Key Points: The High Court held there was no variation in the terms of the Charge and therefore no registration was required.

On 1 September 2010 the High Court handed down its much anticipated decision in the appeal from the Queensland Court of Appeal in Re Octaviar Ltd (No 7) [2009] QCA 282, unanimously dismissing the appeal in Public Trustee of Queensland v Fortress Credit Corporation (Aus) 11 Pty Ltd [2010] HCA 29.

The fixed and floating charge

A fixed and floating charge was granted on 1 June 2007 (Charge) over the assets of Octaviar (the second respondent) in favour of Fortress Credit (the first respondent). The Charge was registered with ASIC, as required by sections 262 and 263 of the Corporations Act 2001 (Cth). Under a facility agreement also entered into on 1 June 2007 funds were advanced by Fortress Credit to Octaviar Castle Pty Limited, a subsidiary of Octaviar. Octaviar and Octaviar Administration had agreed to act as guarantors (Facility Agreement). The Charge secured the liability of Octaviar to Fortress Credit.

Under clause 2.1 of the Charge, Octaviar charged to Fortress Credit all of the "Secured Property" (being all of its present and future property) as security for payment of the "Secured Money." "Secured Money" was defined to include all moneys that became payable by Octaviar to Fortress Credit "under or in relation to a Transaction Document." The Charge did not define "Transaction Document", but clause 1.2 provided that terms not defined in the Charge were defined in the Facility Agreement. The Facility Agreement defined Transaction Document as "each other document which [Fortress Credit] and [Octaviar Castle] or [Octaviar] agree in writing is a Transaction Document for the purposes of the Facility Agreement."

Octaviar subsequently agreed to guarantee the indebtedness of Young Village Estates Pty Limited to Fortress Credit (YVE Guarantee), effectively increasing the money secured under the Charge. A deed was entered into between Fortress Credit, Octaviar and Octaviar Castle on 22 January 2008 which stated that the YVE Guarantee was a "Transaction Document" for the purposes of the Facility Agreement.

In late 2008, administrators were appointed to Octaviar and Octaviar Administration (another subsidiary company). Each company executed a deed of company arrangement under Pt 3.5A of the Corporations Act. The appellant, the Public Trustee of Queensland, who is trustee for certain noteholders, sought orders terminating each deed on the basis that each deed had been based on the premise that the Charge was valid in all respects, however the Charge did not secure the YVE Guarantee.

The Public Trustee argued that the January 2008 Deed varied constituted a "variation" in the terms of the Charge, and that this variation was required to be registered under section 268(2) of the Corporations Act in order for the increased liability under the YVE Guarantee to be secured by the Charge. This argument succeeded at first instance, and rendered the Charge void in respect to this additional liability.

The Queensland Court of Appeal overturned this decision. It held that the terms of the Charge itself were not varied, and therefore no notice of variation of the Charge had to be lodged under section 268(2) of the Corporations Act. The Court stated that even though the burden of liability under the Charge changed, this was done in accordance with the terms of the Charge.

The High Court decision

The High Court addressed two issues in its decision:

  • whether the January 2008 Deed was a "variation in the terms" of the Charge to which section 268(2) of the Corporations Act applied; and
  • whether the January 2008 Deed created a new charge to which the registration provisions of sections 262 and 263 applied.

The Court held that the January 2008 Deed did not constitute a "variation in the terms" of the Charge and was therefore not required to be registered under section 268.

Under section 266(3) a charge will be void against a liquidator or administration where, " there has been a variation in the terms of a registrable charge on property of a company having the effect of increasing the amount of the debt or increasing the liabilities (whether present or prospective) secured by the charge....unless a notice in respect of the variation was lodged under section 268" within the specified time period [emphasis added].

The High Court focused on the first limb of section 266(3), which was whether or not the terms of the Charge had been varied by the execution of the January 2008 Deed. If the terms had not been varied, there would be no need to go on to consider the second limb of section 266(3), which was whether or not the effect of the variation was to increase the liabilities secured by the Charge.

The High Court agreed with the reasoning of the Queensland Court of Appeal, which stated that section 268(2) is directed at variations in the terms of the charge and not changes imposed, in accordance with those terms, on the burden of liability under the charge. The execution of the January 2008 Deed was no more than the application of the mechanisms in the Charge to identify particular liabilities as falling within the category of liabilities which the Charge, in general terms, already secured.

The Court went on to say that not only had the terms not been varied by the January 2008 Deed, but the rights and obligations under the Charge had also remained unchanged. In reaching this conclusion the Court pointed to the definition of "Transaction Document," stating that this showed that the parties had contemplated from the outset that a liability might become owing under a document that was, or became at a later date, a Transaction Document by the parties agreeing so in writing.

Was failure to lodge a notice of variation contrary to public policy?

The Public Trustee argued that failure to lodge a notice of variation under section 268 would run counter to the policy of registration laid down in Chapter 2K. The Court rejected this argument. In doing so it emphasised that the registration provisions of the Corporations Act do not purport to create a perfect and complete register of all the details of a registrable charge – such details could only be discovered by looking to the document creating the charge.

The Form 309 is required by section 263(1) to contain a "short description of the liability". In this case the definitions of "Secured Money" and "Facility Agreement" were referred to. Importantly, the particular amount of the liability secured was not required to be provided or described in great detail, and the Court acknowledged that in many cases this amount is not known by the parties at the time of lodgement. A copy of the Charge itself was also annexed to the Form 309 as required. Any person searching the register would have encountered the Charge and would have realised that, given the definition of "Secured Money" and the inclusion of clause 1.2 in the Charge, there was a need to look elsewhere to ascertain the precise nature and details of the liability secured under the Charge. In effect, the particulars lodged for registration adverted to the possibility of the existence of other documents affecting the liability secured.

The Court briefly turned its mind to what constituted the "terms of the charge." The drafting of the Charge was criticized, as the pivotal definition of the "Secured Money" referred to another defined term, which was not to be found in the Charge but in the Facility Agreement. This cast confusion over whether the terms of the Charge included only the Charge itself, or also included the terms of the Facility Agreement for the purposes of section 268(2). While this point did not need to be decided as it did not assist in answering the question of whether there had been a variation in the terms of the Charge, this comment should be noted by drafters of charges.