Public Trustee of Queensland v Fortress Credit Corporation (Aus) 11 Pty Ltd & Ors [2010] HCATrans 159 (22 June 2010)

Last Updated: 23 June 2010

[2010] HCATrans 159

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 TUESDAY, 22 JUNE 2010, AT 10.01 AM

(Continued from 21/6/10)

Copyright in the High Court of Australia

__________________

FRENCH CJ: Yes, Mr Sofronoff.

MR SOFRONOFF: Your Honours, yesterday Justice Gummow inquired about the last edition of Legal Problems of Credit and Security edited by Professor Sir Roy Goode. We have handed up a bundle of materials which includes relevant extracts from the 3rd edition edited by him. Could I ask your Honours to go to that at page 59. At the top of the page in the first sentence the author said that the:

Priority rules governing fixed and floating security cannot be properly understood without a grasp of the concept of attachment.

And then under the subheading he said the:

Attachment denotes the creation of the security interest as between debtor and creditor. The effect of attachment is that the security interest fastens on the asset so as to give the creditor rights in rem against the debtor himself, though not necessarily against third parties.

So then he goes on to analyse what is required for there to be attachment. Over at page 60, at section 2-03 he says:

In order for a security interest to attach otherwise than by operation of law the following conditions must co-exist –

Three of them are relevant, your Honours –

(1) There must be an agreement for security conforming to statutory formalities;

and -

(4) There must be some current obligation of debtor to creditor which the asset is designed to secure;

(5) Any contractual conditions for attachment must have been fulfilled –

If we then go to the next page, 61, he is dealing with the agreement for security and in the first paragraph, about two-thirds of the way down the first paragraph, he says:

An equitable charge, not being a transfer of ownership, rests in contract; there is therefore no distinction between a charge and an agreement for a charge. The essential point is that there must be an agreement for security.

He then discusses matters that are not immediately relevant and in the next paragraph three lines down:

But where the creditor relies not on an actual transfer but on a mere agreement for security––as in the case of an equitable charge or an agreement for a mortgage––equity requires certain conditions to be satisfied before it will recognise the contract as giving rise to real rights. So we shall shortly return to the efficacy of the security agreement itself –

Then, in pursuit of those requirements, if we go to page 65 the sub-heading at the foot:

(50) Fulfilment of contractual conditions for attachment

Attachment does not take place unless the conditions for attachment specified in the security agreement have been fulfilled –

Thus here if the charge between Octaviar and Fortress is the security agreement and read with the facility agreement and it provides for the extension of the security, in the event of a further agreement being reached between the parties, then until that condition - the agreement being reached between the parties -has been fulfilled, the conditions for attachment specified in the security agreement have not yet been fulfilled –

This does not, however, imply that the parties may, consistently with the equitable rules for creation of a security interest by agreement, stipulate any event they choose as producing attachment. On the contrary, where the designated event is a mere contingency––an event which may or may not occur––then unless the contingency is simply the debtor’s acquisition of an interest in the asset –

which is an exception –

the agreement will not by itself be effective to create a security interest, even on the occurrence of the contingency.

Consequently, in this case, the contingency is the parties’ agreement in the future. The agreement does not thereby create a security interest in respect of inchoate future liabilities in respect of which the parties might reach agreement. If your Honours then go to page 67 he then concentrates upon the necessity for there to be what he calls a “security agreement”. In the third line he says:

My concern is with the effect of an agreement for security. At this point, it will occur to the property lawyer to ask: how can a mere agreement for security, as opposed to an actual transfer by way of security, give rise to an immediate security interest? The answer at common law was quite clear: it could not.

We can skip the rest of the paragraph, and he goes on –

Equity, however, treating as done that which ought to be done, considers that the agreement to give security takes effect as an immediate security interest if this is consistent with the agreement between the parties and the subject-matter is identifiable.

He then makes some further observations and over the page in the paragraph beginning on that page he says –

In order for the existence of the security interest to be consistent with the agreement between the parties the following conditions must be satisfied:

(a) The agreement must manifest an intention to confer a security interest on the creditor, not a mere contractual right –

Here, we would submit, it is not even a contractual right because it posits a potential for the parties to agree –

(b) It must reflect the intention of the parties that the interest should attach to the asset immediately –

That is not the case here, of course –

or on the debtor’s acquisition of an interest in it or at an agreed time or on the occurrence of some future event which is certain to occur, and that attachment is not to be dependent on some contingent event –

What we draw from those passages, your Honours, is that for there to be a charge in equity there must be an agreement – a security agreement – which contains the features that Professor Sir Roy Goode identified. What we have here is a charge, which is in all relevant respects a charge, but is not a charge insofar as there is foreshadowed the potential for the parties to agree to enter into a further agreement. It fails on a number of grounds. Fails to identify the liability, it is not immediate; it depends upon a contingency and so on.

Most importantly, in our respectful submission, a charge arises when there is an agreement to grant a charge at a minimum. A fortiori, if the contingency upon which the charge is said to arise is that the parties must agree to the grant of a charge and must agree upon the identification of the liability, the subject of the charge, there can be no charge until that agreement is reached. If that is so, and we submit that it is, if upon agreement only there arises a new charge then it follows that upon the agreement being entered into two things happen.

A new term or new terms are agreed between the parties that must be so because there is an agreement. Secondly, a liability is added to the existing charge and hence there will have been an increase in the liability secured by the charge. In our respectful submission, that is an analysis which is consistent with the statute. Section 268(2) requires notification of variations, notwithstanding that they might be construed as new charges, they are taken to be variations. Section 278(1)(c), which deals with priority times, identifies as the priority time in respect of a variation the date, the time of notification of the variation, that is to say if one looks at the common law, by which I mean equity, one sees that the charge comes into existence at the date of the agreement to grant the charge consistently with that in a case like the present.

If one regards the creation of the charge here as a species of variation of charge then that only occurs – and it does occur upon the making of the agreement. The agreement incorporates the new terms and the agreement – the purpose of the agreement and its effect is to increase the liabilities. My learned junior, Mr O’Sullivan, has reminded me that I ought to draw your Honours’ attention to the text – Sir Roy Goode’s text – at page 72, 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 . . . It follows –

GUMMOW J: Do those cases in footnote 63 bear out that proposition?

