Australia: High Court Rules On Octaviar And Decides That "Variation In The Terms Of The Charge" Indeed Means "Variation In The Terms Of The Charge"

In brief - Octaviar decision confirms return to stability

The 1 September 2010 High Court decision in Public Trustee of Queensland v Fortress Credit Corporation (Aus) 11 Pty Ltd [2010] HCA 29 confirms a return to stability in the long accepted practices surrounding registration and notification of changes to charges over company property.

Last year we reported to you that the result of the Queensland Supreme Court decision in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37 (Octaviar) was that except in all moneys charges, any increase in liabilities secured by a charge had to be notified to ASIC. ( Please click here to read last year's article, Variation of charges: Octaviar decision overturned.)

This decision resulted in holders of securities adopting a more cautious approach to registering charges and notifications to ASIC. On appeal to the Queensland Court of Appeal this decision was overturned. The Public Trustee then appealed the decision to the High Court, where the appeal was unanimously dismissed, thus quashing the first instance decision in Octaviar.

The Octaviar decision at first instance

The case concerned a fixed and floating charge over the company property of Octaviar Ltd held in favour of Fortress Credit Corporation (Aus) 11 Pty Ltd. The Public Trustee argued that the charge was invalid under section 268(2) of the Corporations Act. Section 268(2) requires any "variation in the terms of the charge...having the effect of... increasing the liabilities" to be notified to ASIC within 45 days of the date of the variation. The charge secured all money owing to a lender under certain defined loan transaction documents. After registration of the charge, the parties agreed in writing to include a further document as part of the loan transaction documents. This further document effectively increased the liabilities secured by the charge. At first instance the Queensland Supreme Court held that this further document was a "variation" of the charge which required notification to ASIC under section 268(2) of the Corporations Act and the failure to notify within 45 days meant that the charge was void to the extent of the increased liability.

The Octaviar decision on appeal

The Queensland Court of Appeal overturned the trial decision. The Court interpreted section 268(2) of the Corporations Act to mean that the obligation to notify ASIC was only triggered where the terms of the charge document itself are varied or changed. The Court took the view that there must be a term of the charge, that is, a right or obligation created by the charge, which has been varied. As the charge document always contemplated that additional documents could be included within the definition of "Transaction Documents", the agreement in writing to include a further document as a "Transaction Document" did not constitute a "variation in the terms of the charge". There was therefore no need to notify ASIC of the new document which resulted in the increase of liability secured by the charge. The charge was therefore not void (either in whole or in part).

The High Court decision on Octaviar

In dismissing the Public Trustee's appeal of the decision of the Queensland Court of Appeal, the High Court unanimously held that the reference in section 268 of the Corporations Act to "a variation in the terms of a charge" means, in the case of a charge created by a written document, a change to the terms contained in that written document. Later occurring facts which change the factual operation of the existing terms of the charge, such as the agreement to include certain documents as "Transaction Documents", do not constitute "a variation in the terms of a registrable charge" and are therefore not something that would require a notice to be lodged at ASIC, even though as a matter of fact the liabilities secured by a charge may have been changed.

Implications of the Octaviar decision

The decision of the Court at first instance in Octaviar called into question the well established practices in the area of registration and notification of changes to charges over company property. The decision affected a significant number of secured financing arrangements where there had been an increase in the liabilities secured by a charge, including increases in facility limits. Holders of securities can now breathe a sigh of relief that their existing securities will not be deemed void in such circumstances. 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".

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