Public Trustee of Queensland v Fortress Credit Corporation (Aus) 11 Pty Ltd & Ors [2010] HCATrans 158 (21 June 2010)

Last Updated: 24 June 2010

[2010] HCATrans 158

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Brisbane No B9 of 2010

B e t w e e n -

PUBLIC TRUSTEE OF QUEENSLAND

Appellant

and

FORTRESS CREDIT CORPORATION (AUS) 11 PTY LTD

First Respondent

OCTAVIAR LIMITED (FORMERLY MFS LIMITED)

Second Respondent

OCTAVIAR ADMINISTRATION PTY LTD (FORMERLY MFS ADM)

Third Respondent

OPI PACIFIC FINANCE LIMITED

Fourth Respondent

WELLINGTON CAPITAL LIMITED

Fifth Respondent

FRENCH CJ
GUMMOW J
HAYNE J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON MONDAY, 21 JUNE 2010, AT 2.15 PM

Copyright in the High Court of Australia

__________________

MR W. SOFRONOFF, QC Solicitor-General of the State of Queensland: May it please the Court, I appear with my learned friend, MR D.B. O’SULLIVAN, for the appellant. (instructed by Clayton Utz Lawyers)

MR D.F. JACKSON, QC: May it please the Court, I appear with my learned friend, MS J. LUCHICH, for the first respondent. (instructed by Baker & McKenzie Solicitors)

FRENCH CJ: Thank you. I note there are submitting appearances for the second, third and fourth respondents and no appearance for the fifth respondent who has been served. Yes, Mr Sofronoff.

MR SOFRONOFF: Your Honours, may I go to the legislation and then to the documents before dealing with arguments. Could I ask your Honours to go to the Corporations Act, Chapter 2K which begins at section 261, relevantly at 262. The provisions of the chapter, 262, provides that:

The provisions of this Chapter relating to the giving of notice in relation to, the registration of, and the priorities of, charges apply –

to particular charges which are then set out relevantly, relevantly, “(a) a floating charge” and it does not apply to charges or liens arising by operation of law. If your Honours would then look at subsection (11), the charge itself “is not invalid merely because of the failure to lodge” a notice that has to be lodged. If your Honours would then go to section 263, that is the principal section relating to lodgement of notices:

Where a company creates the charge, the company must ensure - - -

GUMMOW J: Just a minute. What is the consequence, then, if there is no invalidity under - - -

MR SOFRONOFF: There are consequences for, firstly, priorities and, secondly, there are consequences for validity against a liquidator or administrator but not as between the parties and so on.

GUMMOW J: Is there an offence?

MR SOFRONOFF: No. There is an offence except in respect of a company’s failure to maintain its own register. I will come to that in due course, your Honour. If your Honours would go to 263. A company must ensure that there is lodged a number of things. The first is a notice, setting out certain particulars, relevantly, 263(1)(a)(iv):

a short description of the liability (whether present or prospective) secured by the charge -

I will come to the meaning of the terms “present” and “prospective” in due course, your Honours. In addition, there must be a short description of the property charged. The section does not assume that a charge will be created by an instrument. It might be created by a resolution of the company. Subclause (b) takes that case into account; “a copy of the resolution” must be lodged. Relevantly for the purposes of this case, subclause (c) - - -

GUMMOW J: Just a minute, look at 263(1)(a)(v) “a short description of the property charged”. If it is a floating charge the description will necessarily have to be prospective.

MR SOFRONOFF: Yes, and general.

GUMMOW J: And general, yes.

MR SOFRONOFF: Then subclause (c) if:

the charge was created or evidenced by an instrument or instruments - - -

the company must ensure that there is lodged, with the notice, the instrument or a copy of the instrument. Subsection (2) in the case of charges created of a kind referred to in (1)(b) there is a provision relating to when the charge is taken to be created. Then if your Honours would look at subsection (5), if the notice is not “accompanied by the documents” that had to be lodged with the notice, then a notice is not taken to have been lodged.

If your Honours would then go to 265. Section 265 makes provision for ASIC keeping a register of “Company Charges” and it must – subsection (2), enter into the register “particulars required by the relevant section”. If your Honours would then jump to section 1274, that is the provision pursuant to which a person – subsection (2):

(a) inspect any document lodged with ASIC –

subject to some exceptions, none of which applied in this case –

(c) require a copy of . . . any document that the person is entitled to inspect -

So the notice that the company lodges, together with the instrument, would be available for public inspection, pursuant to section 1274(2). Section 271 obliges the company itself to keep a register of charges; that is section 271(1) – must keep a copy of:

(a) every document relating to a charge . . .

(2) A company must keep a register -

Your Honour Justice Gummow asked me about offences. Subsection (5) creates an offence in relation to the company’s obligation to keep its own register. So that deals with charges of particular kinds that have been created and the statutory obligation to lodge a notice, and as the case may be, an instrument with ASIC within 45 days after the creation of the charge. If your Honours would then go to section 268. That section deals with cases:

(1) Where, after a . . . charge . . . has been created –

somebody else becomes what is called –

the holder of the charge –

that is, the charge as assigned, and where a charge is varied. Section 268(1) relates to assignment of the charge, we can pass over it. Section 268(2) then deals with a limited class of variations. The charge “has been created, there is a variation in the terms of the charge”, and the variation to the terms of the charge must have a particular effect; either it increases the amount of the debt or it increases the liabilities secured by the charge.

Your Honours will notice again the expression, “present or prospective” that is used there, and I will come back to that in due course. If there is “a variation in the terms of the charge having the effect of” prohibiting or restricting the creation of subsequent charges, we can pass over that. In that case the company must within 14 days after the variation occurs lodge a notice setting out particulars of the variation, accompanied by the instrument, and we will see that there are priority consequences and consequences for enforceability against a liquidator or administrator if that is not done.

So I will come back to the subsection in due course, of course, but in summary one is looking for a variation, one is looking for a variation in the terms of the challenge. One is looking for a variation in the terms which has the effect relevantly here of increasing the amount of the debt or increasing the liabilities secured by the challenge. Subsection (3) contains an exception or an exclusion:

Where a charge created by a company secures a debt of an unspecified amount or secures a debt of a specified amount and further advances, [then the making of] a payment or advance made by the chargee to the company in accordance with the terms of the charge is not taken . . . to be a variation in the terms of the charge having the effect of increasing the amount of the charge - - -

FRENCH CJ: The proposition that it is an exception is an assumption, is it not? I mean, a contestable proposition.

MR SOFRONOFF: It contains an assumption and we will endeavour to explain the history of that provision and our submission will be, in due course, that the assumption was misconceived, but I will come back to that, your Honour. Your Honours will see that the category of cases dealt with by subsection (3) is a very limited category. It does not relate to an increase in liabilities generally, it relates only to an increase in liabilities because of the making of a payment or advance and it only relates to the making of a payment or advance by the chargee to the company that is granted the charge.

FRENCH CJ: It picks up an all-moneys charge?

MR SOFRONOFF: It would pick up an all-moneys charge, and I will come back, in due course, to make some submissions about that. The variation provisions generally, your Honours, section 268, as well as many of the priorities provisions to which we will come, originated in one of the reports of the Eggleston Committee. In your Honours’ list of authorities – I think it is in the common list of authorities – at tab 43 your Honours will find the relevant report which was printed in late 1972. It is the seventh interim report which dealt with registration of charges. Could I foreshadow what I am about to take your Honours to.

First, the members of the subcommittee considered the problem of tacking that had been solved by legislative means in relation to real estate. Tacking, your Honours will recall, relevantly made provision for two sorts of things. One was where mortgagee No 3 advances money and if mortgagee No 3 can get mortgage No 1, mortgagee No 3 can tack the advances made under mortgage No 3 to mortgage No 1 and get priority over mortgagee No 2. We are not concerned with that.

The second form of tacking is where a mortgagee makes advances. There is then a subsequent mortgage. Mortgagee No 1 continues to make advances after the subsequent mortgage. Mortgagee No 1 retains priority, even for the advances made subsequent to the creation of the second mortgage for as long as mortgagee No 1 has no notice of the second mortgage.

The position with respect to real estate was changed. The common law position was changed by a series of enactments in all States and in England – I think deriving from England. Relevantly in Queensland it was by section 82 of the Property Law Act 1974. Your Honours have that, I think, in separate bundle that we have handed up. Subsection (1) provides that a prior mortgagee retains priority for “further advances” against “subsequent mortgages” in two cases - if the mortgagee makes an arrangement with subsequent mortgagees so that is an agreement, or if the first mortgagee has no notice of the subsequent mortgage at the time that the further advance was made.