MR SOFRONOFF: They do, your Honour, and we supplied them to the court in the bundle that we handed up yesterday. A little more than halfway down that paragraph –

It follows that a security interest cannot attach by virtue of that agreement even on the occurrence of the designated event. There must be either a completed security transaction, by pledge or mortgage, or a new security agreement –

That is the key, in our respectful submission, to this analysis. Until there is a security agreement there is no charge. Here there will have been no security agreement until the parties agree to allow resort to the charged property to be had to secure the liability, the subject of the new agreement. That is to say there is a fresh agreement. It must follow that terms have arisen, they are new terms. The effect of those terms is to increase the liabilities.

HAYNE J: Could you just restate that proposition again?

MR SOFRONOFF: Yes. There is no charge until there is an agreement to grant the charge, having immediate effect upon the property, having an identifiable liability. If that is so here the fresh charge, or the variation, came into existence upon the entry into the agreement between the parties on 22 January. Being a fresh agreement it contains terms. Consequently, the terms of the charge have been varied by the addition of new terms and the purpose and effect of the addition of the new terms is to increase the liability secured.

HAYNE J: The proposition is one which I suspect cannot, without rereading it, I think, several times – I cannot, without rereading the proposition, I think several times, understand whether there is not a slide in there between the notion of new charge and a proposition about new liability secured by an existing charge. Is there such a slide or an equation?

MR SOFRONOFF: No, your Honour, I am dealing in terms of a new charge.

HAYNE J: That is the end proposition you seek to advance. There is a new charge – do you not?

MR SOFRONOFF: In the context of the statute, it is a variation to the terms of the charge, having the effect of increasing the liabilities or a new charge, it does not matter which, because in either event notification is required. The point of the analysis is to seek to demonstrate, as a matter of principle that until an agreement of the relevant kind has been reached, it cannot be said that there is a charge in respect of a particular liability. The particular liability here is the YVE guarantee. There is no charge in respect of that liability until the agreement is entered into between the parties, that there shall be a charge in respect of it. That occurred on 22 January. It simply cannot be said that there was an agreement between the parties at the date of the creation of the original charge – that the charge shall secure the YVE guarantee liability – even potentially. So, in any event, those are our submissions on that issue, your Honours.

The construction that we advocate, your Honours, is as we have said, consistent with both the provisions dealing with variations requiring there to be notification and the policy of the Act which seeks to relevantly provide notice to creditors, including unsecured creditors most importantly, who will advance money to the company upon the faith of the register and indeed, to shareholders whose position will be affected by the state of the company.

There are two places in the Act where what might otherwise be thought to be variations or failures to notify are excused. The first, of course, is section 268(3) which provides that further advances are not captured by variations, and the second is in 282 where the qualification in respect of faulty notices is the subject of legislation in 282(4)(a). So there are two specific exceptions to the requirements to notify the creation of charges. One is the further advances position and the second is you are given notice but it is bad, to a limited extent specified in 282(4). Other than that, the regime is, in our submission, absolute. Any other form of addition of a charge is notifiable.

The decision of the Court of Appeal, in our respectful submission, is that despite what cannot be argued against, despite a fresh agreement to add a new liability, despite the fact that nobody can know that that agreement has been entered into by searching the register, despite the fact that it is important to unsecured creditors, in particular, to know that the fresh agreement to add a new liability has been entered into, and importantly

shareholders, and particularly important to those classes of people when the company is in distress, when it is most likely that such a device would be availed of, no notice has to be given. Our construction, we respectfully submit, regulates the priorities in a fair way and ensures notice to affected persons in accordance with the policy of the legislation.

Your Honours, in the bundle, we have included a one-page note on the question of notice – actual notice and constructive notice. I do not want to say anything more about it. The fine analysis of that subject will not assist in answering the fundamental question that your Honours will be needing to address.

The third matter is, your Honours, your Honour the Chief Justice yesterday asked whether the Eggleston Report dealt with the question of regimes of invalidity and priority. The answer is that at paragraph 47 - could I simply inform your Honours of that, the committee observed that section 100 of the Companies Act 1960 dealt with invalidity of a limited kind, but did not have a system of priorities. The proposal of the committee was to establish a system of priorities as well as to deal with partial invalidity – invalidity as a charge – and we find that now in the sections that we have been dealing with.

Finally, your Honours, the two members of the committee other than Senator Eggleston, were Mr J.M. Rodd, who was a solicitor and partner of Arthur Robinson and Mr P.C.E. Cox, who is a chartered accountant. Those are our submissions, your Honours.

FRENCH CJ: Thank you, Mr Sofronoff. Yes, Mr Jackson.

MR JACKSON: Thank you, your Honours. May I commence by mentioning two matters which arise from the appellant's argument yesterday. The first is that the references to relevant provisions of the Corporations Act did not include a reference to section 270(2). Section 270(2) is the provision which makes it an offence for the company and any officer in default to fail to comply with section 263 or section 268.

Now, your Honours, our learned friends gave your Honours a bundle of material arising from matters yesterday. I am sorry ours did not get to the Court before your Honours commenced relevantly, but could I give your Honours a bundle of documents which deals with what I have just said about section 270 and goes through to where one sees the penalty provisions. The penalty provisions are not great. They involve at the moment, I think, a penalty of $550. Your Honours, that is the first thing. That is simply an aide-mémoire where your Honours will see those provisions.

The second thing is that we have given your Honours a note about knowledge and notice, I think to the same effect as our learned friends, and the third thing, your Honours, concerns the difference between the voidness, as it were, as against the liquidator, et cetera or absolutely in the two provisions of section 267 to which reference was made yesterday. Your Honours, in the end the better view is probably that the voidness is as against liquidators and some other officers, in both cases, rather than absolutely void in the section 268 contravention.

FRENCH CJ: I think the declaration in that first instance was not so limited, was it, Justice McMurdo's declaration?

MR JACKSON: No, I think it was wider, your Honour, yes.

FRENCH CJ: Yes.

