In Re Octaviar Ltd; Re Octaviar Administration Pty Ltd  QSC 37, the Supreme Court of Queensland considered the question of what is meant by a "variation" of a charge for the purposes of section 268(2) of the Corporations Act.
The case considered a charge registrable under the Corporations Act regime which secured all money owing under defined "Transaction Documents". "Transaction Documents" included a category of documents as agreed between the chargee and any one of the primary obligors under the financing transaction. The chargee and one of the primary obligors agreed to include a further document as a Transaction Document in the manner contemplated by the definition.
The result of this agreement was that, notwithstanding there was no formal amendment of the charge, the actual quantum of the secured money increased. The Queensland Supreme Court held that this was a "variation" of the charge which required notification to ASIC under Chapter 2K of the Corporations Act and a failure to notify within the prescribed period resulted in the charge being void to the extent that it secured the increased liability.
The decision is of interest as to whether it is viewed as a departure from market practice or a case that will be confined to its facts. As explained in this Alert, financiers will need to consider financing transactions that have been entered into in the past to determine whether any further lodgements are required with ASIC and will also need to consider whether a different approach will need to be adopted in the case of new secured financing transactions and future amendments or other changes to secured financing transactions.
It is not yet known if an appeal will be lodged against this decision. Any appeal must be lodged on or before 3 April 2009. A further Alert will be issued if this occurs.
In May 2007 Octaviar Ltd (Octaviar) granted a guarantee (Young Guarantee) in favour of Fortress Credit Corporation (Australia) II Pty Ltd (Fortress) of the obligations of Young Village Estates Pty Ltd under a loan agreement with Fortress dated 25 May 2007. This guarantee was unsecured.
In June 2007 Octaviar gave a second guarantee in favour of Fortress of the obligations of Octaviar Castle Pty Ltd (Castle) under a loan agreement with Fortress dated 1 June 2007 (Castle Loan Agreement). Octaviar also gave a charge over its assets in favour of Fortress in relation to its obligations under this guarantee (Charge). The definition of "Secured Money" in the Charge was essentially all money owing under any defined "Transaction Document". Transaction Document, in turn, had the meaning given in the Castle Loan Agreement. In the Castle Loan Agreement paragraph (c) of the definition of "Transaction Document" stated that "Transaction Document" included:
"each other document which the Lender and the Borrower or a Security Provider agree in writing is a Transaction Document for the purposes of this Agreement;".
In January 2008 Fortress and Octaviar, which was a "Security Provider" for the purposes of the Castle Loan Agreement, agreed that the Young Guarantee was a "Transaction Document" under the Castle Loan Agreement (January 2008 Agreement). The Young Guarantee was not previously a "Transaction Document" and therefore the effect of the January 2008 Agreement was that the obligations of Octaviar pursuant to the Young Guarantee were, from January 2008, secured by the Charge.
No notification was lodged with ASIC under Chapter 2K of the Corporations Act in relation to the January 2008 Agreement.
Questions considered by the court
The relevant questions considered by Justice McMurdo of the Queensland Supreme Court were as follows:
- Did the January 2008 Agreement result in the Charge securing the money owing by Octaviar under the Young Guarantee?
- Was a new charge created as a result of the January 2008 Agreement?
- Were the terms of the Charge varied as a result of the January 2008 Agreement?
Each of these issues is considered in turn below.
Did the January 2008 Agreement result in the Charge securing the money owing by Octaviar under the Young Guarantee?
As a matter of construction of the documents, the answer given by Justice McMurdo to this question was yes. There are no surprises in this.
Was a new charge created as a result of the January 2008 Agreement?
In looking at this question Justice McMurdo primarily analysed three cases:
- Landers v Schmidt  1 Qd R 188;
- Coast Securities No. 9 Pty Ltd v Bondoukou Pty Ltd (1986) 69 ALR 385; and
- Sibbles v Highfern Pty Ltd (1987) 164 CLR 214.