Subsection (3), for the purpose of determining whether a mortgagee has notice or not, registration is immaterial. Registration does not constitute constructive notice. The second paragraph of subsection (3) provides that it only applies where the prior mortgage “was made expressly for securing a current account or other further advances”, that is to say, the privilege to tack is restricted to relevantly first mortgagees with no notice of subsequent mortgages and, secondly, to a particular category of mortgages – those which are made expressly for securing a current account, which of course, will go up and down – or for making further advances such as a loan facility with a building developer or something of that kind. Subsection (4) provides that subject to that, all rights to tack are abolished.

Your Honours will see in the annotation at the top the title to the section. This derives from section 94 of the English Property Law Act 1925. That was the position which obtained with respect to the right to tack in respect of mortgages of real estate.

GUMMOW J: What was the position of Torrens Title?

MR SOFRONOFF: I cannot answer that, your Honour. I will have to look for that. The position, however, with respect to personal estate was addressed by the Eggleston Committee at paragraph 57 of the report. The authors first pointed out that the problem of tacking is – do your Honours have that? It is at page 22 of 46, your Honours. The authors first point out that the problem of tacking is more rare in the case of personalty but could arise. Then in the second sentence they say:

It seems to us to be reasonable to provide that if the instrument creating the charge expressly provides for the making of further advances, the holder of a registered charge should be entitled to the benefit of the security in respect of further advances, even if they [w]ere made after he received notice, by registration or otherwise, of a subsequent interest, unless he has agreed not to exercise the right.

Then there is a rationale given for that.

GUMMOW J: Do we know who constituted this body?

MR SOFRONOFF: I do not know, your Honour, who constituted it. We will find out who that was.

FRENCH CJ: I think it is at the back.

MR SOFRONOFF: While we are there, if your Honours would go then to paragraph 62. Your Honour Justice Gummow, the members of the subcommittee were a Senator Eggleston, a J.M. Rodd and a P.C.E. Cox. We will see if we can find out who the latter two gentlemen were. In paragraph 62, the subcommittee observed that they thought that the action required:

the filing of particulars of any variation in the terms of the charge.

There should be provision for that and:

priority should be accorded to the increased security . . . as from the date on which the particulars are filed.

So what we submit one can draw from that, your Honours, is that, first, the provisions in section 268 relating to variation of course derive from that recommendation of the Eggleston Committee. It found its way into the company’s code of 1981 and from there, of course, the Corporations Law and then finally to the Corporations Act. Secondly, the legislation as it came to be in the Companies Code 1981 and ultimately in this Act dealt with the system of priorities of registered charges which took into account what might be described as a statutory doctrine of tacking in respect of further advances. That is provided for, firstly, in 268(3) and then subsequently, as we will see, in sections 280 and 282 which deal expressly with priorities.

FRENCH CJ: Is it right that the Eggleston Committee wanted to substitute a system of priorities entirely for provisions as to invalidity against liquidators and the like?

MR SOFRONOFF: That they wanted to distinguish between the two, your Honour?

FRENCH CJ: No, substitute. I am just looking at page 18 of the report.

MR SOFRONOFF: Of what, your Honour, sorry?

FRENCH CJ: Of the report of the Committee.

MR SOFRONOFF: Of the report, yes.

FRENCH CJ: I may have misread it but I thought wrestling with properties of invalidity and limited invalidity and the position of purchases without notice.

MR SOFRONOFF: Your Honour, I will have to look at the Companies Act 1960 to answer that question, but I will ask my learned junior to do that, but what did indeed happen is that, as your Honours will see in a moment, first there is a set of provisions relating to priorities and, secondly, there is a set of provisions relating to validity as against liquidators and administrators, but the validity of the charge as a contract continues notwithstanding non-compliance with the registration provision.

FRENCH CJ: The invalidity in relation to an unregistered variation seems to be absolute under 266(3) and that is reflected in the nature of the declaration, I think, content of declaration that was made at first instance. It is an interesting - - -

MR SOFRONOFF: I see, your Honour, yes.

FRENCH CJ: Whereas in 266(1) it is void only as against the liquidator, administrator, et cetera .

Yes, and I think I put that clumsily, your Honour, because, of course, its only use in a liquidation would be if it was enforceable as against the world, relevantly, the liquidator and other creditors, so your Honour is correct that it attacks the validity generally in the provision your Honour has pointed out to me. As in the case of 266, it attacks its validity as a security. It remains good as a contract of loan.

Could I take your Honours then to section 265 in which your Honours have seen that in subsection (2) provision is made requiring ASIC to enter particulars in the register. Subsection (14) makes similar provision in relation to entry in the register of particulars of a variation of a charge, and the requirement for ASIC to enter particulars in the register is then linked to the system of priority which begins in section 278 by creating what is called a “priority time”. A -

priority time, in relation to a registered charge, means:

subject to the exceptions –

(a) . . . the time and date appearing in the Register in relation to the charge, being a time and day entered in the Register pursuant to section 265 –

We can skip over (b).

(c) to the extent that the charge has effect as varied by a variation notice of which was required to be lodged under subsection 268(2)-the time and day entered in the Register in relation to the charge pursuant to subsection 265(14).

So in relation to the charge proper, the priority time is the date the particulars are entered in the register. In relation to variations, to the extent that they increase the liability, the priority time in respect of that is the time the variation is entered into the register, and that then links to the next definition:

prior registered charge, in relation to another registered charge, means a charge the priority time of which is earlier than the priority time of the other charge.

That definition of “prior registered charge” as we will see will have effect, not only in relation to the original charge, if that is in question, but also in relation to a variation that was notified, or ought to be notified.

If your Honours then would look at section 280, that begins the regime of priorities. In substance, what section 280(1) provides for is that a prior registered charge has priority over subsequent registered, or unregistered charges, unless the other charge was created earlier and with notice. Could I invite your Honours to read subparagraphs (a) and (b)? Subsection (1) creates the prima facie rule in relation to a registered charge and the priority is accorded over subsequent registered charges or unregistered charges.

Then 281 makes similar provision in relation to unregistered charges, and then one comes to 282 which qualifies the prima facie provision. The first matter is that insofar as a chargee has priority, subsection (1) extends that priority only:

to any liability that, at the priority time in relation to the first-mentioned charge –

It was not present liability. The statute puts it in the negative:

does not extend to any liability that, at the priority time . . . is not a present liability.

So the question arises, at the date of registration of the particulars by ASIC, what was the nature of the liability which was secured by the charge? Does it answer the description of “present liability”? As to that, we need to go to section 261. Your Honours will see that the definitions in section 261 are expressed to be for the purposes of the Chapter “unless the contrary intention appears”. The second definition is:

present liability, in relation to a charge, means a liability that has arisen, being a liability the extent or amount of which is fixed or capable of being ascertained, whether or not the liability is immediately due to be met.

I say nothing about that yet, your Honours, and invite your Honours to look at the definition of “prospective liability”:

prospective liability, in relation to a charge, means any liability that may arise in the future, or any other liability, but does not include a present liability.

Your Honours will have seen the expression “prospective liability” elsewhere in the corporations legislation. If your Honours would go to section 459P. Section 459P makes provision for who can apply to wind up a company in insolvency and subsection (1)(b) says that a creditor can do so, and “creditor” includes a person who “is only a contingent or prospective creditor”. Similarly, in section 459D, when a court is considering whether a company is insolvent, it can take into account, pursuant to 459D(1), contingent or prospective liabilities of the company.

Your Honours will be familiar with those cases where courts are concerned to determine whether a company that is able to meet its current liabilities is nevertheless insolvent because when one has regard to all of its assets and all of its liabilities, contingent and prospective and current, it is plain that it cannot meet its liabilities and is insolvent, or will not be able to meet its liabilities and is insolvent. Your Honours will have seen, then, that the insolvency provisions refer to contingent and prospective liabilities, and 2K in relation to charges refers to present liability and prospective liability.

The two sets of expressions, in our respectful submission, have completely different meanings and could I explain why we make that submission. It is necessary, in our submission, to understand those terms in order to understand the effect of the priority system and the key provision section, 268. Your Honours are, of course, familiar with, in the context of insolvency cases, the definition of a contingent liability being a liability arising from a present relationship which may become a present liability upon the occurrence or the non-occurrence of an event. Similarly, in that context, a prospective liability has been held to be one where a creditor will become entitled to payment of money by some other person and the actual date for payment has been fixed or can be determined by some reference, but the actual payment is certain. So a contingent liability may or may not arise; a prospective liability is postponed to the future but will arise.

