Circulating assets – recent decision determines when employee entitlements obtain priority
Employee Entitlements and Priority of Secured Creditors – key guidance on the operation of s561, Corporations Act
Introduction
In RCR Tomlinson Limited [2020] NSW SC 735, Black J, on an application for directions, was asked to give advice as to whether certain interests, to use a neutral characterisation, were circulating assets. That issue arose by reason of a dispute as to whether those interests came within the operation of s 561, Corporations Act and would, thereby, be available to employees in priority to the claims of secured creditors.
The Judgment also contains an important analysis of what constitutes an “account” for the Personal Property Securities Act (“PPSA”).
Summary
This decision provides important guidance to practitioners and secured creditors as to the operation of s561, Corporations Act.
In particular, the decision is authority for the following propositions:
- The relevant time for determining whether an asset is a circulating asset is the date on which administrators were appointed prior to the liquidation;
- Rights to receive surplus funds from customers who had a right to call upon performance bonds but may or may not do so and had not done so at the appointment date, were not circulating assets as their nature was too uncertain at that time; and
- Claims for work in progress as at the appointment date, even if there had been no claim at that date were in the nature of circulating assets if there was a right to issue an invoice for that work or nothing further was required to do so than the issue of a certificate that the work had been satisfactorily completed.
Whilst it did not arise for consideration, the reasoning in the case would support an argument that progress payments which are able to be claimed at defined milestones which occur prior to the appointment date in the course of performing a contract are also circulating assets.
Background
RCR Tomlinson Limited and its related companies ( “RCR”) provided engineering, construction and maintenance services to customers in Australia. RCR appointed voluntary administrators who were subsequently appointed as its liquidators when RCR entered creditors’ voluntary liquidation.
In the course of its business, RCR would arrange for the provision of performance bonds, bank guarantees, or similar instruments, to its customers (“Customers Bonds”). The Customer Bonds were issued by various financiers whose claims were secured on a syndicated basis by way of a charge given by the Group. For the purposes of the application for directions, it was accepted that, if a Customers Bond was called and the customer received a payment beyond the amount which it was entitled to receive, it would be under an obligation to remit that surplus to RCR (“Surplus Proceeds”).
RCR would also engage sub-contractors to deliver some of the services which it had contracted to provide to its customers. Those subcontractors would provide bonds, bank guarantees, or similar instruments, to RCR in order to secure their obligations to it (“Subcontractor Bonds”).
At the time of the appointment of the voluntary administrators (“Appointment Date”), calls had not been made on various of the Customer Bonds which had been provided to counterparties on behalf of RCR or under the Subcontractor Bonds.
Also, at the Appointment Date work under some of the contracts which RCR had with its customers had reached different stages of progress but for which no invoices had been issued (“WIP”).
The issues raised by the application for directions, in essence, concerned whether any of:
- the Surplus Proceeds;
- the WIP; or
- the proceeds from calls under the Subcontractor Bonds where those calls had not been made as at the Appointment Date (“Subcontractor Proceeds”)
were circulating assets and, therefore, subject to be applied consistently with the requirements of s 561, Corporations Act.
Threshold Question
A preliminary issue which Mr. Justice Black needed to address was to identify the time at which an assessment is made as to whether an asset or interest is subject to a circulating security interest. In that regard, His Honour concluded (at[25]):
“… it seems to me that it is necessary to determine the question whether property is comprised in or subject to a circulating security for the purposes of s 561 of the Act at the Appointment Date rather than on a continuous basis or at some other unidentified date, adopting the same approach in respect of s 561 of the Act as is adopted in respect of s 433 of the Act.”
That is to say, in the case of RCR, the decision as to whether an asset or interest was a circulating asset was to be made as at the Appointment Date.
Surplus Proceeds
At the Appointment Date, there were a number of Customer Bonds in respect of which no demand had been made. As already noted, it was accepted that, if Surplus Proceeds were received by any customer of RCR, it would be obliged to remit that amount to RCR.