All of these cases considered real property mortgages under the Queensland Property Law Act 1974. In the first two of these cases it was held that a new "charge" had been created where the mortgagor and the mortgagee entered into an express deed of variation to amend the relevant real property mortgage to ensure that further advances, provided some time after the mortgage was first entered into, were secured by that mortgage. In the third case the mortgage in question had secured all money owing under an overdraft facility from the time it was entered into and the High Court held that there was not a new mortgage entered into each time the overdraft facility was utilised; instead the mortgage simply continued in accordance with its terms.
Justice McMurdo considered that a critical element of a charge is the obligation or liability that the charge secures. He concluded that it was because of the change to the nature of the obligation or liability secured that the courts in Landers and Coast Securities reached the conclusion that a new charge had been created. Similarly, because there was no new "type" of liability secured under the real property mortgage considered in Sibbles (that is, the amount of the overdraft facility liability may have changed but at all times the real property mortgage secured amounts owing under that overdraft facility), the opposite result was achieved in that case.
It was concluded that, as a result of the January 2008 Agreement, the Charge secured obligations under the Young Guarantee. Before that agreement was entered into, it had not done so. Therefore, Justice McMurdo held that, on the basis of the Landers and Coast Securities cases, if not for the provisions of Chapter 2K of the Corporations Act, a new charge would have been created by the January 2008 Agreement.
However, because of Chapter 2K, Justice McMurdo held that there was no new charge created.
Were the terms of the Charge varied as a result of the January 2008 Agreement?
This question is important, because, under the terms of section 268(2) of the Corporations Act, where there is a "variation" of the terms of a charge which is registrable under the Corporations Act, and that amendment has the effect of increasing the amount of the debt or increasing the liabilities secured by the charge, then notice of that variation must be lodged with ASIC within 45 days of the date the variation occurs.
Under section 266(3) if that notice is not lodged within that time period, and is not subsequently lodged prior to the date that is six months prior to the "critical day" (essentially the date administration or winding up processes commence in relation to the chargor company), the charge is void as a security to the extent of the increase in the debt or liabilities secured.
Justice McMurdo held that, notwithstanding there was no formal amendment of the Charge, by means of the January 2008 Agreement, there was a variation of the Charge for the purposes of section 268(2) of the Corporations Act because after the January 2008 Agreement was entered into the Charge secured a liability that had not previously been secured. Consequently, because notice had not been lodged within the prescribed time, the Charge was void as a security to the extent of the increase in the debt or liabilities secured.
The decision of the Supreme Court is inconsistent with the typical financing practice, where lodgement would generally only be made under section 268(2) of the Corporations Act if an express amendment was made to the terms of a registrable charge to alter the secured money or obligations in a way that increased the amount or obligations secured.
Careful consideration will need to be given to the potential ramifications of this decision:
- For secured financing transactions entered into in the past, where finance documents not subsequently amended and where no additional liabilities incurred under new documents that are secured by a registrable charge: In such cases, it would seem clear that reliance can be placed on section 272(4) of the Corporations Act, which provides that a charge has been validly registered for the purposes of Chapter 2K of the Corporations Act if ASIC has issued a certificate of registration for that charge.
- For secured financing transactions entered into in the past where amendments have been made to the finance documents or new documents have been entered into after the date of a registrable charge and this has, in either case, resulted in the actual liabilities secured by that registrable charge increasing: Consideration needs to be given to whether notification needs to be lodged with ASIC under section 268(2) of the Corporations Act in such cases, if this has not already occurred.
- For new secured financing transactions: A different approach needs to be taken. In light of Octaviar the nature of the secured obligations should be described in some degree of detail in the security document itself. There is a question of whether obtaining "all moneys" securities would be a solution to the issues that have been raised by the Octaviar decision. As a commercial matter this may not be practicable and there is insufficient support in the decision to conclude that adopting such an approach is an adequate remedy to the issues raised.
- Where amendments are to be made to a secured financing transaction in future, or new documents are entered into which, in either case, increase the actual liabilities secured by a registrable charge: Careful consideration will need to be given as to whether further registration will be required with ASIC and what documentation will need to be lodged.