Against that background of the meaning of those terms in the insolvency context, could I give your Honours some references to that. I will not take your Honours to the cases. In respect of the definition of “prospective liabilities”, Stonegate Securities Limited v Gregory [1980] 1 Ch 576 at 579 and Edwards v Attorney General [2004] NSWCA 272; (2004) 60 NSWLR 667 at 679. In relation to contingent liabilities, Community Development Pty Ltd v Engwirda [1969] HCA 47; (1966) 120 CLR 455 at 459 to 460 by Justice Kitto and at 461 by Justice Owen.

If we look at section 261, however, we can see that the definition of “present liability” is defined in terms that would include what, in the other context, is a prospect of liability. It is:

a liability that has arisen, being a liability the extent or amount of which is fixed or capable of being ascertained, whether or not the liability is immediately due to be met.

That is to say, a postponed liability that exists is said to be a present liability:

prospective liability, in relation to a charge, means any liability that may arise in the future –

That is something that is described in the other context as a contingent liability that may or may not arise. The differences, of course, can be explained because Part 5.4 in which the insolvency provisions exist and those terms are used – or rather, prospective liability is used and contingent is concerned with insolvency, and Part 2K is concerned with charges, not insolvency, and they have a different history in any event.

If I can take your Honours then back to 282 and the system of priorities, we have seen that the prima facie rule relating to priority in 280, in relation to registered charges, gives priority to a prior registered charge as long as the chargee has no notice of the other charge. Then 282(1) limits that priority to present liabilities, that is to say, fixed liabilities, not contingent liabilities. Subsection (2) then makes a rule for prospective liabilities – an exception, we would submit, for prospective liabilities, an exception from the limitation, subsection (1):

Where a registered charge on property of a company secures:

. . .

(b) a prospective liability of an unspecified amount –

With or without a present liability –

any priority accorded by this Part to the charge over another charge of which the chargee . . . does not have actual knowledge extends to the prospective liability, whether the prospective liability became a present liability before or after the registration of the first-mentioned charge.

Your Honours can see echoes within that of the statutory doctrine of tacking which we have seen in section 82 of the Property Law Act. That raises the question, which is not answered by subsection (2), what about knowledge of the subsequent charge, and that is answered a little later in subsection (4). Subsection (3) then makes provision for a second exception to the general rule in subsection (1) that priorities are limited to present liabilities, and the second exception relates to charges which secure:

prospective liability up to a specified maximum amount; and the notice lodged . . . sets out the nature of the prospective liability and the amount so specified, then any priority accorded by this Part . . . extends to any prospective liability . . . to the extent of the maximum amount so specified, whether the prospective liability [crystallised] before or after the registration of the –

second charge. Then there are two qualifications in subsection (4) to those exceptions. The first qualification relates to “a prospective liability up to a specified maximum amount” but where the notice is bad, subsection (4)(a):

Where:

(a) a registered charge on property . . . secures . . .

• (ii) a prospective liability up to a specified maximum amount;
  

but the notice lodged . . . does not set out the nature of the prospective liability or the maximum amount -

then something follows, and that which follows is in subparagraph (c) and (d). First:

any priority accorded to this Part to the charge over another charge of which the chargee in relation to the first-mentioned charge has actual knowledge extends to any prospective liability –

only insofar as the prospective liability crystallised or became –

a present liability at the time when the chargee in relation to the first-mentioned charge has actual knowledge –

of the charge, that is to say, if you have a prospective liability up to a specified maximum amount and you lodged a notice but your notice was defective then you can secure liability, you can secure priority for any crystallised liability that arose before you got knowledge of the subsequent charge. Secondly, subclause (d), you have protection for priority if, I am looking five lines in that subparagraph, at the time when you had actual knowledge of the other charge, the terms of your charge required you to make the advance after that.

GUMMOW J: Is this expression “actual knowledge”, is that the subject of any definition?

MR SOFRONOFF: No, except that if your Honour looks at subsection 282(2)(b), we see that the expression “actual knowledge” is used in the same paragraph as registration – as, I am sorry, your Honour. In answer to your Honour’s question, the term “actual knowledge” is not defined but in the context - - -

GUMMOW J: I always understood “notice” was one thing and “knowledge” might be something else. Actual notice might plead imputed notice. Are these subjects grappled with?

MR SOFRONOFF: I am sorry, your Honour?

GUMMOW J: Are these matters grappled with in the statute?

MR SOFRONOFF: No, they are not grappled with in the statute, your Honour. It speaks of registration and your Honour will see in 280(1)(b) in relation to unregistered charges, it speaks not of knowledge but of notice of the unregistered charge. Subparagraphs (a) and (b) both speak of “notice” of registered charges, (2)(a) speaks of “notice” of the subsequent registered charge, 282 speaks of “actual knowledge”. So, not that it matters in this case but, in our respectful submission, “actual knowledge” means what is says and the use, the deliberate use of the term “notice”, in this context, must mean that notice can be constituted by something short of actual knowledge. I have not considered whether registration would constitute notice but we will think about that. Can I tell, your Honour, that it is not likely that that aspect is going to bear directly on this case.

FRENCH CJ: Your submission – you are taking us to 282, as I understand it, as an aid to the construction of the requirement of 263(1)(a)(iv), is that correct? I am looking at paragraph 53 of your submissions. I just want to make sure I know where we are going.

MR SOFRONOFF: No, your Honour, I was taking your Honours to the priority regime in order to demonstrate that the question of what is a variation will bear not only upon the validity of the charge as a security against the liquidator, but upon the whole scheme of priorities between competing charges.

FRENCH CJ: Yes.

MR SOFRONOFF: I was saying, your Honours, that there is a prima facie rule that priority is limited to present liability. There are two exceptions to that. A prospect of liability of an unspecified amount wins priority subject to the conditions in section 282(2) and a prospective liability up to a maximum specified amount retains priority if it accords with subsection (3). Those two exceptions are themselves subject to qualifications. The first of them appears in subsection (4) where the notice is bad. It is a maximum specified amount but the notice is bad. You retain priority if, subparagraph (c), your have not got actual knowledge of the other charge, or subparagraph (d), you are obliged by your charge to make the advances, that is to say, it was one of those facilities where the contract obliges you to continue to make advances from time to time under a finance contract of a development of a building or something of that kind.

GUMMOW J: How do these definitions of “present liability” and “prospective liability” differentiate or discard notions of actual and contingent liabilities?

MR SOFRONOFF: They do not, your Honour. The definition of “present liability” would include an actual liability or a prospective liability. When I say “prospective liability”, I mean what is regarded as a prospective liability in the context of insolvency. The definition of “prospective liability” for 2K would include contingent liabilities. So it is a case where - - -

GUMMOW J: But do these definitions encompass something that previously would have been neither actual or nor contingent?

MR SOFRONOFF: Yes, potentially, your Honour, because the definition of “prospective liability” will include any liability which is not a present liability:

any liability that may arise in the future, or any other liability, but does not include a present liability.

I do not know what that might be, your Honour, but potentially it does. So it creates its own terms of arc for use with the regime. I said that there were two qualifications. The first relates to charges where the prospective liability is up to specified maximum amount and the second is in relation to charges which secure a prospect of liability of an unspecified amount, and the same two qualifications in (c) and (d) apply to that. There is then, we see, a requirement to register a charge, to notify it, a requirement to notify variations to a charge of the particular kind. The date of notification, in due course, becomes the priority time. The priority time is the time from which priority is to be measured.

Section 280 makes a general rule in relation to registered charges which will apply, as the case may be, to the charge proper or to any subsequent variation. Section 282 limits that priority to present liabilities, but then goes on to deal with prospective liabilities. We then come to - - -

GUMMOW J: I am sorry to be slow-witted about this, but prospective liabilities, do they include, therefore, mere expectancies – what used to be called mere expectancies? Something that you could not possibly assign without value.

MR SOFRONOFF: I beg your pardon, your Honour?

GUMMOW J: Something you could not now assign without value because it has no present existence? It probably does.

MR SOFRONOFF: To answer your Honour’s question one needs to go a further step, in our submission, it is this, that what the definitions are always concerned with are liabilities secured by the charge. There must actually be a liability that is the subject matter of the charge. So to answer the question whether a particular liability would fall within one definition or another, the first question to ask is, is it a liability in relation to the charge? Is it purported to secured by the charge? For that to be so, in our submission, there must be an actual liability, that is to say, there must be a relationship between the parties, contractual.

There might be some other kind of relationship between the parties other than contractual which is secured by charge potentially. In practical terms that would not happen, but potentially one could secure a potential liability in tort or of some other kind. But there must be an extant liability, whether it be contingent in the old-fashioned sense or prospective, but there must be liability. It must not be something that might arise in the sense of an agreement to agree. We will come to a couple cases. That is not, in our respectful submission, something that can give rise to a security.

GUMMOW J: Are these matters canvassed in the Eggleston Report?

