Australia's High Court dismisses the appeal in the contentious Octaviar case

Practical Law UK Legal Update 5-503-4219 (Approx. 3 pages)

Australia's High Court dismisses the appeal in the contentious Octaviar case

by John Elias , Minter Ellison

Published on 01 Oct 2010 • Australia

This article is part of the PLC Global Finance September 2010 e-mail update for Australia.

On 1 September 2010, in a clear 5-0 joint judgment, the Australian High Court dismissed the appeal in the Octaviar case relating to the registration of changes to charges registered with the Australian Securities and Investments Commission (ASIC).

Outline and effect

The Australian Corporations Act 2001 requires that notice of a variation in the terms of a charge must be lodged with ASIC where the variation increases liability secured by the charge. Failure to do this may render the charge void as security for the increased liabilities as against a liquidator or administrator.

The Australian High Court decision confirms that an increase in the liabilities secured by a registered charge will not usually require separate lodgement with ASIC unless the increase is effected by an amendment to the words in the charge. In particular, where a charge is expressed to secure all money owing to the chargee under or in connection with a defined class of documents (often called 'Transaction Documents' or 'Finance Document'), and the definition of Transaction Document/Finance Document contemplates that additional documents can be added by a separate agreement between chargor and chargee, the addition of a new Transaction/Finance Document by separate agreement will not need to be notified to ASIC.

Before the Octaviar litigation commenced, it was common to vary the amount secured by a registered charge by adding or amending Transaction Documents, without lodgement with ASIC. The initial Octaviar judgment called this practice into question and suggested that lodgement with ASIC was necessary (either because the practice created a new charge or because it varied the terms of an existing charge in a manner which increased the liability secured).

While further analysis of the Australian High Court decision is required, in our view, given careful drafting, the 'pre-Octaviar' market practice can resume.

Some lessons

As always, care will need to be taken in the drafting of charges:

If it is clear that a term of the charge will be 'variable or ambulatory in its factual operation', there is no 'variation in the terms of the charge' for the purpose of the Corporations Act each time its operation is, as a matter of fact, altered or modified. Accordingly, if a charge clearly contemplates that it will secure liability that might become owing under a document that becomes a Transaction Document in the future, and a document subsequently becomes a Transaction Document in the manner contemplated in the drafting, no lodgement with ASIC should be required.
While not directly relevant to the Australian High Court's decision, the Court was critical of the drafting of the charge in the case because the 'pivotal' definition of Secured Money in turn referred to another defined term which was not to be found in the charge but in a separate document. This was in the context of consideration of what the terms of the charge actually comprised and the Court indicated that the terms of the charge could extend to some or all of the separate document. The risk in drafting a charge in this manner is that a variation to the words in the separate document could, by implication, then effect the variation of the terms of the charge requiring registration with ASIC.

Australia's High Court dismisses the appeal in the contentious Octaviar case | Practical Law