MR JACKSON: Your Honours, could I just say this, that that is the first point and in relation to it, in relation to the penalty question, could I remind your Honours there was some reference to section 270(2) in the reasons for judgment in the Court of Appeal and your Honours will see that in Justice Holmes at volume 2, page 699. It is paragraph [51], commencing at the bottom of the page and then she deals specifically with section 270 on the next page in the last three lines of the same paragraph. Could I mention also that it was adverted to by Justice Muir at page 712 in paragraph [102].

Could I just mention also, your Honours, that a provision to which, I think, your Honours have not yet been referred, and I should mention it, is section 270(1) which allows the notice in respect of a charge to be lodged by any interested person as well as being lodged by the company and one might expect that on some occasions the notice is lodged by the person having the advantage of a charge.

Your Honours, the second matter concerns reference to the Seventh Eggleston Report, which is behind tab 43 in volume 2 of the materials. Now, your Honours, at page 34 of that document, at the bottom of the page, there is set out there the then proposed section 108A and your Honours will see from the way in which it is set out – it goes over the next page as well – that the particulars referred to in the proposed section 108A(2) were to:

identify the terms of the original charge that have been varied and shall indicate the nature of the variation made in each such term.

Your Honours will see the reference to variations is a reference back to subsection (1). Your Honours could I just say that the summation of the effect to be taken from that report by Justice Holmes in her reasons is, in our submission, probably correct in terms of what can be drawn from that and what cannot be drawn from it. That is, your Honours, page 699 in volume 2.

In paragraph [49], what your Honours will see – five lines down in paragraph [49] on page 699 – where her Honour says that:

The Seventh Eggleston Report is not generally illuminating for present purposes. (One can read the language of its recommendations as supporting either argument, depending on how one conceptualises the liabilities secured by the charge.) Still, the draft provision, s 108A . . . provides some historical basis for the view that, in establishing that s 268(2) applies, the existence of a variation in the charge’s terms is as important and distinct a step as identification of the prescribed effects. The plain words of the section confirm that approach.

Now, your Honours, could I then go to the language of section 263 at section 268 and in the course of doing so, seek to deal with the considerations which the appellant suggests make one or other applicable. Your Honours, the obligation to lodge documents pursuant to section 263(1) arises when a company creates a charge and the charges to which sections 263 and 268 apply are the charges of the nature referred to in section 262(1). I will come back to that in just a moment, your Honours, but as is apparent from the charge in the present case, volume 1 at page 150, the charge was security as it appears at page 151 for, to put it shortly, the secured money. It is clause 2.1 – I will come back to that your Honours.

The charge was both a fixed charge, clause 2.4, and a floating charge, clause 2.5, and could I just say, your Honours will see in relation to clause 2.4(a) that it was a fixed charge in respect of “real property”. May I say something about that, your Honours? Your Honour Justice Gummow raised a question, I think, about the Property Law Act and the application to real property, but there are specific provisions in section 262 dealing with the position of real property. In that regard, your Honours, could I just say that if one goes to section 262(7), one sees first that:

a charge is taken to be a charge on property of a kind to which a particular paragraph of subsection (1) applies even though –

to put it shortly, it charges property to which subsection (1) would not apply as well, and one sees then in subsection (8) that the provisions of the chapter mentioned in subsection (1) do not apply in relation to a charge on land. So, your Honours, this is a charge which falls within section 262 but, of course, it covers other things as well.

Now, your Honours, if one goes back to the charge and the definition of “secured money”, at page 151, as is apparent from the terms of that definition, the charge created was in respect of:

all money, obligations and liabilities of any kind.

It referred to moneys, obligations and liabilities of any kind:

that are or may in the future become due, owing and payable –

The definition also said that the charge applied whether the chargor was principal debtor, or as surety - - -

GUMMOW J: Where are you reading from, Mr Jackson?

MR JACKSON: I am sorry, your Honour. I am reading from the definition of “secured money” at page 151.

GUMMOW J: Thank you.

MR JACKSON: What I was saying, your Honour, I can say it very briefly, was that it secured all moneys, obligations and liabilities of any kind. It said that they were liabilities, et cetera, “that are or may in the future become due, owing or payable”. The liabilities were those under, or in relation to a transaction document. It is a little more broadly expressed:

by the Chargor to or for the account of the Lender under or in relation to a Transaction Document -

Your Honours would see also, if one goes to paragraph (b) of the definition, it also said:

whether the Chargor is liable as principal debtor or as surety -

Now, your Honours, those provisions recognise, in our submission, that the operation of the definition of “secured money” may be ambulatory in the sense that the underlying monetary obligations may change from time to time. Your Honours, that is hardly surprising in the case of company charges. One should also note the definition of “secured property” which is also at page 151, and it referred to:

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

and then you will see that it elaborated upon in some detail. Your Honours, the charge was also, in a sense, ambulatory in that the property comprising the secured property itself might change from time to time as the company acquired and disposed of property.

Your Honours, on the creation of the transaction document on 22 January 2008 there was no change in any of the terms of the charge. There was no change in any of the property subject to the charge. It was exactly the same property as the property which was subject to the charge at all times. Your Honours, true it is, of course, that the debt which was secured had increased but the charge itself, in our submission, did not change.

Now, the appellant contended yesterday that the position was different from that which your Honour Justice Hayne had put about the case of a new guarantee entered into by the parties in circumstances where the terms of the charge would encompass liability as a surety but the entry into a new guarantee would just as much be the making of a further agreement as the addition of the other document as a transaction document.

It is difficult – your Honours, it is a very common thing – one would think in the financing of business that there will be changes in the amount and nature of the obligations owed from time to time, but it is difficult to see, with respect, that one can draw a very principled distinction between the case of entry into a new guarantee which it is accepted would be covered by the charge and circumstances where there is an additional liability by virtue of the entry into something contemplated by the charge – equally contemplated by the charge – as the entry into a new transaction document.

At the heart of the matter, in our submission, in relation to section 263, is the fact that the statute requires the registration of charges and we would simply submit that that does involve looking to see what is the charge. If one looks at the charge in the present case there was no new charge, there was simply the application of its provisions to circumstances which were contemplated by it.