MR SOFRONOFF: The matters that I am - - -

GUMMOW J: That we have been debating about the universe that is covered by these definitions of the - - -

MR SOFRONOFF: No, your Honour, I think the answer is no. Could I ask your Honours then to go to section 266? We have dealt with priorities, which will be the case where the security is good, but there is another competing security. Section 266 then deals with the case where the company is being wound up or an administrator has been appointed under one of the provisions, or a deed of company arrangement has been entered into. In summary, if there has been no registration of a notice within a defined time period then the charge will be void as a security on the property of the company.

It is not necessary to look at this for the purposes of the case, but can I tell your Honours that section 266(1)(c)(ii), in dealing with “critical day”, that is a term that is defined in subsection (8) of that section. By reference to section 513C, relevantly for present purposes, it is the day the administration began, but nothing turns on that for the purposes of the appeal. Your Honours will see then that subsection (1) where one of those events occurs a registrable charge is void unless notice was lodged under section 263, relevantly:

(i) within the relevant period; or

(ii) at least 6 months before the critical day –

If your Honours would go to subsection (3):

Where, after 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 –

Mirroring the language of 268 and the events occur:

the registrable charge is void as a security on that property to the extent that it secures the amount of the increase - - -

FRENCH CJ: Are we meant to read that void as against the liquidator administrator or the deed’s administrator?

MR SOFRONOFF: It is void as a security. It is good as a contract of loan.

FRENCH CJ: No, I know that, but I am just looking at the difference in language between 266(1) and 266(3).

MR SOFRONOFF: Yes, I see that, your Honour, yes. Yes, there is a limitation at 266(1), which is not there in subsection (3).

FRENCH CJ: Is there any explanation for that?

MR SOFRONOFF: No, your Honour, not that we are aware of. Against that background, your Honours, may I take you to the documents in the case and to appeal book volume 1? Your Honours will see in appeal book volume 1 that there are two sets of numbers in the bottom right-hand corner. I am referring to the number upon each page at the far right. If your Honours would go to page 148.

To put this document into context, the first point in time was when the company called Young Village Estates, which is not a subsidiary or related to Octaviar, bought something from Octaviar and as part of that deal it borrowed money from Fortress which was subsequently paid to Octaviar as part of the purchase price. Octaviar guaranteed to Fortress the repayment of that loan. It gave no security, apart from the personal security, the guarantee. Subsequently, a subsidiary of Octaviar, called at the time MFS Castle. Octaviar, was called MFS until it changed its name. A subsidiary of Octaviar called MFS Castle borrowed a substantial sum of money from Fortress. Again, Octaviar guaranteed the repayment of that loan, but this time he gave a charge, the one your Honours are looking at, over its property to secure that guarantee.

In due course, in early 2008, it became evident that Octaviar might be heading for financial trouble and Fortress triggered a provision of the documents. That provision was this. The guarantee and the charge were said to secure liabilities, not only those that were already guaranteed by Octaviar in respect of Castle but any liability that the parties might agree should be covered by the charge by agreeing that the documents evidencing that liability should be “a transaction document”. On January 22 the parties, relevantly Fortress and Octaviar, agreed that for the purposes of the charge Octaviar had given to secure the liability to Fortress of its subsidiary, the Young Village guarantee liability document would also be a transaction document and by that means sought to include that liability as a liability secured by the charge.

So the first document your Honours are looking at is the charge granted by Octaviar to Fortress to secure its promise to guarantee the loan of its subsidiary, Castle, to Fortress. If your Honours would go to page 151, clause 2.1, “The Chargor” – which is on page 150 identified as “MFS Limited” – that is Octaviar by another name:

The Chargor charges to the Lender –

that is Fortress –

as security for the due and punctual payment and satisfaction of the Secured Money –

all of the secured property.

GUMMOW J: “Secured money” is defined?

MR SOFRONOFF: Above at page 151:

Secured Money means all money, obligations and liabilities of any kind that are or may in the future become due, owing or payable, whether actually, contingently or prospectively, by the Chargor to or for the account of the Lender under or in relation to a Transaction Document - - -

GUMMOW J: Is that defined?

MR SOFRONOFF: Not in this document. It is defined but not in this document.

FRENCH CJ: You have to the facility agreement for that.

MR SOFRONOFF: Yes.

GUMMOW J: Is there anything in this document that picks up definitions in another document?

MR SOFRONOFF: Yes, 1.2, your Honour:

Terms not otherwise defined in this Deed have the meaning given in the Facility Agreement.

The term “facility agreement” is on page 150:

Facility Agreement means the agreement described in Item 2 of the Schedule –

If we then go to the Schedule, which is at page 173, item 2:

The definition of Facility Agreement (Definitions – clause 1.1):

A $250,000,000 Facility Agreement dated on or about the date of this Deed between, amongst others, the Chargor and the Lender.

Your Honours will see while we are there at page 173, item 3:

Priority Amount (Definitions – clause 1.1):

$750,000,000.

If we go back to page 151, “secured property” is defined to mean:

all of the present and future property, rights and undertaking of the Chargor –

and as your Honours have seen 2.1 charges that property with:

the due and punctual payment and satisfaction of the Secured Money –

If your Honours then would go to 2.12:

For the purpose only of determining priorities between the Charge and any other Security Interest under Part 2K.3 of the Corporations Act:

(a) the Charge secures:

(i) all Secured Money that is a present liability . . .

(ii) all Secured Money that is a prospective liability at the priority time . . . up to a maximum amount equal to the Priority Amount –

that is the $750 million –

(b) the prospective liability secured by the Charge is all money, obligations and liabilities of any kind that are or may in the future become due, owing or payable, whether actually, contingently or prospectively by the Chargor to or for the amount of the Lender under or in relation to a Transaction Document –

which raises the question, “What does that expression mean?” The finance facility is at page 101. Could we, before going to the definition, go to page 110, clause 2.1:

Subject to this Agreement, the Lender grants to the Borrower a cash advance facility under which the Borrower may draw Advances -

Then clause 14.1:

Each guarantor . . . guarantees . . . to the Lender the payment and satisfaction of the Guaranteed Liabilities.

If your Honours would go to page 137, one of the guarantors – item 2 – is MFS Limited, that is Octaviar. On that page, your Honours will see item 5, the definition of commitment - $250 million. That links with what your Honours saw in clause 2.1 –

the Lender grants to the Borrower a cash advance facility under which the Borrower may draw Advances –

up to the commitment. That is the 250 million. So that is guaranteed by Octaviar, and we come then to the definitions clause. At page 104, the facility, in the middle of the page:

means the cash advance facility made available to the Borrower under clause 2 –

that your Honours have seen. Over the page, 105, at the foot, the guaranteed liabilities means, in respect of a guarantor, moneys payable or may become payable:

under or in relation to the Facility –

Then we come to 109, the definition of “transaction documents”. It is defined by reference to four categories. Category one is this agreement, facility agreement; category two is each security, and if your Honours look at page 108, “security” is defined to mean the documents “listed in Item 8 of Schedule 1”. So they are existing documents. Subclause (c):

each other document which the Lender and the Borrower or a Security Provider agree in writing is a Transaction Document for the purposes of this Agreement -

and category four are documents entered into:

for the purpose of amending or novating –

the agreement or any of the securities. If we go back then, your Honours, to the charge at page 151, “secured money” is defined as meaning:

Secured Money means all money, obligations and liabilities of any kind that are or may in the future become due, owing or payable . . . by the Chargor to or for the account of the Lender under or in relation to a Transaction Document –

that is to say, under a facility agreement, one of the securities referred to in the facility agreement, or any document which the parties agree in writing is a transaction document for the purposes of the facility agreement. In relation to transaction document, if your Honours would go to the facility agreement at page 123, clause 12 defines “Events of Default” and in some places does so by reference to obligations under a transaction document. Clause 12.1(c), for example, it is a default if the “Obligor fails to perform” an “obligation under a Transaction Document” of certain kinds; subclause (d), if representations or warranties are made under or “in connection with, a Transaction Document” and they are “untrue or misleading”; subclause (e) relates to authorisations “under any Transaction Document”. Over the page, subclause (o), “vitiation of documents” that are transaction documents and, finally, a catch-all in subclause (s), “other event of default” described under a transaction document.

If your Honours would go to the charge at page 156, the expression “transaction document” is used not only in the definition of “secured money” but also, for example, in 4.2 on page 156, 4.3, 5.1, 5.2. Now, those were the relevant three agreements. If your Honours would then go to page 270 in appeal book 1. At pages 270 and 271 by letter dated 22 January 2008, countersigned by Octaviar and by the borrower and by somebody on behalf of Fortress, the lender, the parties agreed, relevantly, that something called the “YVE Guarantee”, just below line 30 on page 270, was to be a transaction document. Your Honours can see that paragraph 2 at the foot of page 270:

the YVE Guarantee is a Transaction Document for the purposes of the Facility Agreement.

