CHAPTER 5 AUSTRALIAN JOINT VENTURES AND THE CROSS CHARGE
| Jurisdiction | United States |
(May 1991)
AUSTRALIAN JOINT VENTURES AND THE CROSS CHARGE
Clayton Utz
Sydney, New South Wales, Australia
TABLE OF CONTENTS
Page
1. INTRODUCTION
2. WHAT IS A CROSS CHARGE?
2.1 Definition
2.2 Equitable Nature of Cross Charge
2.3 Fixed and Floating Nature of Cross Charge
3. GENESIS OF THE CROSS CHARGE IN AUSTRALIA
4. PURPOSE AND ADVANTAGE OF THE CROSS CHARGE
4.1 Protection of the Non-Defaulting Participant
4.2 Rights of the Non-Defaulting Participant
4.3 Remedies available to the Non-Defaulting Participant
5. EFFECT OF THE CROSS CHARGE
5.1 As Security
5.2 Corporations Law
5.3 Registration
5.4 Priority
5.5 General Priority Rules
5.6 Special Priority Rules
5.7 Present and Prospective Liabilities
(i) Present Liabilities
(ii) Prospective Liabilities
5.8 Amount of Liability
5.9 Stamp Duty
5.10 Prior Existing Charges
6. RELATIONSHIP OF CROSS CHARGES TO SECURITIES HELD BY FINANCIERS
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6.1 The Financier's Security
6.2 Special and General Purpose Participants
6.3 Priority with respect to Special and General Purpose Participants
6.4 Change in Financier's Exposure
7. PRACTICAL EXAMPLES OF JOINT VENTURE STRUCTURES USING CROSS
7.1 Basic Joint Venture
7.2 Complicated Joint Venture
8. PRACTICAL EXAMPLES OF PROBLEMS ENCOUNTERED WITH THE USE OF CROSS CHARGES
8.1 "Clogs" on the Equity of Redemption
8.2 Crystallisation and Automatic Crystallisation
8.3 Charges and Cross Charges
9. CONCLUSION
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Most of the work in the preparation of this paper was done by Kathryn Hardy, a senior banking and finance lawyer with Clayton Utz. I am very grateful to Kathryn for her assistance.
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1. INTRODUCTION
This paper considers cross charges as a form of security between the participants of a joint venture. It is limited to unincorporated joint ventures, such as those commonly used for mining and petroleum exploration and development.
As it is in the United States, the unincorporated joint venture in Australia is a contractual creation between two or more participants, each of whom holds a certain share in the assets of the venture. There is no single joint venture vehicle constituted specifically for the purposes of the venture. Rather, the unincorporated joint venture operates essentially as a form of co-ownership by the participants.
As explained in Section 3 of this paper, the concept of a joint venture is a relatively recent phenomenon in Australia. To date (unlike partnership law, with which the law relating to joint ventures continues to be confused) there is no State or Federal statute or code governing the concept.
It has been this lack of a formal, legally recognised entity which has led to considerable confusion in the past as to whether the Australian courts would in fact recognise the concept of a "joint venture" or merely attempt to classify it as falling within an established legal category, such as a partnership. Several commentators have recently made the dangerous assertion that a joint venture is in fact a partnership, thereby denying the existence of the principal benefit — of no joint (or joint and several) liability.
It seems that the Australian courts recognise the concept of the joint venture as a relationship simply based upon the terms of the contract between the various participants;1 — which is not a particularly convincing or helpful position to have reached. However, I am confident that the concept is so important to the economic welfare of the country and so entrenched that the Courts would now uphold a correctly constructed mining or petroleum joint venture agreement as a joint venture and not a partnership.
In Australia, the main distinction between an unincorporated joint venture and a partnership is that the participants in a joint venture do not carry on business in common with a view to profit. The joint venture is structured in such a way that it is not concerned with the sharing of profits, but rather with the sharing of costs. Further, each participant has a share in the assets of the venture, but each participant does its
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own selling of the proceeds, separately from the others.2
2. WHAT IS A CROSS CHARGE?
2.1 Definition
A cross charge is a form of security developed in Australia. It is essentially an adaptation of the equitable charge whereby each joint venture participant grants an equitable charge over its share in the joint venture assets, in favor of its co-participants.