If one goes, your Honours, to a decision that was referred to in the judgments below of the Court in Sibbles v Highfern Pty Ltd which your Honours will see in – it is one of the materials behind tab 12. There is one passage in the joint reasons to which I wish to take your Honours and your Honours will see that at page 223 in the last paragraph on the page where their Honours were – I said the joint judgment, it is the plurality – in the third line:

The charge could not operate until Highfern’s account with the bank was overdrawn but it then operated upon the property charged in relation to each advance.

The particular passage I wanted to go to, your Honours, is the next sentence which has its analogies with the present case:

There was not a fresh mortgage or charge on each such occasion but the application of an existing contractual arrangement by way of mortgage or charge in relation to a specific advance.

Now, your Honours, the appellant places considerable reliance upon the fact that sections 263 and 268 are provisions which enable persons to become aware that the company has charged its assets. That is true, of course, as a general proposition but it does not provide the answers to the present issues, in our submission, because one needs to examine what the legislature has chosen to make the public aware of.

Your Honours, if one goes to section 263 and in particular to the details in 263(1)(a) what your Honours will see - if I could go down to paragraph (iv) – when one comes to that provision it can be seen that the obligation is to give “a short description of the liability” and one sees the words, “(whether present or prospective) secured by the charge”. That has been done.

Your Honours, if I could just say two things about that. It has been done because it refers both to the present and the prospective liabilities secured by the charge. A second lodgement would be, we would submit, really in quite similar terms. If one were to put in something complying with section 263 it would simply be a lodgement of a document in similar terms.

Could we refer your Honours to our written submissions, paragraphs 5 and 6. The amount actually secured from time to time is not required to be stated and, indeed, the legislative history is against the adoption of the view that the actual amount does have to be stated. Your Honours, that history is summarised in passages in two articles in the additional materials that we provided to the Court.

The first of them is behind tab 2. It is an article by Messrs Boxall and D’Angelo and I particularly want to refer to the document at page 103. Your Honours will see about halfway down the page the paragraph commencing, “Neither the banking and finance industry nor ASIC itself” and your Honours will see, in particular, the reference at the bottom of the page:

Nothing in the Explanatory Memorandum for the Companies Bill 1981 (Cth) . . . suggests any expectation or policy to the contrary, and in the administration of Ch 2K neither ASIC nor its predecessor bodies have required the disclosure under s 263(1) of secured amounts or anything more than generic descriptions of secured liabilities.

Your Honours will see at the top of the next page, the first paragraph, listing some further aspects about the history of it.

FRENCH CJ: Amendments to give effect to Eggleston Committee recommendations were introduced into the Uniform Companies Acts in what year? I think the report was 1972, was it not?

MR JACKSON: Yes, the report is 1972. I do not know that it quite got in in quite that form, your Honour.

FRENCH CJ: No. Yes, but some amendments.

MR JACKSON: Yes, some amendments.

FRENCH CJ: Perhaps you can give us that later on.

MR JACKSON: There were provisions like section - Corporations Act 1989, I think it was, your Honour, that one saw provisions that are similar to the present ones but before that there were some other provisions in the corporations laws and perhaps I could give your Honour the reference later if I may?

FRENCH CJ: Yes.

MR JACKSON: The other thing I was going to say, your Honours, was this. If one goes to the document behind tab 4 in the same volume you will see in an article by Mr Douglas at page 211 about a third of the way down the page he said:

The requirement to provide only “a short description of the liability ... secured by the charge” is noteworthy, particularly when the requirement is considered in historical context.

He goes on to make the point that:

Prior to the enactment of the Companies Act 1981, s100(5)(a) of the Companies Act 1961 (Vic) (and corresponding provisions in the other Companies Acts) required lodgement –

He is speaking particularly about debentures -

of a statement containing particulars of:

the total amount (if any) secured by the whole series.

Your Honours will soon see a little further down in the paragraph commencing:

In exposure drafts of the proposed Companies Bill, released for public comment in April 1980 and August 1980, the requirement was expressed as follows:

the amount of the debt or the nature of the other liability (whether contingent or otherwise) secured by the charge.

In response to concerns raised on the exposure drafts, the requirement was further softened, and the Companies Act 1981 simply required:

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

Your Honours, I am sorry to have taken a moment or two about that but the point I am seeking to make is that one does not have to have in the notice something saying the amount of the charge and the view that something that describes liabilities other than generically must be one that is to be imported is, in our submission, not correct.

HAYNE J: Questions of amount were engaged, if at all, by reference to stamps legislation, were they not? It became significant to know how far the instrument was stamped, that is, to secure what amount.

MR JACKSON: Yes, your Honour, and also it has a relationship to – there is some relationship to priority, perhaps, and to notification that what one sees in the present case is that there was a liability in the facility to $250 million, but of course as can sometimes happen, and as has happened in relation to many company liquidations in the past – depending to a large extent on the prevailing rates of interest – one can see that the liability that was said to be the maximum liability for which it was secured was three times that, and liquidations and so on can go on for a very long time.

Your Honours, could we refer also to what we have said in our written submissions in paragraphs 34 to 38, which is, I think, to the effect of what I have just been submitting. Could I come more specifically, your Honours, then to section 268. Your Honours, the starting point in relation to section 268 is found in the opening words of the subsection, namely that the provision becomes applicable:

Where, after a registrable charge . . . has been created, there is a variation in the terms of the charge -

But the variation, your Honours, must have had an effect referred to in either paragraph (a) or paragraph (b) of section 282, and that one cannot leave out of account, in our submission, that the fact that the variation of which section 268(2) speaks is a variation, to use the words of the provision, “in the terms of the charge”.

Now, your Honours, it is clear if one looks at section 268(2)(b), that those words are perfectly apt in their application to 268(2)(b) because there could not be, one would think, a “prohibiting or restricting the creation of subsequent charges on the property” without such a variation being a variation in the terms of the charge. Your Honours, the words are also, in our submission, perfectly apt in relation to section 268(2)(a).

Your Honours, if one applies them to the events before and after 22 January, the first thing is that the terms of the charge did not change. The property liable to the charge did not change. All that occurred was that there was a change in the amount secured by the charge, and then the manner provided for by the charge.