Then if your Honours would go to page 241, this is the guarantee pursuant to which Octaviar guaranteed to Fortress the debt owed by YVE to Fortress. It is dated a little time before the charge was created, a month or so. If your Honours would go to 247, just in the middle of the page:

Guaranteed Money means all amounts that:

at any time;

for any reason or circumstances in connection with the Transaction Documents - - -

FRENCH CJ: These are transaction documents for the purpose of the facility agreement with Octaviar, Castle?

MR SOFRONOFF: Of this one, yes.

FRENCH CJ: With YVE, I am sorry, yes.

MR SOFRONOFF: YVE, yes. If you go to 249, near the bottom of the page, “Transaction Documents” is defined by reference to “the Facility Agreement” which itself is defined, at page 247, meaning the loan agreement between Fortress and YVE. If your Honours would go then to 193 – it begins relevantly at 176, the loan agreement between Fortress and Young Village Estates Pty Ltd. Young Village Estates borrows money, we need not look at the detail of it. It is a sum of about $53 million. If your Honours would then go to page 193. In this contract as well there is a definition of “transaction documents”. In different form your Honours will see subclause (g):

any document which the Company acknowledges in writing to be a Transaction Document -

The earlier agreement required an agreement in writing between the parties. So what happened, then, was that Octaviar having charged its property to secure the liability of its subsidiary Castle, to secure its guarantee of the liabilities of its subsidiary Castle, on 22 January agreed in writing that its liability to guarantee the loan to YVE should also be a transaction document for the purposes of the charge. That raises, in our respectful submission, in respect of these contractual documents, these questions. What liabilities did the charge secure when it was created? What liabilities did it secure when the deed of 22 January was executed? It looks like a letter but it is styled a deed, that is why we call it a deed. Did the deed of 22 January vary the terms of the charge so as to increase the liability secured by the charge? It is necessary, then, to identify what is a charge. It is a basic question, in our submission, but one needs that platform.

BELL J: Just before you move to that, can I inquire, just as you are taking us through the papers, whether we have the notice setting out the short particulars for the purpose of 265?

MR SOFRONOFF: Yes, I think, your Honour, my learned friend, Mr Jackson, was going to read this.

MR JACKSON: Your Honour, that has been provided to the Court, I understand, attached to an affidavit from our side.

MR SOFRONOFF: Your Honour will find it as exhibit 1 to the affidavit of Mr Walter. The fourth sheet in that affidavit is the notice that was lodged by Octaviar, Relevantly, on the first page just at halfway:

Briefly describe the liability (whether present or prospective) secured by the charge:

See Annexure “A”, part 1.

We will come to that. In the next category:

Briefly describe the property charged:

See Annexure “A”, part 3.

Then the box for “details of the chargee” is ticked and the chargee is Fortress. Over the page the subheading is “Documents” and one of the boxes is ticked:

I verify the annexure marked (“B”) of (28) pages is a true copy of the instrument(s) creating or evidencing the charge.

Then if we go to “Annexure A” – and this was a brief description of the liability secured by the charge – and your Honours see the definitions that we have seen in the documents. Then a few pages over is the instrument itself, the “Fixed and Floating Charge” which your Honours have seen.

If your Honours would go to the common bundle of authorities, tab 7, you should National Provincial and Union Bank of England v Charnley [1924] 1 KB 431. We submitted to Justice McMurdo at first instance and in the Court of Appeal that for there to be a charge there must be two identified parties. There must be an identified liability which is to be the subject of a charge and there must be identified property which is to be the property to which resort can be had to discharge the liability. At page 449, Lord Justice Atkin, in the fourth-last line on that page, said:

It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the court. If those conditions exist I think there is a charge. If, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence, to seize the goods, there will be no charge.

In the bundle that we handed up to your Honours’ associates we have given your Honours a copy of the decision of this Court in Associated Alloys Pty Ltd v a company with a number[2000] HCA 25; , [2000] 202 CLR 588, where, at paragraph 6 Justices Gaudron, McHugh, Gummow and Hayne referred to an English case and said:

Lord Hoffmann, with whose speech the other Law Lords agreed, gave a description of an equitable charge in which he emphasised that the proprietary interest created thereby is held by way of security, so that the chargee may resort to the charged asset only for the purpose of satisfying some liability due to the chargee.

That description was made in a different context, but - - -

GUMMOW J: It was made to distinguish trusts.

MR SOFRONOFF: Yes, it was made in a different context, but what one sees recurrently, in our submission, is that there must be the two parties, of course, an identified liability and identified property. Could I give your Honours references to these authorities that to the effect that a contract to give a charge upon the happening of a contingency, is not itself a charge, and we have given your Honours, I think, the references in the cases in the bundle, Goode on Legal Problems of Credit and Security, 4th edition - - -

FRENCH CJ: What about the definition of “charge” in section 9?

MR SOFRONOFF: I should have pointed that out to your Honours, I am sorry, but it does not identify the elements.

FRENCH CJ: It includes “an agreement to give” a charge, I think.

HAYNE J: We go from that definition in 9, do we not, into 262?

MR SOFRONOFF: Yes.

HAYNE J: Yes, so what are we getting out of these authorities that you are taking us to that bears upon the immediate questions that we have to address?

MR SOFRONOFF: Nothing directly, your Honour. What I had wanted to do was to seek to demonstrate that if one has an agreement to give a charge, subject to a contingency, it has been held that that itself is not a charge, but that what we have here is not an agreement between the parties to give a charge but a foreshadowing in the charge that there might be such an agreement. A fortiori, the definition of “transaction document” cannot be elevated into a charge itself, that is to say it cannot be elevated into a provision pursuant to which one party is obliged to grant to the other party recourse to property in respect of some liability.

HAYNE J: Does that chain of argument suggest that you are using the term “charge” in a sense different from that which we see deployed in sections 9 and 262?

MR SOFRONOFF: No, your Honour. We bind ourselves to the tax. We are not seeking to mould a tax of loss or tax or anything of that kind.

FRENCH CJ: There is no contention against you, is there, that there is any obligation to, as it were, hook into the charge any particular transaction document in the future. This was a matter of agreement that might arise between the parties subsequently, as happened in this case.

MR SOFRONOFF: Yes, but it arises in a case, your Honour, where absent the definition of “transaction document” the parties to a charge could at any time agree between themselves that an obligation under an unrelated guarantee should be secured by the charge. That, in our respectful submission, would be a plain variation to the charge by adding to the liability secured under it. The terms of the charge are varied so that henceforth not only – the charge is no longer limited to the liability referred to in it, it now extends to another liability, referred to in another document or, if the case may be, an oral agreement. The parties can do that at any time.

FRENCH CJ: What then is the point of the distinction between an all-moneys charge and a charge for a fixed sum because after all, the parties can always agree to extend it.

MR SOFRONOFF: The difference is important, your Honour, because when sections 263 and 268 speak of the variation to the terms of the charge having the effect of increasing liabilities, an all-moneys charge which, like the facility agreement in this case, makes provision for advances up to $250 million, which the lender is bound to give, as each advance is made there is indeed an increase in the liability but not by virtue of a variation to any term of the charge. The variation provision is not concerned merely with an increase in liabilities but a variation to the terms of the charge having the effect of increasing the liabilities. That is important because of the notification policy behind those provisions, that from what you see you can determine - - -

FRENCH CJ: This focuses upon the construction of terms of the charge, does it not, which is at the heart of - - -?

MR SOFRONOFF: It focuses upon the meaning of the terms of the charge and whether what has been done has been effective – I do not want to use the word “avoid” in a pejorative sense because it is either within it or not – so that the variation provisions do not apply. I was saying, your Honour, that the parties can at any time agree between themselves to add a liability to the class of liability secured by a charge. That, in our submission, would involve a variation of the terms of the charge to increase the liability secured.

The use of a device like the one that is used here is a convenience because if the parties do so agree it is not necessary then to do more than sign a simple letter of the kind that was signed; and all of the existing provisions relating to the effect of charges and the obligations of the parties to each other will attach to that liability as well, that is to say absent such a mechanism the parties would have to agree that a fresh liability is added to those secured by the charge. It would also have to enter into some rubric to ensure that the obligations written into the charge do, each of them, mutatis mutandis, attach to the fresh liability.

The use of the device of transaction document avoids all of that, but that is all it does, in our submission. It does not, at the date of creation of the original charge, give one party, Fortress, the right to resort to Octaviar’s property as at that date in respect of any liability that might be agreed between the parties to be incorporated within the charge at some future date, even the liability that is not yet in existence.

