Update on Octaviar

Previously, we have commented on the proceedings surrounding the insolvency of Octaviar Limited (Octaviar).

In summary, Octaviar gave a guarantee for a loan given to one of its subsidiaries (Castle Facility). The guarantee was secured by a charge which was expressed to cover all money owing under “Transaction Documents” (OCV Charge). The term “Transaction Documents” was not defined in the OCV Charge, but the definition of it in the Castle Facility included any documents which Octaviar and the chargee agreed in writing were “Transaction Documents”.

Octaviar had also guaranteed a loan given to one of its subsidiary companies (YVE Guarantee). Octaviar and the chargee agreed by deed that this further guarantee was a “Transaction Document” for the purpose of the Castle Facility (Deed).

In March of 2009, we reported that a trial judge found that the addition of the YVE Guarantee as a Transaction Document was a “variation in the terms” of the Charge within the meaning of section 268(2)(a) of the Corporations Act 2001 (Act) as it increased the liabilities secured. Accordingly, as no notice setting out the particulars of the variation was lodged with ASIC, the OCV Charge was void against the administrators of Octaviar.

The Octaviar trial decision was a radical departure from accepted banking practice in relation to ASIC registration and notification requirements. It inevitably led to more caution in the industry with regards to the way securities were structured and reported on.

The Queensland Court of Appeal overturned this decision in September 2009. As we reported, even though the addition of a further Transaction Document increased the secured liabilities, the Court of Appeal found that it did not create a new charge or vary the existing one.

As expected, the appeal decision was widely welcomed by the market. However, at the time we recommended parties continue to be cautious when taking security as it was still possible for the decision to be appealed to the High Court.

This has now occurred and, on 12 March 2010, the High Court granted leave to the Public Trustee of Queensland to appeal the decision. The High Court will consider afresh the questions of:

• whether the Deed “varied the terms” of the OCV Charge by increasing the liabilities it secured (within the meaning of section 268 of the Act); or alternatively
• whether the Deed constituted the creation of a new charge (within the meaning of section 263 of the Act).

If High Court finds the answer to either of these questions to be “yes”, then the new or varied charge will be void as the change was not notified to, or registered with, ASIC in accordance with the Act.

The High Court has not yet set a date for hearing the appeal. The current timetable suggests the High Court may hear the appeal in June 2010, although it may take longer still for the High Court to hand its decision down.

In the meantime, the law remains unsettled in this area and our previous advice to continue to “Octaviar proof” security arrangements remains unchanged.