In our submission, your Honour, the appellant’s argument does not give sufficient weight to the fact that section 268(2) contains three requirements. One is that there must be a variation in the terms of the charge. The second is that the variation must have the effect stated in the section, and relevantly, the effect is to be that set out in paragraph (a).

Your Honours, we would submit that Justice Muir was correct. If I can go to his reasons for a moment at volume 2 at page 710, paragraph [90] - I will not read it out, but your Honours will see what his Honour there said, and we would say in particular that what he says in the first couple of sentences is directly apposite for present purposes.

Your Honours, could we note also that there are many cases where there may be a variation which would have the effect stated in section 268(2)(a), but would not be a variation in the terms of the charge. Your Honours, could I give these examples. One has the case of interest margin – ratchets, as they are sometimes called – where the interest rate automatically increases on the happening of particular events. That would be a variation of the amount for which the charge was security, without there being a variation in the terms of the charge.

The second instance is where the chargee incurs costs of enforcing the charge which, by the terms of the charge, can be added to the debt, and the amount of the debt is thus increased, and that would fall within paragraph (b) without there being a variation of the terms of the charge. The third circumstance, your Honours, is where the chargor defaults and default interest is added to the amount secured by the charge – again, no variation of the terms of the charge. The fourth, and last instance we would give your Honours is this, where the chargee enters into possession, and for example, carries out building works which, by the terms of the charge, it is able to do and where it is able to add the costs onto the debt secured by the charge.

Your Honours, all those circumstances, the fact that those circumstances are ones which would not satisfy the terms of section 268(2)(a), but would increase the amount of the debt secured by the - - -

FRENCH CJ: The increase in each case is determined by agreement upon the occurrence of some event or other, but no further agreement is necessary.

MR JACKSON: What your Honour puts to me is right, I accept that, but in each of those cases, however, the fact that section 268(2) would not apply does suggest that to treat the fact that there has been an increase in the amount of debt or liability as of itself attracting section 268(2) has the result, your Honours, that one should not accept the proposition that the words “a variation in the terms of the charge”, having the effect, are not themselves to be given meaning. What I am trying to convey by that is that one does have to see a variation in the terms of the charge itself.

FRENCH CJ: It is not possible, is it, to conceive of a variation in the terms which does not involve an agreement?

MR JACKSON: At some point.

FRENCH CJ: Yes.

MR JACKSON: Your Honour, at some point, there either has been the agreement in the terms of the charge itself, or an agreement later. If one takes the very simple case of a charge that relates to future liabilities, the future liabilities are ones which will be created by some transaction in the future, and transactions in the future are almost certain to involve agreement of some kind. I say “almost certain” because it is possible that there may be statutory impositions which would fall within a charge, but they would fall within it because of either agreement or the statute says so.

FRENCH CJ: Agreement is a necessary condition of a variation in terms, but it may not be sufficient for that characterisation on the example you just gave.

MR JACKSON: Yes, your Honour. Your Honours, could I go then to the argument that the decision of the Court of Appeal is erroneous because it really allows one creditor to leapfrog another. That is set out in the appellant’s submissions at paragraph 60 and also in their oral submissions. Your Honours, a creditor has always been able to seek to achieve priority by taking a security. Of course it may be that the security will be set aside as a preference under the earlier companies legislation, and it may be set aside under the many provisions of Part 5.7B of the Corporations Act, and could we refer your Honours to sections 588FE and 588FF.

Your Honours, I will not go to the provisions in detail, but your Honours will see that the various subsections of 588FE, particularly subsections (1), (2), (3), (4) and (5) give rise to circumstances where a charge is capable of being set aside. That is an issue which may yet fall to be resolved in the present case.

Our learned friend’s argument, and I could just mention this in passing, the written argument at paragraph 61 says that “no funding may be available” for a liquidator. Your Honours, it has ever been us really, if I may say so with respect, and it provides no reason to expand the meaning of section 263 or section 268, and your Honours, I wipe away a tear as I deal with that argument, with respect.

Your Honours, could I come then to the question of priority as against other registered charges. They are matters that may have to be dealt with at some point in the future. They are not at the present. Your Honours, one does have to bear in mind that registration informed anyone who cared to check that there was an all-moneys clause, indeed one which would accommodate up to 750 million.

Our learned friend’s argument, if I could just turn to another aspect of it now, is that the 22 January agreement altered the meaning of “transaction document” whenever it was used in the charge. Therefore, thereafter it meant “YBE Guarantee”. Your Honours, that contention, in our submission, should not be accepted. At all times, the term had the same meaning. Its factual operation may have changed, but no more than that. We have referred to that, your Honours, in our written submissions in paragraphs 12 and 13.

Your Honours, it was also contended by our learned friends that there was actually a variation in the terms of the charge because the deed of 22 January was now to be read as incorporated in it. Your Honours, that is an argument which has an element of freshness, if I may say so, with respect, in the sense that it has not been agitated in the courts below. But in our submission, in any event, it should not be accepted. The terms of the charge, we would submit, are those in the instrument of charge and no more.

Your Honours, that is of course a matter of assertion, but that is what we would submit is the correct decision. One registers the charge, and there it is, and it gives notice, notice of the possible ambit of it and the types of things that may be included in it. It is simply a case where it refers specifically to one aspect of the possibility of further agreement.

Your Honours, could I just say something about section 268(3). The presence of the provision has been argued at times as suggesting that section 268(2) would otherwise be applicable in the instances to which section 268(3) appears. Your Honours, no doubt that is a possible, but it is in our submission, not the better view of the role of section 268(3). Section 268(2) does not come into play whenever there has been a further advance. Rather, it would come into play whenever there was a variation in the terms of the charge, having that effect. Section 268(3) is dealing with what one might think is a most common case of further advances. It is declaratory and we would submit Justice Muir was right in his description of it in volume 2 at page 712, paragraph 101.

Our learned friends devoted some attention to the question of attachment but, of course, attachment is in a sense concerned with the property, the subject of the charge. Does the charge attach to that property? It is then sought to say that you cannot have a charge – I will put it slightly differently. That issue does not directly arise. The property charge has not changed. But, your Honours, it is then argued that this is a case where there has to be agreement. Until there is agreement, there cannot be the charge.

