On 1 September 2010 the High Court in Public Trustee of Queensland v Fortress Credit Corporation (Aus) 11 Pty Ltd dismissed the appeal from the decision of the Queensland Court of Appeal and in doing so provided relief to many secured creditors. The decision reaffirms the long accepted practice of drafting the terms of a company charge to include liability under documents to be agreed in the future.
The decision of the High Court in Public Trustee of Queensland v Fortress Credit Corporation (Aus) 11 Pty Ltd finally resolves the uncertainty which arose from the first instance decision of Justice McMurdo.
The case concerned the granting of a company charge which was expressed to secure all money owing under a “Transaction Document”. The term “Transaction Document” was defined (in another document) to include each document which the parties agreed in writing to be a “Transaction Document”.
In the first instance decision, Justice McMurdo held that including a further document, which increased the liabilities secured by the charge, as a “Transaction Document” amounted to a variation of the terms of the charge for the purposes of section 268(2) of the Corporations Act 2001 (Cth) (the Act).
Under section 268(2) of the Act, any variation in the terms of a charge which has the effect of increasing the amount of the debt or the liabilities secured by that charge must be notified to ASIC. Failure to notify ASIC will render the charge void as security against a liquidator or administrator to the extent that it secures an increased liability (section 266(3) of the Act).
The Queensland Court of Appeal overturned the decision of Justice McMurdo finding that the obligation to notify ASIC is only triggered where the terms of the charge document itself are varied. Since the charge document provided for additional documents to be added to the definition of “Transaction Document” the addition of a further document did not constitute a variation in the terms of the charge.
High Court decision
The High Court unanimously found that “there was no variation made to the terms of the charge, either in their text or in the rights and obligations to which those terms gave rise.” By lodging a copy of the charge instrument a person who searched the ASIC register of charges would be put on notice that they needed to look elsewhere to ascertain the precise nature and details of the liabilities secured. The particular amount of the liability secured does not need to be specified nor does the nature of that liability need to be described in great detail. Therefore whilst a person would need to conduct further investigations into the nature of the “Transaction Documents” to ascertain the exact liabilities under the charge, this is not contrary to the policy of the Act’s charge notice provisions. The High Court recognised that the charge notice provisions do not purport to create a perfect and complete register of all details of a registrable charge.
The crucial question in determining whether notice must be lodged is whether there has been a variation in the terms of the charge or whether there is merely a variation in its operation.
The High Court has confirmed that the long accepted practice of increasing the liability secured by a charge by adding or amending transaction documents without notifying ASIC will not ordinarily amount to a variation in the terms of the charge.
Secured creditors who did not react to Justice McMurdo’s first instance decision can feel relieved that the High Court has emphatically re-established the status quo.