By way of example, suppose there is a joint venture comprising two companies, X Co and Y Co, each of which has a 50% interest in the joint venture. X Co and Y Co enter into an agreement, together with the joint venture Project Manager, pursuant to which each of X Co and Y Co covenant with the other and the Project Manager, to pay all amounts owing by themselves, to the Project Manager or to each other, under or pursuant to any of the joint venture documentation. For the purpose of securing such covenants, X Co and Y Co each grant a charge over their respective interests in the joint venture in favour of one another and the Project Manager; and hence the term "cross charge".
2.2 Equitable Nature of Cross Charge
An "equitable charge" is a form of security commonly required by financiers. It is simply the creation by the chargor of potential rights as security for the repayment of a sum of money, which rights may only be exercised upon default by the chargor in the performance of its obligations. Such potential rights however automatically cease upon repayment of the moneys owed by the chargor to the financier.
The real difference between the standard equitable charge granted as security for moneys lent and the cross charge is that the latter will not be expressed in terms of securing the repayment of moneys to a financier; but rather, the payment by each participant of its share of the joint venture expenses and liabilities as and when they fall due.
2.3 Fixed and Floating Nature of Cross Charge
The cross charge will be expressed to be a fixed and floating charge; that is, it will charge all of the present and future interests of each participant in the assets of the joint venture. For example, in a mining joint venture, the cross charge will initially charge each participant's respective interests in the mining tenements (and all ancillary tenements for mining purposes), freehold and leasehold land, housing and other infrastructure such as power supply agreements and transport facilities. It will also charge each participant's interest in various plant and equipment as well as insurance
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proceeds, bank accounts, sales contracts, product from the joint venture.3 Recently there have been instances where cross charges have been extended to cover the proceeds from the sales of product.
One of the basic premises of the cross charge is that it secures the payment by the participants of their respective calls as and when they fall due.4 If a participant defaults in the performance of its obligations, rather than enabling the defaulting participant to make up such default from the sale of its share in the joint venture (that is, after completion of the venture), the recourse to be had by the non-defaulting participant usually involves the exercise of certain remedies which have an immediate effect upon the defaulting participant's share in the joint venture assets.
3. GENESIS OF THE CROSS CHARGE IN AUSTRALIA
As indicated above, the joint venture has only existed in Australia since the 1960s when the concept was "borrowed" from the United States — to cater for sharing the costs and risks of large scale iron ore exploration and development. The cross charge arose as a natural progression from the participants' desire to secure the performance by one another to make all contributions as and when they were payable.
Apparently an earlier version of the cross charge was common in oil and gas ventures in the United States between an individual and an oil company. As was often the case, the individual could not afford his share of the joint venture expenses, so the company would lend him his share of the venture expenses and then recover these moneys with interest from his share of the production.5
In Australia, the cross charge is generally only utilised in mining and petroleum joint ventures. By way of comparison, property joint ventures do not normally utilise cross charges. In such joint ventures the participants usually prefer to rely upon support guarantees from the parent and/or related companies.
One aspect of the cross charge which has only recently become an accepted proposition, is its first priority. Financiers were initially reluctant to postpone their interests to those of the participants. However this issue has been resolved such that it is now generally accepted practice that the cross charge be given first priority ahead of the financier's security.6
A senior American lawyer informed me recently that "in the U.S. lenders wouldn't
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subordinate to their own mothers".7 I find this surprising, given that lenders to major resource projects are universally demanding and difficult, but few of them are stupid. If the financier's security ranks first and one of the participants defaults in the payment of a call, the logic is that if the financier strictly enforces its rights it will soon be running the project. In Australia most financiers find that logic less than palatable.
4. PURPOSE AND ADVANTAGE OF THE CROSS CHARGE
4.1 Protection of the Non-Defaulting Participant
As indicated above, the primary purpose of the cross charge is the protection of the non-defaulting participant's interest in the joint venture, in the event that the other participant defaults in the performance of its joint venture obligations.8
By virtue of the cross charge...
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