Your Honours, agreement has been reached, agreement has been reached that the charge will apply to all transactions, to put it loosely, which the parties agree are to be the subject of the charge. In our submission, if one is looking to see what is registered by the charge, what has happened is completely covered by it and affects no variation of it.

Your Honours, I am reminded that the version of the Companies Act on which the passage in Goode is based are slightly different in – anyway, your Honours, I do not want to say something on the run about it without understanding what I am saying. So if there is anything in relation that we wish to say, could we give your Honours a note about it in the next day, and our learned friends of course. Your Honours, those are our submissions.

GUMMOW J: Mr Jackson, is there some discussion by Justice Holmes of this expression “the terms of the charge” - - -

BELL J: I think it is at paragraph [48] at appeal book 699.

MR JACKSON: Well, your Honour, I think it perhaps right to say that her Honour’s enthusiasm for it increased a bit between the start of paragraph [48] and the conclusion of her reasons. Your Honour will see the first sentence of paragraph [48], but then your Honours will see at the conclusion of that paragraph she says, “In the present case, the terms of the charge, so defined - - -

GUMMOW J: Yes. It is the last words, is it not, “and, arguably, in the Octaviar Castle facility agreement”?

MR JACKSON: Yes.

GUMMOW J: Is that not giving rise to some anxieties?

MR JACKSON: In our submission, no, your Honour.

GUMMOW J: I am looking at tab 5 of the materials you handed up this morning, the further bundle.

MR JACKSON: Your Honour, could I, before I go to that, just refer also to paragraph [61] of her reasons at page 702.

GUMMOW J: Paragraph [61]?

MR JACKSON: Yes.

GUMMOW J: I am looking at the bottom of the first column on page 31 of that Insolvency Law Bulletin which you gave to us:

While, at first blush, the Court of Appeal . . . obiter observation about what precisely can be said to constitute the “terms of the charge” needs further consideration and analysis –

et cetera, and the last sentence on page 31. It is your case, it is not, that the terms of the charge are sufficiently indicated by the instrument itself?

MR JACKSON: Yes, it is, your Honour.

FRENCH CJ: I thought Mr Sofronoff accepted – and I do not want to put words in his mouth – yesterday that one could approach the instrument as though the definition of “transaction document” which appears in the facility agreement were contained in the charge itself because there was sufficient lead in from the terms of the charge to the facility agreement.

MR JACKSON: Yes, your Honour, that is what I thought he had accepted yesterday. But, your Honour, if one looks at the ambit of the obligation to register, or what one has to give, and if one goes to section 263, the requirement under 263(1)(a)(iv) is to give “a short description of the liability” and the short description of the liability was the short description of the liability in the present case. If I could just take you to the annexure to Mr Walter’s affidavit, your Honours will see that at page 3 of the actual charge what it did was to describe “secured money”. It set out the definition of that term. It then spoke in the third line of the –

Transaction Document (as defined in the Facility Agreement (as defined below)) –

It set out what the facility agreement was. So, your Honours, what we would say is that if one were looking to see what was conveyed by what was the subject of that charge, you would see that it referred to the existence of a facility agreement. If one wanted to find out more, if one were a lender, one could say, “Show me the facility agreement”, and the facility agreement would then give you the definition of “transaction document” and one would say, “Are there any transaction documents?” So, your Honours, what is required is the giving of a short description and the tentative possibility, that in the end Justice Holmes discounted, is one which might perhaps arise in some cases, but it does not arise in the present case, in our submission.

HAYNE J: But the hinge or perhaps a hinge about which the argument against you turns is I think captured in paragraph 28 and paragraph 30 of the submissions of the appellant. If we look at paragraphs 28 and 30 of the principal submissions of the appellant, we observe in paragraph 28 an argument which proceeds from description:

to vary the terms of the charge by adding a new liability or new liabilities –

I emphasise the word “new”, to the further step –

to vary the written terms of the charge itself –

You then capture the combination of the two points thus made in the last sentence of paragraph 30:

Any variation to the terms of a charge to add to –

I emphasise those words –

the liabilities secured would constitute a variation to the terms of the existing charge –

Now, I had understood an answer, perhaps the answer, you make to that to be, well, look at the charge document. What has happened is contemplated by, provided for, by the charge document. End of inquiry, Mr Jackson?

MR JACKSON: In our submission, yes, your Honour. Your Honour, I referred earlier to making an assertion, but, in a sense, it is a question of taking a view as to what is meant by “a variation in the terms of the charge”, and that involves a question as to the meaning of the charge. If one has a situation where the charge is one which is capable of relating to, in terms, future liabilities and one is seeking to apply to that the question whether there has a been a variation in the terms of the charge, the fact that the application of its terms to factual circumstances has changed, does not involve a variation in its terms. It may involve a variation in its effect, of course, but it is not a variation in its terms.

So, in a sense, your Honours, the case does come down to a really very narrow point in a way, no matter how one does it, one way or the other. If one arrived at a situation where, in the end, the appellant’s argument would require no more than the lodgement of a document in terms similar to the existing one, then the argument against the adoption of that view is, in our submission, strong and the notion that there has to be appended to, or a new lodgement of, additional documents whenever there is a document entered into which has the result that the ambit of the liabilities covered by the charge has in fact changed, is one which, in our submission, rather goes against the notion of there having to be lodged the short particulars of the liabilities secured, that meaning, of course, a short description sufficient to identify the classes of liabilities that are involved. Your Honours, I do not know if I can advance it beyond that, but that would be our submission.

KIEFEL J: If it were not for the reference to “transaction document” in the definition of “secured money”, would the position of requirement of notification be otherwise?

MR JACKSON: Your Honours, if I could just go to the definition of “secured money” – I am not quite sure which words your Honour was cutting out from it.

KIEFEL J: I am looking at the definition of “secured money” as incorporating a liability arising under a transaction document and then, of course, the definition of “facility agreement” and I suppose what I am wondering, Mr Jackson, is whether the effect of that is to potentially incorporate a fresh agreement for liability within the charge. That is a new agreement, one that was only in the most general terms contemplated but not actually – as distinct from a liability flowing from an extant agreement within the facility agreement.

