provision in section 268 of the Act.
The Court of Appeal decision
The Queensland Court of Appeal overturned McMurdo J's decision and found that the obligation to notify ASIC under section 268(2) of the Act of a variation in the 'terms of a charge' is only triggered where the terms of the charge document itself are varied or amended. It is not enough to merely increase the liabilities secured by the charge.
The argument that Chapter 2K of the Act would be defeated in the event that a search of the ASIC register did not identify the exact liabilities secured by the Charge was dismissed. It was held that it is the purpose of the ASIC register to notify those searching it whether or not a company's assets are encumbered, not notification of the actual amount secured by a charge.
The High Court decision
The High Court dismissed the appeal by the Public Trustee to overturn the decision of the Queensland Court of Appeal, upholding the validity of Fortress' charge.
Agreeing that a document (in this case the YVE document) is to be a 'Transaction Document' for the purposes of a charge is not a variation requiring registration under section 268(2) of the Act.
If parties have chosen that a term of a charge will be variable or ambulatory in its factual operation, there is no variation in the terms each time its operation is, as a matter of fact, altered.
As regards the Chapter 2K regime, the High Court noted that a copy of the Charge had been lodged as required under section 263(1) of the Act, and as such, any person searching the register would be informed of 'the need to look elsewhere to ascertain the precise nature and details of the liability or liabilities secured' by the Charge.
Lavan Legal comment
In affirming the decision of the Court of Appeal, the High Court has restored the position and market understanding prior to the first instance decision.
Existing securities will not be deemed void in circumstances of variation. From the time of its creation, a charge should be regarded as always encompassing a liability that might be or become owing under a document that was or became a 'Transaction Document'. This final determination should be a relief for lenders and insolvency practitioners alike. It dispenses with the need to notify ASIC every time there is an increase in liability under a charge.
If you have any queries in relation to this matter please contact Partner, Alison Robertson on 08 9288 6872 / alison.robertson@lavanlegal.com.au.
²Re: Octaviar Ltd: Re: Octaviar Administration Pty Ltd [2009] QSC 37
