21 Sep 2009

Octaviar appeal

Re Octaviar Ltd (No 7) [2009] QCA 282 is the appeal from the decision of Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37. This decision was handed down on 18 September 2009.

The case considered a charge registrable under the Corporations Act which secured all money owing under defined "Transaction Documents". The money secured under the charge was, in a practical sense, increased by the parties designating a new document as a "Transaction Document". This designation was permitted by the charge as the definition of "Transaction Document" included a category of documents as agreed between relevant parties.

At first instance, 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. A failure to notify within the prescribed period resulted in the charge being void to the extent that it secured the increased liability. On appeal, this decision was overturned. The Queensland Court of Appeal unanimously held that, although the liabilities secured had been increased, the charge had simply continued to operate in accordance with its terms and had not been varied.

It is not yet known if an appeal will be lodged against this decision. Any application for special leave to appeal to the High Court must be filed by Friday, 16 October 2009.


In May 2007 Octaviar Ltd 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

Holmes JA (with whom White J agreed) delivered the majority judgement. Muir JA agreed with the conclusions of the majority though with slightly different reasoning.

When is a lodgement required under section 268(2) of the Corporations Act?

Of most interest is the analysis of the Court of Appeal on the question of the interpretation of section 268(2) of the Corporations Act.

This section provides:

"(2) Where, after a registrable charge on property of a company has been created, there is a variation in the terms of the charge having the effect of:

(a) increasing the amount of the debt or increasing the liabilities (whether present or prospective) secured by the charge; or

(b) prohibiting or restricting the creation of subsequent charges on the property;

the company must, within 45 days after the variation occurs, ensure that there is lodged a notice setting out particulars of the variation and accompanied by the instrument (if any) effecting the variation or a certified copy of that instrument."

For the purposes of the analysis, Holmes JA was prepared to accept that the phrase "terms of the charge", as used in section 268(2), included the obligations and, in a general sense, the liabilities under a charge. Muir J adopted a slightly more formal approach, holding that where a charge is created by instrument, "the terms" refer to those in the instrument and those implied by law.

Both judgments distinguish between a variation of the terms of the charge that has the effect of increasing liabilities secured by a charge and some other event that has the effect of increasing those liabilities. Section 268(2) would apply only if it is first established that there was a variation. Holmes JA and Muir J both found that there was no such variation. In the words of Muir J, after the execution of the January 2008 Agreement, the terms of the Charge were "precisely the same in word and operation as they were before its execution" (at paragraph [90]). There was no alteration or modification of the terms, the Charge continued at all times to secure the amounts owing under documents falling within the definition of "Transaction Document".

The Court of Appeal also dismissed the argument that the policy of Chapter 2K of the Corporations Act would be defeated if a person searching the Australian Securities and Investments Commission (ASIC) register could not determine the exact liabilities that were secured by a registered charge. The registration regime does not require that the amount secured by a registrable charge is notified to ASIC. Holmes JA and Muir J seemed inclined to accept the view that the policy underlying the ASIC register is simply to allow those searching the register to determine whether a company's assets are encumbered or not.

Finally section 268(3) of the Corporations Act was not considered to be relevant or to affect the interpretation of section 268(2). That section states that registration is not required under section 268(2) of the Corporations Act where a payment or advance is made by the chargee to the chargor in accordance with the terms of a charge securing an unspecified amount or a specified amount and future advances. However section 268(3) is not the only circumstances in which an increase in liabilities secured by a charge is not required to be notified to ASIC.

Was a new charge created as a result of the January 2008 Agreement?

In looking at this question, at first instance, Justice McMurdo considered a number of cases involving an interpretation of section 73 of the Queensland Property Law Act 1974. In two of those 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. Justice McMurdo concluded that, as a result of the January 2008 Agreement the Charge secured obligations under the Young Guarantee where it had not previously done so. Adopting the reasoning of the two Queensland 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.

The Court of Appeal did not accept this reasoning. Holmes JA thought there was an unnecessary emphasis on the fact that the January 2008 Agreement was the manner by which the Young Guarantee became a Transaction Document. This was considered to be incidental. In her Honour's view, on its true construction, the mechanism provided for in the Charge, that is, an agreement between the relevant parties, had been used to identify liabilities as secured by the Charge. Holmes JA acknowledged that the case of Coast Securities No. 9 Pty Ltd v Bondoukou Pty Ltd (1986) 69 ALR 385, as relied on in the first instance decision, may have tended to support a contrary conclusion but thought that this case should be confined in its application to section 73 of the Queensland Property Law Act.

Concluding comments

The decision of the Court of Appeal is consistent with typical financing practice, as it had existed prior to the decision at first instance, 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.

Although the Court of Appeal decision supports previous financing practice, until it is known whether or not an appeal will be lodged, a cautious approach should be taken. "Secured money" definitions in registrable charges should be clearly drafted to, as suggested by Holmes JA, put searchers of the ASIC register on notice that enquiry should be made as to the nature of the liabilities secured.

It remains the case that, when amending or restructuring financing documents, careful consideration should be given to whether a variation of a charge that is notifiable under section 268(2) of the Corporations Act has occurred.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.