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Client Update: Octaviar, round 3 – the saga continues. What should we do now?

19 October 2009

In brief: As we reported last week, in the ongoing Octaviar matter an application was lodged with the High Court on Thursday 15 October 2009 for special leave to appeal against the decision of the Queensland Court of Appeal, which had overturned the unsettling first instance judgment. 

The relief felt by the market at the Court of Appeal decision has been dented. While that decision was unanimous, and, in our respectful view, correct, the market now has to live with an element of uncertainty, which could conceivably run through much of 2010. In the normal course, the application is unlikely to be heard until the first quarter of next year. It is difficult to predict whether the High Court will grant the application and take up the appeal. If it does grant the application, the hearing of the appeal proper and the court's decision may take months.

Thus, parties need to settle their position on the issues now. In this Client Update, we discuss the implications and suggest ways forward pending the High Court decision. As with some of our previous communications on this matter, this Client Update has been prepared jointly by us and Mallesons Stephen Jaques in consultation with John Sheahan SC.

The application for special leave to appeal

On 15 October 2009 the Public Trustee of Queensland lodged an application for special leave to appeal to the High Court from the decision of the Queensland Court of Appeal in Public Trustee of Qld v Octaviar Ltd [2009] QCA 282.  You will recall from our previous Client Updates that, in a unanimous decision, the Court of Appeal overturned the decision of Justice McMurdo at first instance in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37 (see our Client Update).

The grounds of the application for special leave focus on the deed of 22 January 2008, by which the parties had brought additional obligations within the scope of an existing 'Transaction Document' style charge by designating a new document to be secured. The grounds go to the very heart of the issues that caused such disruption following the first instance decision:

  • did the deed of 22 January 2008 constitute a variation to the terms of the charge having the effect of increasing the liabilities secured by that charge, within the meaning of section 268(2) of the Corporations Act 2001 (Cth)?
  • alternatively, did that deed constitute a new charge?

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What does this mean for market practice?

In our Client Update issued shortly after the Court of Appeal decision, we offered some interim recommendations pending news of any appeal. The lodging of the special leave application means that the key issues which arose out of the first instance decision remain 'in play'. Although the Court of Appeal decision represents the current state of the law and, in our respectful view, is correct and likely to be upheld, we cannot dismiss the possibility that the High Court might adopt some or all of Justice McMurdo's reasoning in the first instance decision, or even adopt a new course.  So long as an appeal is pending, the law cannot be regarded as finally settled.

While the Court of Appeal decision did not quash or reverse every element of the reasoning at first instance, it at least meant that the position regarding transactions within the facts of the Octaviar case was restored to what the market understood it to be before the first instance decision. In other words, where a charge describes the secured liabilities, anything which has the effect of adding a liability which falls within that description (and does not alter that description or the remainder of the charge document) is not a registrable variation. If the charge provides a pre-agreed contractual mechanism for bringing liabilities within that description, an act (including an agreement) which is effected strictly in accordance with that mechanism, and does not alter the terms of the charge document, will not constitute a registrable variation, even if it has the effect of increasing the amount secured. For example, on our current analysis of the Court of Appeal's decision, if a charge secures all amounts owed under a specified facility agreement, and the charge includes the usual interpretation clause which provides that references to a document includes that document as amended, it is strongly arguable that an amendment to the facility agreement to increase the facility limit should not be a registrable variation of the charge. Of course, that view must be subject to anything the High Court may have to say.

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Recommendations

Our joint recommendations are as follows, pending resolution of the special leave application:

New transactions

For new transactions parties should, in our view, continue to seek to 'Octaviar-proof' their charges in one of the ways previously suggested in our Table of Solutions. Given that most in the market will already have done the work to implement these changes, this ought not be overly onerous.

Historical variations

In relation to reviewing historical files, this remains a question of balancing risk against cost. If the appeal is taken up, it could be a year or more before we have a final decision of the High Court and that is time that could be used to trigger, by lodgment, and absorb, the six-month 'cure period' under s266(3) for any doubtful transactions, to protect against a possible reversal of the Court of Appeal decision.

Clearly, where most of the work has been done and time and money has been invested in fixing historical variations, parties will very likely want to press on.

But in any case parties ought to continue to review charges and associated historical variations where there is a real risk of chargor insolvency, or where enforcement is a real possibility. In these cases, there is much to be said for pressing on and removing any risk without waiting for the High Court. Remember that, almost regardless of what the High Court ultimately says in relation to the specific facts of the Octaviar case, the 'genie is out of the bottle' in the sense that liquidators, unsecured creditors and others who have an interest in tearing down security are now alert to the possibilities which s268(2) presents and will actively probe anything that might be a registrable but unregistered variation. Even if the High Court rejects the application for special leave, it cannot be said that the Court of Appeal decision resolved all potential issues.

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