MR JACKSON: What it contemplates is that there will be money obligations and liabilities in the first place that may in the future become due, to take that example, and they become due under or in relation to a transaction document. One goes then to page 109, see the definition of “transaction document”, and the transaction documents include – and they speak, of course, of documents, and paragraph (c) is a document which they “agree in writing is a Transaction Document”. Now, in the nature of things, that is something which may relate to an entirely future liability, and that is what is covered by the charge, your Honours. It accepts that they are future liabilities which will come into existence, no doubt by agreement.

KIEFEL J: Is there a distinction, though, between agreement that something is a transaction document and an agreement to attach a liability to the security? That seems, I thought, a point of distinction Mr Sofronoff was making.

MR JACKSON: Well, your Honour, no. In our submission, there is not. If one takes the case of a transaction document, the purpose of having the definition of “transaction document”, relevantly, is in order that liabilities under it will become liabilities falling within the definition of “secured money” and in relation to those, that it allows the parties to agree that a document, which presumably has to in some way or another give rise to the liabilities, they agree that it is a transaction document. I do not know, your Honour, if I am answering quite your Honour’s question on that matter.

KIEFEL J: Yes, I mean, do I understand you to say that it really operates no differently from an all-accounts clause?

MR JACKSON: Your Honour, it depends how simple one makes the all-accounts clause, of course. If you take all-accounts clause which covers any obligations that may be owed by the borrower to the lender, to put it shortly, then that encompasses situations where the liabilities will arise by agreement. If you get a case where you have a developer, for example, who has a number of properties, the money that is lent in respect of another property will become something dealt with by agreement, it will then fall within the all-moneys clause, and this is not really very different from that.

KIEFEL J: I suppose except for their position as surety rather than as an advance direct from the lender to the person giving the security. So, in that sense, it is a stranger transaction to the charge except that, as I think you point out, paragraph (b) of the definition of “secured money”.

MR JACKSON: Yes, your Honour, if I could just go back to the development example, if you took the case of a company which is a developer, a company owned by the people who are its directors, to put it shortly, and who guarantee the obligations to the lender, now, if they gave charges or securities in respect of their obligations then, speaking as a matter of definition at the moment, as distinct from company charges, the situation would be that they would be making agreements on each occasion and they would be covered by the “all moneys” clause that applied to them, despite the fact they are guarantors rather – they are borrowers.

GUMMOW J: I think what was lying behind perhaps Justice Holme’s statement in the last sentence at paragraph [48] was some unease with the rather too clever drafter in clause 1 of the security, in particular 1.2. It is not a good method of drafting to have such a pivotal provision like the definition of “secured money” refer to another defined term. I mean, you have to find out what that means by scouring the document and then lighting on 1.2 and then going somewhere else. Now, whether that leads to any invalidity is another question, but that is the source of the problem, I think. No doubt these diligent people who are writing these articles that you have handed up to us are now seized of the problem.

MR JACKSON: Well, maybe, your Honour, but it is always desirable in drafting documents to avoid problems, of course.

GUMMOW J: Yes, but the security is the core document.

MR JACKSON: Your Honour, I accept that.

GUMMOW J: This method of drafting teaches it as the last wagon on the train. That is the problem. It is the first wagon that causes the requirement of registration and the devastating consequences that can happen. That is what this litigation is all about, I suppose.

MR JACKSON: Well, your Honour, the requirement that the terms of facility agreement be stated in the charge that is not the point, I think, which your Honours will find has been taken in the proceedings before, but your Honours, could I just say in relation to it, what one does see is that it does make clear, perhaps it might have been done in a much better way but it does make it clear that you have to look, that there are documents that you would need to look at. Your Honours, those are our submissions.

FRENCH CJ: Thank you, Mr Jackson. Yes, Mr Sofronoff.

MR SOFRONOFF: Your Honours, three things. In relation to the matter that your Honour Justice Kiefel raised with our learned friends, if one goes to the definition of “transaction document” at page 109 of volume 1 and if one were to delete subparagraph (c) so that the only transaction documents were the agreement, the security, identify documents and let us delete paragraph (d) as well for that matter to make the position much clearer, the charge would be certain and would be certainly circumscribed.

It would leave it open to the parties, in any event, upon a future date to agree between themselves that a document recording a transaction shall be a transaction document for the purposes of the charge and the question then arises that increasing the liabilities, is that an alteration to the terms of the charge? In our respectful submission, the answer to that would be yes. That the parties have contemplated entering into such an agreement does not alter the position in principle, in our submission.

FRENCH CJ: Is it right, Mr Sofronoff, to understand your submissions as of yesterday, to accept that the fact that the “Transaction Document” definition is found elsewhere, a point really Justice Gummow was just putting to Mr Jackson, does not go to the question of – the mere drafting does not go to the question of validity on your argument?

MR SOFRONOFF: Correct, your Honour, because that would be a different point as to whether all of the documents that should have been registered were registered.

FRENCH CJ: We can deal with this on the theoretical assumption that you find the facilities agreement definition of “transaction document” here in the charge.

MR SOFRONOFF: Yes, because if the facility document had been lodged, that might be a point that we missed, but if the facility document had been lodged we would still be here.

FRENCH CJ: Yes.

KIEFEL J: Is it part of your argument that you do not have such a thing as a transaction document until the agreement of 22 January?

MR SOFRONOFF: Yes.

KIEFEL J: Therefore, the definition of “secured money”, the possibility of there being such a document encapsulating the agreement has come into existence for the first time?

MR SOFRONOFF: Yes, and it is behind the point that the parties contemplated it - - -

KIEFEL J: Sorry, what you do is you take out words “to a Transaction Document” in secured money and put in something like “to the agreement of the 22 January being a transaction identified - - -

MR SOFRONOFF: Yes, then it would refer to that as well. That is reinforced by provisions of the Act, in our submission.

HAYNE J: Just before you come to that, we begin, do we not, from the premise that this charge is to be read as identifying the secured money as all moneys owing on certain identified accounts?

MR SOFRONOFF: Yes.

HAYNE J: As well as all moneys which, in the future, may become owing under or in relation to later identified accounts.

