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What do you need to do?Consider the steps that ought now be implemented as a consequence of the findings of the Court of Appeal
Martin James
Partner
Martin James
Partner
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Nuncio D'Angelo
Partner
T +61 2 9296 2457
Melbourne
Hal Bolitho
Ian Paterson
Perth
Nicholas Creed
Brisbane
Aaron Bourke
Hong Kong
Richard Mazzochi
(馬紹基)
Beijing
David Olsson
(沈文)
London
Rowan Russell
The Octaviar decision has been emphatically overturned by the Queensland Court of Appeal. But this does not yet mean that life necessarily returns to the way it was. For a start, there is the possibility of appeal. In any event, the “genie is out of the bottle”: parties who want to attack charges will be looking closely at the registration provisions of the Corporations Act and the drafting and registration of charges and variations, and at least one remark in the appeal judgment may leave some uncertainty. Thus, parties taking security will need to remain alert, though not alarmed.
For now, pending resolution of any further appeal, little should change in terms of documentation and practice, though some parties in some transactions may choose to proceed more slowly in addressing concerns.
In this Alert, we discuss the elements of the appeal court’s decision, and what the decision means for Australian banking and finance market practice.
The decision
On Friday 18 September 2009, in a 3-0 decision the Queensland Court of Appeal overturned the decision of McMurdo J in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37: see Public Trustee of Qld v Octaviar Ltd; Octaviar Administration Pty Ltd; and Fortress Credit Corporation (Australia) II Pty Ltd [2009] QCA 282.
The effect of the first instance decision
Market upheaval followed the handing down of the first instance decision. Principles emerging from that decision brought into question decades of market practice and understanding of the law around the registration of charges and variations to charges, when and how a variation of a charge might constitute a new charge, the operation of “Transaction Document” style charges and other matters. There were serious knock-on effects in those States which retained mortgage stamp duty. Many banks and other lenders in the Australian market suddenly found themselves in the uncomfortable position of possibly having huge unsecured positions previously thought secured.
Our response to it
We quickly alerted the market to the decision on Tuesday 10 March 2009. In May 2009 we and Allens Arthur Robinson, after consultation with John Sheahan SC, published a “Table of Solutions” in an effort to stabilise the market and begin to bring about common market practice in the face of these uncertainties, both in relation to rectifying historical variations that had not been registered but had suddenly become registrable, and in structuring documentation for new transactions. In June 2009, partners of our firms jointly published an analysis of the case: “The Octaviar case: Some reflections” (2009) 20 JBFLP 95.
The Court of Appeal decision
The facts of the case are by now well known and are discussed in our original Alert. The Court of Appeal found that the deed of 22 January 2008, by which the parties had brought additional obligations within the scope of an existing “Transaction Document” style charge by designating a new document to be secured, constituted neither a variation of that charge nor the creation of a new charge. In doing so, it reversed several key points of principle propounded in the first instance decision. In summary, the Court held the following:
- The designation of a new document as a “Transaction Document”, and thus as secured, in accordance with the terms of a charge is not a new charge or a “variation” of the charge in the relevant sense. It is merely the operation of the charge document, ie the application of an existing contractual mechanism in the charge, which contemplated that further documents may be added by designation. So long as the designation is done in the manner contemplated by the charge itself it is not a variation. It does not matter that the designation is by a new agreement.
- It is not the policy of the charges registration regime in Chapter 2K of the Corporations Act that a person searching a company’s charges register at ASIC should be able to determine the monetary amount secured by a charge. Rather, its primary purpose is to allow those searching to find out whether the company had encumbered its property, and alert them to the need for further enquiry as to the amounts secured.
- The “terms of the charge” for s268(2) purposes is much narrower than was held at first instance, and is a concept relating to the actual provisions of the charge rather than its effect. Muir JA was quite definitive in this regard, holding that where a charge is created or evidenced by an instrument in writing (eg a deed of charge), the “terms of a charge” can only be a reference to the terms contained in that instrument (and any implied by fact). Holmes JA, on the other hand, did not feel the need to decide that specific issue in reaching her conclusions. She observed that “the terms of the charge…were to be found in the deed by which it was created, and, arguably, in the …facility agreement”. White J agreed with Holmes JA’s conclusion but not necessarily her reasoning.
- It follows that there must be a variation of those terms before the notification/registration obligation in s268(2) is engaged.
What does this mean for market practice?
Although the decision of the Court of Appeal is welcome, and now represents the state of the law, the parties have 28 days to lodge an application for special leave to appeal to the High Court. That expires on Friday, 16 October 2009 (unless extended by the Court). Until then, the matter cannot be regarded as finally settled.
Australian banking and finance market practice in relation to charges has changed dramatically as a result the first instance decision. Enormous energy and resources have been expended by many in the market since March to try to ameliorate the perceived effects of the decision, both in relation to historical matters and to accommodate it in new transactions.
While, at first blush, the Court of Appeal decision appears to be a comprehensive reversal of the first instance decision, and indeed has resolved much of the uncertainty generated by it, it would be unwise to conclude that the position is completely restored to that which prevailed pre-6 March 2009. Leaving aside the possibility of an appeal and its outcomes, Holmes JA’s obiter observation about what precisely can be said to constitute the “terms of the charge” needs further consideration and analysis, and may affect some charges. In any case, in a very real sense the genie is now out of the bottle and parties with an interest in attacking the registration of charges and variations of them (eg liquidators and competing creditors) will continue to scrutinise registrations (or lack of them) very closely for future challenge.
Recommendations
Mallesons’ and Allens’ joint recommendations are as follows, pending resolution of any appeal or the lapse of the appeal period:
- new transactions: for new transactions parties should continue to seek to “Octaviar-proof” their charges in one of the ways suggested in our Table of Solutions. Given that most in the market will already have done the work to implement these changes, this ought not be overly onerous, at least for those parties.
- historical variations: this remains a question of balancing risk against cost. Where there is a real risk of chargor insolvency, or where most of the work has been done and time and money has been invested in a solution, parties will very likely want to press on. In other cases, there is much to be said for pressing on and removing any risk, but parties may perceive the likelihood of the risk to have reduced, and therefore may consider slowing down depending on their appetite for expense, workload and risk. In any event parties will still need to consider their documentation. For example, Holmes JA’s obiter statement above raises the question as to whether, if the documents are drafted in a certain way, a variation of a facility agreement to increase the facility limit might still engage s268(2), even if the mere addition of new secured liabilities under a new document via designation does not.
Follow-up
We will issue a further bulletin with additional guidance if there is news of an application for special leave to appeal to the High Court, or if the appeal deadline passes without one.