Octaviar – the uncertainty is finally laid to rest

Last month, the High Court handed down its much anticipated decision 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 Appeal¹. This latest decision lays to rest the uncertainty and confusion created by the contentious first instance decision of McMurdo J², relating to circumstances which constitute a variation to a charge.

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 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’.

‘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 so as to engage 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 didn’t 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 Court found that although the Agreement effected an increase in the secured liabilities, the Agreement was neither:

  • a variation in the terms of the Charge requiring registration under section 268(2) of the Act; or

  • a new charge requiring registration under section 263 of the Act.

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

In upholding the decision of the Queensland Court of Appeal, the High Court held that designating the YVE Guarantee as a ‘Transaction Document’ did not vary the terms of the Charge, nor did it create a new charge, and as such, the Agreement did not require registration under the Chapter 2K regime.

The court held that the ‘Charge, from the time of its creation, always encompassed a liability that might be or become owing under a document that was or became a Transaction Document by the parties agreeing so in writing’. Accordingly, the parties agreement that the YVE Guarantee was a ‘Transaction Document’ did not vary the meaning of ‘Transaction Document’ in the facility agreement, and consequently the meaning of ‘Secured Money’ in the Charge. The court held that if ‘the parties have chosen that a term of the charge will be variable or ambulatory in its factual operation, as is, for example, common with ‘all moneys’ clauses …. there is no variation in the terms each time its operation is, as a matter of fact, altered or modified’.

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

The High Court’s decision has restored the long standing market practice that existed pre-Octaviar, and the accepted view of banking and finance lawyers and other advisors, that by virtue of a pre-agreed mechanism, designation of a new document as a ‘Transaction Document’, or an increase of liability under an ‘all moneys’ security, do not constitute variations required to be registered under the Chapter 2K regime.

However, lenders and drafters of charges should be conscious of the court’s criticism with respect to key definitions not being set out in the charge document, and have a good understanding of the structure of their documentation, to ensure any variations to the ‘terms’ of a charge are identified and notified to ASIC as and when required.


¹Re Octaviar Ltd (No 7) [2009] QCA 282

²Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37