FRENCH CJ: If you have notice of an ambulatory term either directly or indirectly in relation to the charge, the application of that ambulatory term by pulling in another document, which is, I am assuming for the moment, apparent on the face of the charge, I know you have to get back to the facility agreement, why does that constitute a change in the terms of the charge if one of those terms is ambulatory in the sense that we are talking about?

MR SOFRONOFF: In this case, for the reason that – hence, it can be easily demonstrated in this way. The definition of “transaction document”, can I ask your Honours to go to that at page 109. First, the definition at the date of creation of the charge referred to the “Agreement” and the “Security” and potentially any other document agreed upon, there being no other documents agreed upon. Upon the entry into the 22 January deed, that definition now must be taken to mean, by reading the 22 January letter with it, the agreement, the security, and the YVE guarantee, that is to say, there will be three sets of existing documents which will come within the definition of “transaction document”.

GUMMOW J: But the phrase “agree in writing” in paragraph (c) is ambulatory in the sense that it means “have already agreed” or “hereafter agreed”.

MR SOFRONOFF: Yes, it is ambulatory.

FRENCH CJ: On your submissions, would it make any difference if that definition of “transaction document” were explicit in the charge?

MR SOFRONOFF: No, it would not make any difference, your Honour.

FRENCH CJ: So we are not concerned - - -

MR SOFRONOFF: Not concerned with the fact that it is in the facility agreement.

FRENCH CJ: - - -about the fact that you have to go to the facility agreement to look it up?

MR SOFRONOFF: No.

FRENCH CJ: So we can deal with this as though it were the simple - - -

MR SOFRONOFF: Yes, certainly, your Honour.

FRENCH CJ: - - - case of the charge with this definition written in it.

MR SOFRONOFF: Yes, but at the date of contract the only transaction documents were the agreement and each of the securities. After 22 January, the definition of “transaction document” meant the agreement, the security, the YVE guarantee and any document the parties might in the future agree. The second way in which the terms have been altered is that now, if one is to construe the charge, one cannot only look at the terms contained in the charge and the facility documents as the two documents. One has to look at the charge, the facility agreement, the YVE guarantee and the January 22 letter in order to comprehend the contract of charge.

Now, that is, in our submission, we would respectfully say, unarguably a change to the terms of the charge because new terms have been added. If one asks, what are the terms of the agreement, it is no longer possible after 22 January to look in the facility agreement and the charge. One also has to look into the 22 January deed and the YVE guarantee. Together now they constitute the contract of charge.

Thirdly, the terms of the charge have been varied to increase liabilities because as Justice McMurdo pointed out, or as he concluded, before 22 January the only liability in respect of which Fortress could resort to the property was the liability under the Castle guarantee. After 22 January there were two sets of liabilities, indeed, more than that, the liability under the Castle guarantee and now the liability under the YVE guarantee and potentially other liabilities, if the transaction document trigger in the YVE guarantee itself was triggered.

So, in our submission, it comes down to this. One can, for drafting convenience, use a device like the definition of “transaction documents” and the reference to transaction documents elsewhere in the charge. That saves a lot of drafting when the time comes. But it does not alter the contractual substance of what has happened, which is first that the parties, for the first time on 22 January, have added a liability to the class of liability secured by the charge. By adding a liability to the class of liabilities secured to the charge they have increased the liabilities secured and that protects one of the elements of 263 and 268.

Secondly, the question arises has there been a variation of the terms of the charge in order to have the effect of increasing the liabilities and the answer is yes because now the terms of the charge are Fortress may have resort to the property of Octaviar to discharge Octaviar’s liability under the Castle guarantee and – and this is the new term – Fortress may have resort to the property to discharge Octaviar’s liability under the YVE guarantee.

HAYNE J: Does that reading of 268(2), in particular does that reading of the expression “variation in the terms of the charge” entail reading “charge”, in a sense, different from the way in which the expression is used in 262?

MR SOFRONOFF: In section 262, your Honour?

HAYNE J: Yes.

MR SOFRONOFF: Excuse me, your Honour, I will look at section 262.

HAYNE J: Which identifies the charges that are required to be registered.

MR SOFRONOFF: No, your Honour, it does not require any difference in reading because to take another case - - -

HAYNE J: It seems to me that what you are doing in your reading of “variation in the terms of the charge” is to read it as identifying, including – I do not know which, perhaps either will do – any alteration in the documents to which one may have regard in understanding the rights of the parties at point 1, compared with point 2. Is that right?

MR SOFRONOFF: Your Honour, I would say yes to that proposition if instead of “may” one used the word “must”. So could I develop it in this way? Could I respond to your Honour in this way? Assume that the physical document constituted by the charge document was altered to add a new subparagraph (e) to the list of transaction documents, the words, “YVE guarantee”. That, in our submission, would constitute a “variation in the terms of the charge” because a new term would have been incorporated into the physical document itself. That would also involve an increase in the liability secured, just using the ordinary English.

It cannot make any difference that instead of writing it into the first document a second document is created for that purpose, a collateral contract, if one wishes or a variation of the contract more properly. It cannot make any difference in principle to the conclusion that there has been a “variation in the terms of the charge” if one, by a contractual document, incorporates a further liability, which heretofore was not the subject of any rights or liabilities between the parties in relation to the charged property.

Now, in our submission, this is quite different from the position, for example, from a mortgage or a charge pursuant to which further advances might be made because there, although as each advance is made the present liability is increased, there is no alteration to the terms of the charge, it is simply an execution of the terms of the charge. That is the reason for the distinction between cases like Landers v Schmidt, on the one hand, where in order to obtain a further advance, the mortgage being limited to a particular sum, the parties had to execute a fresh document to increase the amount of money that the lender was prepared to pay resulting in there being not only a fresh mortgage but a variation, and Sibbles v Highfern in which there was a mortgage of a current account in which it was to be expected, according to its very terms, that the account would go up and down and there was no fresh mortgage each time the account became more in debit, because the terms were not varied in any respect. There was simply the mortgage being executed, according to its terms – being performed according to its terms.

The courts in those cases were not concerned with the question, was there a variation? They were concerned with the question, was there a new mortgage?

HAYNE J: If the charge was to secure the indebtedness of the debtor company on any account whatsoever to a bank, for example, and the company went guarantor for a subsidiary’s debt some point after execution of the charge, variation or no?

MR SOFRONOFF: If a company gained an all-moneys charge, in our submission, no variation because nothing has occurred to vary the terms of the charge. It is no different in principle from a further advance made pursuant to an existing mortgage.

HAYNE J: What distinguishes the subsequent guarantee of a subsidiary’s debt where to establish indebtedness you would no doubt have to look at the guarantee instrument from this case?

MR SOFRONOFF: One has to do more than – in the first example your Honour put to me, all the company had to do was give a guarantee and it would come within the charge. In the second example, this case, the company had already given the guarantee. It had to agree that the charge would cover it. It had to vary the charge so that the charge spread to cover the fresh liability. In the earlier example your Honour gave me, the charge already covers all liabilities as soon as they come into existence. That is the misconception that, we respectfully submit, comes within section 268(3), the assumption that a further advances charge would involve a variation but for subsection (3). In our submission, that assumption which appears to underlie that subsection was wrong. Sibbles v Highfern, which was decided a few years after the first of these provisions appeared in the Companies Code, is authority for that.

Could I ask your Honours now to go to the reasons of Justice McMurdo and then I will take your Honours to the reasons of the two members of the Court of Appeal who gave reasons - - -

FRENCH CJ: So if a charge simply secured such present liabilities as exist between us and such future liabilities as we may agree in writing?

MR SOFRONOFF: Yes.

FRENCH CJ: Any future agreement in writing would be a variation of that term or the terms of the charge?

MR SOFRONOFF: Yes.

FRENCH CJ: Even though you are on notice when you read it?

MR SOFRONOFF: Well, your Honour, that there is notice is one thing.

FRENCH CJ: Yes, but it does tell us something about the purpose of this provision.

MR SOFRONOFF: Yes. That it provides some notice to the inquirer is a virtue that in terms of policy backing for one argument or the other has some significance. It has no significance, in our respectful submission, to the question in principle that the Court has to decide, whether there is or is not a variation when parties subsequently agree that a particular liability, new or formerly created, shall now be the subject of an existing charge.

FRENCH CJ: Well, the constructional question is whether there is a variation in a term, on the face of it, ambulatory?