MR SOFRONOFF: Well, it states that. The question is whether that constitutes an existing charge or not. I was going to go to the Act and it bears upon what your Honour just put to me. If one goes to 263(1)(iv), our learned friend directed the Court’s attention to that and said that the notice, indeed, did contain “a short description of the liability . . . secured by the charge”. That is not correct, we respectfully submit, because at the date of registration of the charge the liability under the YVE guarantee was not a liability secured by the charge. It was neither a - - -

HAYNE J: That is a proposition that says you cannot register a charge which contemplates the creation of further dealings between the parties, is it not?

MR SOFRONOFF: No, your Honour.

HAYNE J: No?

MR SOFRONOFF: The charge then – in that case the charge does not alter, it remains operative and it operates upon the new liability that has then arisen. This is a case where, whether the liability is in existence at the date of the original charge or not, the charge at its inception applies only to defined liabilities and at a subsequent date the parties do not enter into a new transaction which itself then creates a liability coming within the charge automatically. We would agree, instead, that the charge itself shall be extended. There is, in our submission, a fundamental difference between a further advances charge and the charge of the kind that Octaviar granted to Fortress here.

GUMMOW J: What is that fundamental difference?

MR SOFRONOFF: The fundamental difference is that in the one case the parties have agreed that the charge will extend as soon as a liability of a defined kind arises.

GUMMOW J: This is the further advance?

MR SOFRONOFF: Yes, and the agreement here is that the charge shall extend if the parties agree that it shall extend.

GUMMOW J: But they might have to agree to make a further advance?

MR SOFRONOFF: But that is not any dealing with the charge. That is simply a creditor/debtor contract that is entered into and immediately upon its creation the charge captured it here. The parties have to do something completely fundamentally different, namely, agree that the charge shall extend to something. So they are dealing – the subject matter of the new agreement is the charge. In the further advances cases, or the all-moneys cases, the subject matter of the agreement is a debtor/creditor relationship which, by its terms, the charge happens to catch.

HAYNE J: Well, this is amplification of the proposition in paragraph 28 of your submissions which distinguishes between new liability and liabilities already secured.

MR SOFRONOFF: Yes, and if one goes to section 263, the fundamental section dealing with the registration of charges, what you need to describe is the liability present or prospective, secured by the charge. On no footing could it be said that the liability under the YVE guarantee was a present or prospective liability secured by the charge. It was merely a contemplation by the parties. The definition of “transaction document” linked to the definition of “secured money” was merely a foreshadowing that the parties might, at some future date, agree to vary the scope of the charge by extending it to capture something else, or not.

One sees the same thing reflected in 282(3). I am sorry, I should go first to 268(2). What is in question is whether there has been an increase in the debt or liability secured by the charge, so one asks what is the charge secured? On no footing could it be said that the charge ever secured anything other than the liability under the Castle guarantee until the agreement was entered into.

HAYNE J: How does that take account of whether present or prospective in 263(1)(iv)?

MR SOFRONOFF: Well, a prospective liability, when it is defined in 261 is defined in contradistinction to present liability and present liability, we can see from its terms, is a reference to what in other contexts is an actual liability or a prospective liability and the term “prospective liability” is speaking about a liability that may arise in the future. It would defeat, it would give section 268 no work to do if prospective liability were said to contemplate something other than a contingent liability arising out of a present relationship, a present agreement. It would follow that any liability whatsoever if entered into – if agreed upon later as coming within the charge, could come within the category of prospective liability. Your Honours will see that - - -

KIEFEL J: I am sorry, I am interrupting your answer, please conclude your answer.

MR SOFRONOFF: No, I have, I think.

KIEFEL J: We are here, focused, of course, upon the one further agreement of 22 January but your argument must, I think, rely upon the potential scope of what might be a transaction document, that is it can be anything the parties agree.

MR SOFRONOFF: Yes.

KIEFEL J: Here there is a relationship, at least, between what Octaviar has already provided to Fortress Credit by way of a guarantee but potentially it could, in the future, take on some relationship for some other party’s debts, to any extent, as long as it does not exceed the maximum of the charge and avoid the notification provision.

MR SOFRONOFF: Yes, exactly, your Honour. That was the second point I wanted to raise by way of reply and it is this that our learned friend submitted that all that occurred was that there was a change in the amount secured by the charge but that, we respectfully submit, is not correct. Not only did the amount increase but the nature of liabilities was added to in a significant degree. The original liability was limited to the Castle guarantee. Now, not only is the amount increased but the liabilities under the YVE guarantees are added. So the actual basket of obligations has had added to it the basket of obligations in the YVE guarantee which are very, very wide.

Could I give your Honours the references without taking time to take your Honours to them, but at page 251 clause 2.2 contains the YVE guarantee. At 237 the definition of “Guaranteed Money” is set out and then the finance agreement which contains the obligations of YVE that are guaranteed are extremely wide and at 193 extend to obligations that YVE accepts. I will start again, extends to obligations contained in documents that YVE acknowledges are transaction documents so the domino

continues.

Consequently, what your Honour Justice Kiefel put to me is correct. First, the parties contemplate that they might add to the liabilities secured by the charge. That does not do anything contractually in our respectful submission, absolutely nothing. Secondly, they add to the liabilities by adding a liability of a different nature, different character, in respect of the different risk and commercially, in our respectful submission, it is very important to identify that we do not only increase the dollars but we may be increasing the risk. The risk attaching to the Castle guarantee is one thing, Castle being a subsidiary. The risk attaching to the YVE guarantee is another thing, YVE not being a subsidiary, not being under the control of Octaviar.

HAYNE J: Be it so, it has gone guarantor for it.

MR SOFRONOFF: Quite, quite, your Honour. The point is that the reason, in our respectful submission, notification of variation is crucial is because not only if you add to the amount but if you add to the liability you change the circumstances that are of interest to persons searching the register.

FRENCH CJ: Well, even on an all advances charge, I suppose future advances might be made under a variety of different terms and conditions.

MR SOFRONOFF: Yes, that is true. Your Honours, those are our submissions.

FRENCH CJ: Thank you, Mr Sofronoff. The Court will reserve its decision. The Court will adjourn briefly to reconstitute.

AT 11.31 AM THE MATTER WAS ADJOURNED