The requirement under the corporations legislation to notify the Australian Securities and Investments Commission (ASIC) within 45 days of the creation of a registrable charge is generally well understood in the business world.
However, there tends to be less familiarity with requirement to notify ASIC of the variation of a registrable charge where the variation results, among other things, in an increase in liability secured by the charge.
The latter requirement has been brought into sharp focus by the decision of the Supreme Court of Queensland in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd1, which highlights the potentially serious financial consequences that can flow to a lender who fails to comply with it.
Facts of the case
The case involved two loans made by a financier to two different borrowers. The repayment obligations of each borrower were guaranteed by a third party guarantor company. The second loan was also secured by a fixed and floating charge over the guarantor.
The charge was expressed to secure the guarantor's obligations under the "Transaction Documents" which was defined, in customary fashion, to include the guarantee of the second loan and "any other document which the lender and the borrower... agree in writing is a Transaction Document".
The lender and the guarantor later agreed that the previously unsecured guarantee of the first loan would also be a "Transaction Document" in the manner contemplated by the charge document. However, no amendment was made to the charge itself and no notice was given to ASIC.
The court found that the parties' agreement to bring the first guarantee within the scope of the fixed and floating charge was effective to vary the charge and thereby increase the liabilities secured by it, but the failure to notify ASIC of the change rendered the charge void to the extent that it purported to secure the guarantee of the first loan.
Consequences of decision
The decision has sent shock waves through the financing community.
It is probable that the decision will not affect "all moneys" charges that do not identify a specific loan. This is because the liability is agreed at the outset and no change is needed to capture a new and different liability.
However, in other cases, when a secured facility is increased by a variation to the original charge a new notice to ASIC will be required. Also, the instrument effecting the variation will need to accompany the notice, meaning that commercially sensitive information may need to be lodged on a public register.
Suggestions for lenders
Set out below are some practical steps that lenders can take to shore up their position.
Review existing agreements
First, documentation supporting existing secured loans should be reviewed to determine whether or not it is expressed to secure "all moneys" or obligations under a specific document.
If the charge secures obligations under a specific document, and the liability under the charge has been increased, ASIC should be notified as soon as possible.
Once notice is given, the six month period will start to run. At the end of that period, the charge will be a valid and enforceable security in respect of the increased facility amount.
Take care drafting future agreements
Lenders are also encouraged to consider using an "all moneys" charge for future transactions.
In addition, if a variation needs to be made to a charge by designating another loan to be included as a secured obligation, commercially sensitive information should be contained in a separate document to the instrument which varies the charge. This will enable parties to avoid having that sensitive information filed with ASIC and consequently being open to inspection by the public.