MR SOFRONOFF: No, your Honour. The term foreshadows that the parties may agree with the consequence that if they do agree in those terms, certain consequences will be triggered. The agreement itself must make the liability subject of a charge. Nothing in the existing charge has that effect. It is only the fresh agreement that has that effect. But having made that agreement and having used the rubric of the transaction documents formula, a lot of other consequences follow. One can see that that was one of the purposes of the drafter to ensure that it is locked in perfectly into the existing charge. But that secondary purpose, which is due to the ambulatory effect, has nothing to do, in our respectful submission, with the fundamental question. The parties need to agree that a particular liability not contemplated at the date of the stranger to the charge when it was created, which might not have existed at that date, shall now be covered by the charge.

FRENCH CJ: So, when you talk of “strangers to the charge”, you mean a transaction that is a stranger to the charge?

MR SOFRONOFF: Yes, a transaction that is a stranger to the charge. The ambulatory effect conferred by the definition of “transaction documents” is only to ensure that if there is such an agreement, the agreement with all its welcome respects clutches it in all its detail, relevant detail, clutches it. That is the ambulatory effect. But the big distinction that we would advocate should be looked at is this. The parties may agree that all future liabilities, as soon as they arise between the parties, owed by the chargor to the chargee shall be caught by the charge. So, an event occurs, there is a liability, it is automatically caught by the charge. That, I would submit, is the result of a truly ambulatory provision, an all-moneys clause or a further advances clause.

KIEFEL J: But even in the context of such a provision, there is necessarily a further agreement in relation to the advance of moneys, is there not?

MR SOFRONOFF: But not in relation to the charge. There is a further agreement between the parties to enter into the guarantee of a loan agreement, as the case may be, but there need be no agreement in relation to the charge. What sections 268 and 263 look at is the terms of the charge. So that the distinction I would invite your Honours to consider is, on the one hand, between a charge which the parties agree will cover these liabilities and any other defined liabilities if and when they arise, and a charge which provides that it will cover these liabilities and any liabilities which we enter into a fresh agreement; by means of a fresh agreement, we agree will be covered by the charge. They are two substantially different agreements. One does not involve any variation to the terms of the charge, simply an event. It requires an agreement between the parties to create that liability, of course, although it might be an agreement between other parties.

For example, we might have an all-moneys clause that provides that I will charge my property to secure this liability and any liability Mr O’Sullivan owes to you, and so Mr O’Sullivan then takes on a liability. It has got nothing to do with me but the charge we have already agreed, no further agreement is required, will cover that. That is a species of prospective liability within the meaning of that term in Part 2K. The distinction is between that kind of an agreement which requires no variation whatsoever to the terms of the charge and, on the other hand, one that requires an agreement that the charge shall cover something else.

KIEFEL J: Is it of some importance in relation to your argument that the reference to future agreement arises only in a definition and not in a substantive provision?

MR SOFRONOFF: Your Honour, I think it makes no difference where it would appear. We are addressing it as a matter of principle, that it makes no difference to the outcome, so long as what is contemplated is a fresh agreement between the parties that the charge should extend to something to which it had not formerly extended. Could I ask your Honours to go to Justice McMurdo’s reasons. They are in volume 2 at 669.

GUMMOW J: They are reported in [2009] QSC 37; 69 ACSR 621.

MR SOFRONOFF: Thank you, your Honour. Can I ask your Honours to go to paragraph [34]. At paragraph [34] his Honour analysed the application of the section in these terms:

Prior to 22 January 2008, Octaviar’s property was not charged in order to satisfy the YVE Guarantee. Its liability under the YVE Guarantee was not even conditionally secured by the charge, as it would have been, for example, if the parties had agreed that upon the occurrence of a certain event or circumstance, rather than by a further agreement between them, that liability would become secured. Nor was this a case where the parties agreed at the outset that any liability of Octaviar to Fortress would also be a liability secured by this charge. The only way in which Octaviar’s liability under the YVE Guarantee could have become a secured liability was by another agreement between Fortress and Octaviar. It was by that agreement –

and could I pause there to interpolate, your Honours, it was by that agreement in relation to the charge –

made on 22 January 2008, that the parties agreed upon this essential term of the charge for which Fortress contends, which is that Octaviar’s property has been appropriated or made answerable for the discharge of Octaviar’s liability under the YVE Guarantee.

In my conclusion, the agreement of 22 January 2008 affected the terms of the charge. If the matter were considered outside the statutory context of Chapter 2K of the Act, the agreement would be regarded as creating a new charge, according to Landers v Schmidt and Coast Securities No 9.

They were cases in which, for the purposes of the Property Law Act, the question was whether a new mortgage had been given and in that case, mortgage over land secured the repayment of money in sum X and by a subsequent document, the parties agreed that it would, in addition, answer for sum Y and sum Y was then advanced and that was held to be a further mortgage. Sibbles v Highfern, on the other hand, was a case where the mortgage already provided that it would cover any advances made and subsequently advances were made and it was held that that was not a further mortgage. His Honour then went on:

However, in the context of Chapter 2K, the agreement engaged s 268(2) rather than s 263(1).

His Honour means it was a variation not a new charge –

The agreement increased the liabilities secured by the charge in the sense of s 268(2)(a), in that it added a liability, which was that under the YVE Guarantee, which was previously unsecured.

That, in our submission, we respectfully submit, is a correct summary of the legal effect of the transaction between the parties.

BELL J: That reasoning depended on the view that the terms of the charge in 268(2) is to be distinguished from the terms of the instrument evidence in the charge. Is that a part of the reasoning that you embrace?

MR SOFRONOFF: No, your Honour. We would submit that the terms of the charge is a little amorphous. It can refer to the writing evidencing the terms or the legal obligations themselves. In our respectful submission, whether one looks at this case in terms of searching for a change in legal obligations or whether one looks in terms of searching for variations in the words evidencing the legal obligations, the answer is the same; there is a change. There is a change in legal obligation because after 22 January, Octaviar was bound to put up its property to answer for the YVE guarantees, so the obligation is different. If one looks at written terms, then one cannot answer the question, what are the terms of this charge, without looking at the additional written terms made by the letter of 22 January which then incorporated the YVE guarantee and, for that matter, the facility as well.

BELL J: But looking at the written document, as Justice Muir pointed out at appeal book 710, paragraph [90], nothing in the deed of 22 January disclosed an intention to modify or alter the terms of the deed of charge.

MR SOFRONOFF: The answer is yes and no. The answer is yes in that the instrument itself was not physically buried. The answer is no in that while the physical document was not buried, an additional document was created which now has to be read together with the original document and when read together, as they must be, the terms are different.

FRENCH CJ: I suppose the question is whether his Honour has reasoned from – and I am not saying this is necessarily clear – the fact of the increase in the liability under the charge to a change in the terms of the charge. There seems to be a little element of that running through this, really.

MR SOFRONOFF: Could I submit not, your Honour, respectfully, because his Honour first identifies that there is an increase in liabilities, but that is not enough, of course, because that can happen under an all-moneys charge. What his Honour then focused upon was the fact of agreement and what Justice Holmes criticised him for when she said that he appeared to have overemphasised the significance of the agreement, but it is the agreement by which the terms are varied so as to increase the liabilities. In our respectful submission, in principle, absent the transactional document rubric, if the parties entered into an agreement by which they agreed that the property would now be answerable for yet another liability of Octaviar’s, there would be a variation to the terms of the charge, because the charge no longer reads that it answers liability A, it now reads the charge answers liability A and B.

It does not matter whether you look in one document or two documents or four documents for that, whether one alters the ink on one document or adds to the ink by creating a new document. In our submission, it makes no difference. The use of the transactional document device has other benefits, we would accept, automatic benefits in the legal effect of the document, but it does not have the effect, in our submission, of permitting any liability to be added at any time thereby increasing the liabilities without at the same time altering the terms of the charge.

GUMMOW J: In Tailby v Official Receiver 13 App Cas 543 at 549, Lord Macnaghten said:

A contract for value for an equitable charge is as good an equitable charge as can be.

MR SOFRONOFF: Yes.

GUMMOW J: Is that not what is the effect of this instrument in the first place?

MR SOFRONOFF: No, your Honour. There is no contract here to grant a charge.

GUMMOW J: There is a contract to treat something which happens as falling within this description.

MR SOFRONOFF: Your Honour, in our respectful submission, there is an agreement to agree. The definition of “transaction document”, if it had provided, your Honour, that Octaviar shall grant a charge in respect of any liability which is not the subject of an agreement simply that arose, then that would be, in our respectful submission, a promise or value to grant a charge if a certain event happened. But this is, if I can take your Honours back to the document, the facility agreement at page 109, linking as it does to money secured. “Transaction document” means any other document which the lender and the borrower agree in writing.

Your Honour will recall that in the YVE guarantee all that was required was that the borrower acknowledged the document as a transaction document and this definition requires that the parties agree that it is a transaction document. Another form might have provided that the transaction document means any document which the lender nominates is a transaction document, and in that case - - -

GUMMOW J: We are really talking about the definition of “secured money”, are we not - - -

MR SOFRONOFF: Yes, we are, your Honour.

