Upcoming Mallesons seminarsAll entities that hold or have granted registered charges
What do you need to do?Conduct a review of all charges and identify all of the documents which would be within the ambit of the “secured money” (or equivalent) definition, whether executed before the charge, at the same time as the charge or after the charge, and consider whether a notification to ASIC is required in relation to any of those documents
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Nuncio D'Angelo
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Linda Johnson
Nicholas Pappas
Melbourne
Ian Paterson
Tony Troiani
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Nicholas Creed
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John Naughton
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Berkeley Cox
Philip Pan
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Richard Mazzochi
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David Olsson
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Rowan Russell
The Queensland Supreme Court handed down its decision in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37 last Friday, 6 March 2009. The decision is widely regarded as surprising because it appears to cut across current market practice.
We understand that the decision is likely to be appealed, but pending resolution, serious questions have been raised about the scope of the moneys (and/or obligations) secured by certain registered charges, particularly those where the secured moneys or obligations are defined by reference to moneys or obligations owing under designated specific documents external to the charge (ie as opposed to “all moneys” or “all obligations” charges).
The facts
The case involved, as relevant, a charge given by a guarantor, Octaviar Ltd (the “Charge”) to a lender, Fortress Credit Corporation (Australia) II Pty Ltd (“Fortress”), which secured money due, owing or payable under or in relation to a “Transaction Document”. The term “Transaction Document”, in turn, was defined in the related Facility Agreement between Fortress, the borrower and Octaviar (and another guarantor) to mean certain specifically identified documents, and (through a specific designation process) “each other document which the Lender and the Borrower or a Security Provider agree in writing is a Transaction Document for the purposes of [the Facility] Agreement”. On 22 January 2008, Octaviar Ltd and the borrower agreed with Fortress that Octaviar Ltd’s liability under another guarantee not otherwise connected with the Facility Agreement should also be secured by the Charge, and agreed that it was a “Transaction Document” for the purposes of the Facility Agreement (the “22 January Agreement”). The Public Trustee of Queensland, as trustee for certain noteholders of Octaviar Ltd, argued, among other things, that the 22 January Agreement was a variation of the charge for the purposes of section 268(2) of the Corporations Act 2001 (the “Act”) and ought to have been registered as such.
The decision
Without going into the details of the argument or decision, the Court held that the 22 January Agreement did indeed constitute a “variation in the terms of the charge having the effect of increasing the amount of the debt or increasing the liabilities…secured by the charge”, as contemplated by section 268(2)(a) of the Act, and so a notice in relation to it should have been lodged with ASIC within 45 days. As no such notice was lodged, section 266(3) of the Act rendered the Charge void to the extent that it purported to secure the amount of the increase in debt or liability.
What does this mean for you?
The decision has potentially far-reaching implications for charges that secure liabilities by reference to money or obligations owing under designated specific documents outside the charge (as opposed to non-specific “all moneys” or “all obligations” charges). At the very least, it means that documents not specifically identified in the charge but added into the ambit of the secured obligations by a later “variation” via a designation mechanism need to be separately notified to ASIC as a variation under section 268(2) of the Act.
But it may go wider than this. There are suggestions in the judgment that even those documents which are specifically identified and in existence at the date of the charge might need to be registered with the charge under section 263(1)(c) as the “instruments” which “created or evidenced” the charge (despite the Facility Agreement not being lodged with the Charge, no decision was made on this point in Octaviar because ASIC had issued a certificate in respect of initial registration and the Court held that the “conclusive evidence” rule in section 272(4) applied). This aspect of the decision would seem also potentially to capture arrangements where documents containing liabilities to be secured are specifically identified as being within the “secured money” (or equivalent) definition in the charge but are not executed until some later time, as well as documents not so identified but brought into the secured obligations net by any kind of “designation notice” style procedure at a later time, where they have the effect of increasing the amount of the debt or the liabilities (present or prospective) secured by the charge.
It is fair to say that it is not common market practice to lodge notices in relation to those documents at present.
What should you do as a chargor or chargee?
As mentioned, we understand the case is likely to be appealed. We do not know how soon that appeal will be heard or decided, nor are we yet in a position to express a view with any confidence as to the likely outcome of such an appeal. In the meantime, we recommend that clients who granted or who enjoy the benefit of charges registered at ASIC take the following actions:
- Conduct a review of all such charges, whether prepared internally or by external counsel, to identify those where the “secured money” (or equivalent) definition is of the “specific document” type including those which contain a designation mechanism (ie as opposed to the non specific “all moneys” type).
- In relation to each of those charges, identify all of the documents which would be within the ambit of the “secured money” (or equivalent) definition, whether executed before, at the same time as or after the charge (which, in the case of the latter, have the effect of increasing the amount of the debt or the liabilities (present or prospective) secured by the charge), and which have not been the subject of a lodgement with ASIC under Part 2K of the Act.
- Where those documents were in existence before the charge was executed, or were executed at the same time as the charge, then (assuming the charge has been registered) consider whether section 272(4) applies or whether those documents should now be lodged and registered.
- Where those documents were executed after the charge, then (assuming the charge has been registered):
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- In relation to pending transactions where the charge has not yet been executed, consider converting any proposed “secured money” (or equivalent) definitions which are of the “specific document” type to a non specific “all moneys” type. If that is not possible, consider carefully whether you need to lodge all of the “specific documents” with the ASIC Form 309 on initial registration of the charge (noting that, of course, all those documents then become a matter of public record).
The future
We will issue a follow-up bulletin once the appeal (if any) is decided.