12 December 2006
Key Points:
The decision in Richstar Enterprises provides guidance on the factors Australian courts may find relevant in determining whether a charge over an option is fixed or floating.
On 15 September 2006, Justice French in the Federal Court of Australia determined that a charge held over an option to purchase land could be a fixed charge (Australian Securities & Investments Commission, in the matter of Richstar Enterprises Pty Ltd ACN 099 071 968 (No. 9) v Carey [2006] FCA 1242).
The decision in Richstar Enterprises provides guidance on the factors Australian courts may find relevant in determining whether a charge over an option is fixed or floating. This decision is notable for being the first Australian decision to discuss National Westminster Bank Plc v Spectrum Plus Ltd (which we looked at here).
The House of Lords' decision in Spectrum Plus confirmed that a fixed charge over book debts is possible. However, the typical charge used in bank security arrangements, a charge over "all assets", only creates a floating charge over book debts even though it is expressed as a fixed charge. Lord Scott, in his leading judgment, decided that in order for a charge to be fixed, the chargor must have the ability to control the charged assets. If the chargor does not have control of both the book debts and the proceeds of those book debts, then the charge is only a floating charge.
Background to Richstar Enterprises
By an agreement in August 1999, Westpoint Management Pty Ltd granted Westpoint Corporation Pty Ltd an option to purchase land occupied by the Warnbro Fair Shopping Centre and land adjacent to the Shopping Centre.
On 28 September 2005, Westpoint Corporation granted a fixed and floating charge over all its present and future undertaking, property and assets to Perpetual Nominees Ltd as custodian of The ING Mortgage Pool. The Charge was registered on 13 October 2005.
However, by a "Deed of Assignment of Option" dated 7 October 2005, Westpoint Corporation assigned the option to Bowesco Pty Ltd, a related party of the Westpoint Group. ING was not given notice of and did not consent to this assignment of the option.
After the Westpoint collapse, KordaMentha Accountants were appointed by ING under the Charge as joint and several receivers to the property of Westpoint Corporation. They were also specifically appointed as receivers of the option held by Bowesco.
Factors influential in determining whether the option was subject to the ING fixed charge
The nature of the Charge
Justice French examined the nature of the Charge, which provided for:
"a fixed charge over any interest of the Chargor in any present or future: (i) land;… (x) Encumbrance over any property… and a floating charge over the balance of the Secured Property."
His Honour observed that it is "a matter of some significance that the ING Charge is not expressed to be, in its fixed component, a charge over the whole of the undertaking of Westpoint Corporation. The fact that the application of the fixed charge is expressed distributively over specifically identified categories of property, supports the construction that the intention was to create a charge of the kind that it is expressed to be."
Provision for collection of charged debts
The Charge permitted Westpoint Corporation to collect the charged debts. Justice French concluded that this signalled an intention to provide specifically for that class of property which Westpoint had to be able to deal with on a day-to-day basis to meet its business needs.
Conversely, Justice French considered that Westpoint Corporation did not need to deal with the option on an ongoing basis, therefore it fell under the fixed portion of the charge. His Honour commented that although the fixed charge would prevent the option from being transferred or otherwise disposed of or dealt with, it would not prevent the option from being exercised.
His Honour stated that the "express provision in the charge for Charged Debts indicates an alertness… to the difficulties associated with creating fixed charges over book debts. It indicates an intention, by way of contrast, that the charge in respect of interests in land was to be fixed."
The value of the option
Justice French considered an external circumstance which bore upon the characterisation of the option - an offer of $1 million to acquire the option (in contrast to the $100 Bowesco paid for the transfer of the option). His Honour concluded the parties could not have contemplated that such valuable property could be disposed of for a mere $100 in the course of business within the Westpoint Property Group.
As was the case in Spectrum Plus, the overriding issue was control. The Charge prohibited Westpoint Corporation from transferring, leasing or otherwise disposing of or dealing with any part of the Secured Property. Clearly the parties contemplated that the chargor would be able to control any dealings with the option and did not intend the level of control to be so low that an extremely valuable option could be disposed of for only $100 to a related party.
Conclusion
The issues at stake in Richstar Enterprises led the Court to consider charges over book debts and the House of Lords decision in Spectrum Plus.
Spectrum Plus runs contrary to a considerable body of earlier English judicial authority, and Australian judicial opinion on its correctness may be equally split. Nevertheless, Justice French's decision in Richstar Enterprises appears to be sympathetic with the reasoning and the principles elucidated in Spectrum Plus, without drawing any conclusions in relation to its correctness.
Firstly, Justice French and the House of Lords both went beyond the mere label of the charge as "fixed" or "floating" and looked to the actual terms and the commercial substance of the charge. In Spectrum Plus, the House of Lords stated that they did not look "at the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention." Similarly, Justice French did not merely consider the language of the Charge. Rather, he ascertained the parties' intentions by considering:
Another key feature in both decisions was an examination of control. Justice French quoted some of the Spectrum Plus judgment in his decision and the focus of the passages he quoted was the degree of control associated with a fixed charge over assets. In both cases, the level of control was a question of fact.
On a practical level, Richstar Enterprises highlights the importance of the language of fixed and floating charges, particularly in regard to the identification of the property over which there is a fixed charge and the property over which there is a floating charge. Provisions for dealing with the various classes of charged property are also very important and should reflect the requisite degree of control and to ensure that, in case of dispute, the charge is characterised correctly.
For further information, please contact Louise McCoach.
