Securing new debt by an existing charge - Octaviar appeal decision restores market practice

The Queensland Court of Appeal has overturned the decision of McMurdo J in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37 and upheld the validity of a charge that secured liabilities under a "transaction document".

The decision is a sensible and clear one in our view and should restore market practice.  However whilst a High Court appeal is still a possibility, care is needed.

Facts

• On 31 May 2007 Fortress Credit Corporation (Australia) II Pty Ltd (Fortress) provided a loan to Young Village Estates Pty Ltd (YVE loan), secured by an unsupported guarantee (Octaviar Guarantee) from Octaviar Limited (Octaviar) dated 25 May 2007. 
• On 1 June 2007, Fortress provided a separate loan of $250 million to Octaviar Castle Pty Ltd (Octaviar Castle loan), secured by a guarantee and a fixed and floating charge (Charge) from Octaviar.  The Charge secured all present and future property of Octaviar for the payment of the "Secured Money".
• "Secured Money" was defined as all amounts owing or payable in relation to a "Transaction Document".  The definition of a "Transaction Document" included a provision enabling it to cover new documents to be entered into by a borrower or security provider, upon agreement by all parties.
• On 22 January 2008, Fortress, Octaviar and Octaviar Castle signed a deed (Deed), acknowledging that the Octaviar Guarantee was a Transaction Document for the purposes of the Charge.  This was doubtless assumed to bring the Octaviar guarantee within the Secured Money as defined in the Charge.  Subsequent to repayment of the Octaviar Castle loan, Fortress continued to rely on the Charge as a supporting security for the Octaviar Guarantee and YVE loan.
• In late 2008, administrators were appointed to Octaviar and the validity of the Charge was raised, upon an application by Queensland Public Trustee to set aside a deed of company arrangement.

Issue

The central issue in question was whether the Deed constituted a variation of the Charge increasing the liability secured and imposing a requirement to notify ASIC of such a variation pursuant to section 268(2) of the Corporations Act 2001 (Act).

If such a variation was established, failure to notify it to ASIC would render the Charge void to the extent of new liability as against the administrator under section 266(3) of the Act.

The original decision of McMurdo J found that there had been a variation.  That decision surprised many in the market and necessitated much effort in 'patching up' existing charges which had used the 'transaction document' drafting technique to place new money within the scope of money secured by existing charges.  It changed the wide assumption that such mechanisms did not require ASIC notification.

The Appeal

Fortress appealed the original decision that the Charge was void due to failure of notice in respect of the 'variation' of the Charge.

The Court of Appeal found that there had not been any variation just because the Deed had designated a new Transaction Document to be secured by the Charge.

The Court also considered a number of general principles -  rejecting the argument of the Public Trustee that to uphold the charge would contradict primary objectives of the legislation in relation to the charge notification provisions and the charge priority rules.

Variation of charges

The Court of Appeal accepted that the Deed did not modify or alter any of the terms of the Charge or its operation. Nor did it increase the liabilities secured by the Charge based on the definition of the "Secured Money".  The execution of the Deed was simply a designation of the Octaviar Guarantee as a "Transaction Document" pursuant to an existing right.  The Charge already granted a right over all assets and undertaking of Octaviar and a "Transaction Document" was already defined as including any document which Octaviar and Fortress agreed in writing was a Transaction Document.  The position was more analogous to the commonplace situation of new money falling into the scope of an existing charge when simply advanced under a traditional "all moneys" type of document.

ASIC register does not disclose how much is secured by a charge

Fortress successfully argued that the registration requirements were not designed to ensure that outsiders searching ASIC records could establish the actual amounts of the debt secured by a registered charge.  Registration simply enables outsiders to determine whether or not  the company has charged its property.  It was also accepted that there is no requirement to specify a monetary amount for any liability under the charge on the instrument itself, or the notice to be lodged at ASIC.

Conclusion

It was unanimously held that the Deed was not a variation to the terms of the Charge and it was not necessary to lodge a notice of variation with ASIC.  The decision reinforces the market practice as it was before the original decision.  However the possibility of an appeal to the High Court remains in the picture and financiers should keep in mind the original decision until the fate of any appeal is known.

Our view has always been that financiers are generally best served by using "all moneys" style charges and having facility and other agreements which clearly confirm the money that the charge secures.  That technique minimises the scope for administrative error or legal challenge.  An "all moneys" clause would not have been upset even if the original decision of McMurdo J had been allowed to stand.

The Court of Appeal's comments that the ASIC register is effectively useless in telling outsiders what level of debt is actually secured by a charge will not be news to those who have tried to use the register for the purpose of assessing the creditworthiness of a company.  

Author: Oliver Shtein