The Octaviar decision overturned for now
Last week, in Re Octaviar Ltd (No 7)  QCA 282, the Queensland Court of Appeal overturned the Octaviar trial decision.
The effect of the trial decision was that, except in “all monies” charges, any increase in liabilities secured by a charge had to be notified to ASIC (irrespective of whether the charge document itself was varied or amended). This was inconsistent with market practice and so caused considerable uncertainty and resulted in secured parties adopting a more cautious approach to charge registration and ASIC notification.
In March this year we discussed the facts of Octaviar and the trial decision. In summary:
- On 31 May 2007, Octaviar Limited (OCV) guaranteed a loan agreement between Fortress Credit Finance Corporations (Australia) II Pty Limited (Fortress) and Young Village Estates Pty Limited (YVE Guarantee). The YVE Guarantee was unsecured.
- At around the same time, Fortress entered into a loan agreement with Octaviar Castle Finance Limited (Castle Facility). OCV also provided a guarantee in respect of the Castle Facility (Castle Guarantee). The Castle Guarantee was secured by a registered fixed and floating charge given by OCV (OCV Charge).
- The definition of “Secured Money” under the OCV Charge included all money owning under “Transaction Documents”, as defined in the Castle Facility. The definition of “Transaction Documents” in the Castle Facility included documents that the parties agreed in writing were “Transaction Documents” for the purpose of that facility.
- On 22 January 2008, the parties agreed in writing that the YVE Guarantee was a “Transaction Document” and accordingly that it was secured by the OCV Charge. Within six months, OCV went into administration.
The trial decision
The trial judge found that the agreement that the YVE Guarantee was a “Transaction Document” increased the liability under the OCV Charge and was a “variation in the terms of a charge” within the meaning of section 268(2)(a) of the Corporations Act. Accordingly, as no notice setting out the particulars of the variation was lodged with ASIC, the OCV Charge was void against the administrators of OCV.
The Queensland Court of Appeal’s decision
The Court of Appeal unanimously overturned the trial decision.
The court found that the obligation to notify ASIC is only triggered where the terms of the charge document itself are varied or amended.
The court held that the designation by OCV and Fortress of the YVE Guarantee as a “Transaction Document” in accordance with the terms of the OCV Charge was neither the creation of a new charge nor the variation of the existing charge. Accordingly, there was no obligation to notify ASIC of an increase in liabilities.
The court held that the principal object of the charges registration regime is to alert a person that a company’s property may be encumbered and that further enquiries as to the encumbrance may be required. The purpose is not to allow a person to determine a monetary amount secured by the charge.
The Octaviar trial decision was a radical departure from accepted banking practice in relation to ASIC registration and notification requirements. Whilst the trial decision has been overturned, it is entirely possible that the Court of Appeal’s decision may be appealed to the High Court. Any application for special leave to appeal to the High Court is due to be lodged by 16 October 2009.
Accordingly, it is incorrect to assume that the law in this area is now settled. We recommend that, at least until any possible High Court appeal is resolved, parties continue to “Octaviar-proof” their security arrangements.