GUMMOW J: - - - in the actual charge, because that is what is at the bottom of it?

MR SOFRONOFF: Yes.

GUMMOW J: The charge is payment of the secured money and “secured money” is then defined in that fashion.

MR SOFRONOFF: Yes.

GUMMOW J: Well, how do you say there is a change in the nature of the secured money and therefore a change in the nature of a charge?

MR SOFRONOFF: Because what your Honour put to me was, if it is true as it is, that a contract to give a charge is to be treated as an equitable charge, we do not find a here to give a charge. We have here no more than a foreshadowing that the parties might agree in the future that something will come within the charge.

GUMMOW J: All moneys that are or may be in the future - - -

MR SOFRONOFF: No, under or in relation to a transaction document, and the only means by which an obligation can come within the definition of “secured money” is if the parties agree and one party might not agree. Octaviar not might agree.

GUMMOW J: So?

MR SOFRONOFF: Then there is no enforceable agreement to give a charge and there is no equitable charge.

GUMMOW J: There is no content in the relevant sense.

MR SOFRONOFF: Sorry, your Honour, there is no?

GUMMOW J: There would be no relevant content on which equity could latch.

MR SOFRONOFF: There is no agreement upon which equity could latch.

GUMMOW J: All right.

MR SOFRONOFF: As the editor of Goode on Legal Problems of Credit and Security – we have given your Honours an extract from it – at page 76, paragraph 2-15:

An agreement for a mortgage or charge is treated in equity as a security interest only if it is not subject to any contingency other than the debtor’s acquisition of an interest in the asset. An agreement to give security on any other contingency, whether the contingency be a demand by the creditor to do so, default by the debtor or the occurrence of some other uncertain event, is a mere contract, not an equitable charge.

If your Honours would look - - -

GUMMOW J: What does paragraph 1-76 say?

MR SOFRONOFF: Sorry, your Honour?

GUMMOW J: Footnote 68, what does it say?

MR SOFRONOFF: It is subtitled “Provision for automatic attachment to same asset”:

Where the agreement provides that on the grant of security over an asset a security interest in favour of the earlier creditor shall automatically attach to that asset so as to constitute the creditor a secured creditor over the asset equally with the later incumbrancer, the problem of identifiability is removed. The grant of security to the third party fixes the asset - - -

and so on. So we would submit that there is a distinction between - - -

GUMMOW J: We had better be supplied with paragraph 1-76.

MR SOFRONOFF: We will do that, your Honour. We will do that overnight.

GUMMOW J: What is the last edition of this work edited by Sir Roy Goode?

MR SOFRONOFF: We understand this is the last edition, which is the 4th edition of 2008.

GUMMOW J: It is not edited by Sir Roy Goode.

MR SOFRONOFF: No, that is why I said - - -

GUMMOW J: What is the last edition edited by Sir Roy Goode, he being a significant authority in these matters. We had better just have the third edition, I think.

MR SOFRONOFF: Your Honours, in our submission, there is a distinction between an agreement between parties where the borrower has promised to give a charge over identifiable or identified property in respect of particular liabilities if those liabilities arise. An agreement like this one where the parties have agreed that if the parties agree – where the parties have agreed that provided the parties agree that the charge extends, the first may be regarded as a charge giving rise to enforceable rights, the second is nothing more than an old-fashioned contract and an agreement to agree, not constituting anything beyond being a very convenient drafting device.

Your Honours, could I then go to the reasons of the Court of Appeal. In Justice Holmes’ reasons beginning at the last sentence of paragraph [49], her Honour observed:

There must first be a term of the charge, that is, some right or obligation created by the charge, which can be shown to have been varied, before the effect of the variation becomes relevant.

In our respectful submission, the terms of the charge which dictate the liabilities which must answer to the charge will have been buried by the deed of 22 January. Her Honour then went on”

The exception in s 268(3) –

which is the advances –

only applies where payments in accordance with the charge’s terms are made to the company which created it.

Her Honour is referring to the fact that that exception relates to increase in liabilities but only by the making of further advances and only when those further advances are made by the lender to the company granting the charge. In the case of a transaction like this one, Octaviar did not receive any further advances. It was Castle who was getting the advances and so the exception does not apply to it. Her Honour went on then:

Its embrace is narrow, as the facts of the present case serve to demonstrate. Advances made to Octaviar Castle under the facility agreement would not attract the s 268(3) exception –

and that is correct, in our respectful submission –

because it was not the company giving the charge. Accordingly, every time it made a drawdown on the facility, on the construction the Public Trustee contends for, a variation in the terms of the charge would occur –

In our respectful submission, that is wrong because the liability secured by the charge is not in respect of advances. It is a guarantee to answer, in certain circumstances, for the liability of Castle, that is to say, Castle’s liability is in respect of each advance as it is made. Octaviar’s liability is pursuant to its guarantee and that does not alter – it is not even called upon – it is a contingent liability which does not crystallise until it is called upon, so, in our submission, it would not be correct to say that in a case like the present where Octaviar has given a guarantee of Castle’s obligations, each time Castle receives a further advance, that would constitute a variation in the terms of the charge having the effect of increasing the liability secured.

Firstly, there would be no variation in the terms of the charge and, secondly, there would be no increase in the liability secured because they always remain inchoate, that is to say, contingent, until the guarantee is called upon. Then her Honour went on with some further reasoning in paragraph [51] and if your Honours would then go to paragraph [59]. Her Honour in paragraph [59] drew attention to what she regarded as two errors in the reasoning of the trial judge. First:

the acceptance of the Public Trustee’s construction of s 268(2), which focused on a change in the charge’s effects, as opposed to a change in its terms; and a misconceived emphasis on the 22 January 2008 agreement. The facility agreement definition might have prescribed some other means, not requiring agreement, by which a document came to be classified as a transaction document. It might, for example, have defined “Transaction Documents” as including those relevant to any transaction of a specified kind. Instead, the mechanism chosen was agreement in writing by two of the parties, including Fortress.

Your Honours, in our respectful submission, to describe the drafting technique involving the use of a defined transaction document as a mechanism does not advance the analysis of the problem. Of course it is a mechanism. The question which has to be asked is whether the engaging of that mechanism in this case results in a variation to the terms of the charge having an effect of increasing the liability secured. It is not an answer to that inquiry to say it is merely a mechanism, which of course it is, but it is the nature of the mechanism that needs to be analysed. Her Honour then said:

The fact that there was an agreement involved in the process is incidental rather than fundamental.

In our respectful submission, to describe something as incidental rather than fundamental does not describe it in any terms that advance the legal analysis of the problem:

All that happened was the application of the mechanism for which the terms of the charge provided, so as to identify a particular liability as falling within the category of liabilities which the charge, in general terms, already secured.

In our respectful submission, that is an error because the charge did not in general terms already secure the YVE guarantee or anything other than the Castle guarantee. It required the agreement of the parties, newly entered into, to extend the scope of the charge to have that effect. Her Honour then said:

The 22 January 2008 deed did not entail any change to what the parties were entitled or obliged to do under the charge -

In our submission, it did entail a change to what Octaviar was obliged to do. It was obliged to permit resort to be had to its property to discharge YVE’s liabilities pursuant to the YVE guarantee. Prior to that it was not obliged to do it; there was a change. Correspondingly, Fortress gained an entitlement of the same kind.

FRENCH CJ: Your proposition reduces to this, does it not, that an agreement to extend the liabilities secured by the charge as between chargee and chargor, whether or not contemplated by the charge, expressly or not at all, is a variation to the terms of the charge?

MR SOFRONOFF: Yes. We say that because when one looks at the language of the section, it speaks of a variation in the terms of the charge having the effect of increasing the amount of the debt or increasing the liabilities whether present or prospective secured. So a convenient starting point is to ask, have the liabilities, whether present or prospective, secured by the charge been increased? The answer here must be yes. Then the only other question is, has there been a variation in the terms of the charge? In a case where the parties have foreshadowed the possibility of agreement but have not agreed that some future unidentified liabilities might be secured, it would require a variation of the terms of the charge, wherever they were to be found, to effect that, in answer to your Honour’s question.

FRENCH CJ: All right. Mr Sofronoff, that might be a convenient time. Can you give us an indication of how long - - -

MR SOFRONOFF: Up to 15 minutes, your Honour.

FRENCH CJ: Yes, all right. We will resume tomorrow morning at 10 o’clock. The Court will adjourn until 10.00 am tomorrow.

AT 4.19 PM THE MATTER WAS ADJOURNED
UNTIL TUESDAY, 22 JUNE 2010