Banks should tread carefully pending decision on Octaviar appeal

Banks and others who take security in Australia will need to proceed cautiously pending a final decision on the Octaviar appeal – a process that could take several months.

This Brief Counsel looks at the case and explores some of the implications for secured creditors. 

The Octaviar case

The case – Re. Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37 – relates to an Australian fixed and floating charge which secured all money owing “under or in relation to a Transaction Document”.  Transaction Document was defined to include certain specified documents and also “each document which the Lender and Borrower or a Security Provider agree in writing is a Transaction Document for the purposes of this agreement”.  

In January 2008, the parties agreed to designate an additional document as a Transaction Document so that the moneys owing under that document would be secured by the charge. 

The Corporations Act 2001 (Cth) requires that any variation of a charge which has the effect of increasing the amount secured by that charge must be lodged with ASIC within 45 days of the variation.  Market practice in Australia was to notify ASIC only where there had been a change in the terms of the registered charge itself that increased the liabilities.  The designation of an additional document was contemplated by the original charge so was not considered to be a variation. 

The Queensland Supreme Court at first instance disagreed with this interpretation.  It found that the designation of an additional document as a Transaction Document was a variation of the charge and so required a variation to be lodged with ASIC.  Accordingly the charge was held not to secure the increased liabilities. 

This decision, which caused much concern in the market, was overturned by the Queensland Court of Appeal in September 2009.  An application to appeal to the High Court was lodged on 15 October 2009. The risk is of course that the original decision will be restored. 

Market practice

Until a final decision is received, secured creditors will be affected in relation to:

  • new charges

  • variations to facilities secured by existing charges, and

  • historical transactions.

New charges should be drafted with Octaviar in mind.  Parties will generally be reluctant to register with ASIC copies of the facility agreement or subsequent variations as this would put the commercial terms of the transaction on the public record.  There are a number of ways of drafting a charge to mitigate this and Australian counsel will be able to advise on these when preparing or reviewing the documents.

Banks should be particularly cautious in agreeing to any amendments to loan documents secured by Australian charges where those amendments increase the amount secured.  If there is any doubt Australian legal advice should be sought as to whether the variation ought to be lodged with ASIC.

Secured creditors should also consider reviewing their existing files to see whether there are vulnerabilities in the security due to past variations.  Variations can be lodged with ASIC outside the 45 day period but this does leave the security vulnerable if the chargor goes into liquidation or voluntary administration within 6 months of registration.

It is possible to apply to the court for an extension of time for registration but, as this has not been tested since the Octaviar decision, it is unclear whether such an application would be successful.  An alternative, which has become common since the first Octaviar ruling, is to take a new charge to secure the increased liabilities.  This avoids the 6 month period but does carry the risk of being an unfair preference which may be voidable if the chargor is insolvent at the time the charge is granted.


The future will remain uncertain until the High Court has either heard and decided the appeal or has declined the application to appeal. 

In the meantime secured creditors should take the Octaviar decision into account when taking new security in Australia or dealing with any liabilities secured by an Australian charge and should review prior variations where there are concerns as to the solvency of the chargor.

For further information, please contact the lawyers featured.

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Related topics: Finance; Restructuring & insolvency; Security interest; Financiers/lenders; Creditors

Finance; Restructuring & insolvency

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