It was held that at the Appointment Date, the interest of RCR to Surplus Proceeds was so uncertain that it could not be characterised as personal property for the purposes of the PPSA. As Black J put it(at [70]):
“On balance, it seems to me that …any “right” to Surplus Proceeds was so contingent that it was “nothing but an expectancy”, in the language of Norman [Norman v Federal Commissioner of Taxation [1963] HCA 21], and not an existing contractual right and that it did not have the nature of personal property. The uncertainty in that respect was not merely the completion of performance by a [Tomlinson company], but whether a third party, …, would call on a Bond, which it may or may not do for its own commercial reasons. This is not a case where a Principal was bound to call on the Bond, still less where it had done so, and the only question was the quantum of the Surplus Proceeds.”
If, contrary to his conclusion that the Surplus Proceeds were not personal property, Black J addressed the possibility that they might be a “monetary obligation” and an “account” for the purposes of ss 10 and 340 of the PPSA. His Honour concluded that they did not (at [77], [78], and [79]):
“On balance, it seems to me that the Surplus Proceeds cannot properly be characterised as a monetary obligation at the Appointment Date. First, it seems to me that the term “monetary obligation” must retain something of its character in general usage, and a potential claim in respect of the Surplus Proceeds which might or might not arise depending on the actions of a third party, while of a monetary character, had no element of “obligation” about it. If a claim of that character were treated as a “monetary obligation”, there would be no principled basis on which to exclude other contingent claims which might or might not arise.”
“[Second] The Surplus Proceeds do not satisfy any of the requirements … for a “monetary obligation”, since they were not an existing legal obligation (at the Appointment Date) on a Principal (which had not then called on the Bonds or received their proceeds) to pay an identifiable monetary sum to the company on an ascertainable date or at all, and a Principal did not then have (and, absent a call on the Bonds, would never have) an existing liability to make the payment.
Third, the concept of “account” in s 10 of the PPSA seems to me to have at least its core meaning in common with that of “account receivable” in s 16 of the PPSA NZ, as recognised in the academic commentary to which I have referred above. The Surplus Proceeds are so contingent in character that they would not properly fall within that concept or any expansion of it that can reasonably be drawn from the use of a simpler term “account”.
Fourth, the phrase “whether or not that obligation has been earned by performance” in the definition of “account” in s 10 of the PPSA does not extend the operation of that concept to the Surplus Proceeds, since the right to Surplus Proceeds depended on whether the Principal decided to call upon the Bonds for its own reasons, not on any future performance by [RCR].
WIP
The application for directions sought advice in respect of a number of categories or permutations of WIP as follows:
- “WIP Permutation 1:
The production of the goods or the rendering of services had been completed by the Appointment Date and all that remained to give rise to a right to payment … was for an associated invoice or demand or request for payment … to be issued…
- Permutation 2:
The production of the goods or the rendering of services had been completed by the Appointment Date, but … certification or approval was required before an Invoice could be issued...
- Permutation 3:
The production of goods or rendering of services had commenced before the Appointment Date but was only completed after the Appointment Date and no right to payment … until after the Appointment Date.
- Permutation 4:
At the Appointment Date a contract for the production of goods or the rendering of services was on foot, but [RCR] had not yet commenced producing the goods or rendering the services.
- Permutation 5:
At the Appointment Date there was a head or umbrella contract in place, but no order for the production of goods or for the rendering of services had been placed with [RCR].”
The parties did not argue that each category or permutation of WIP was not personal property. It was disputed, however, as to whether each of them was an account or monetary obligation.
In relation to those various categories or permutations, Black J concluded as follows:
- Permutation 1
“It seems to me that the amounts falling within WIP Permutation 1 were “monetary obligations” and an “account” within ss 10 and 340(5)(a) of the PPSA and therefore a “circulating asset” within s 340 of the PPSA to which s 561 of the Act can apply. First, the extension of the concept of “account” to amounts still to be earned by performance suggests that it would at least include amounts that had been earned by performance that were yet to be invoiced. Second, …, the amounts that were still to be invoiced were governed by the contracts and any dispute as to the amount invoiced could be determined on that basis.”; - Permutation 2
“It seems to me that the position here is the same as for WIP Permutation 1, since any dispute as to certification and the amount invoiced could be determined under the contract. On that basis, these amounts also constituted an account under s 10 and 340(5)(a) of the PPSA, a circulating asset under s 340 of the PPSA and fall within the scope of s 561 of the Act.”; - Permutation 3
“WIP Permutation 3 arises where the production of goods or rendering of services had commenced before the Appointment Date but was only completed after the Appointment Date and no right to payment arose until after the Appointment Date … I accept, that …, if there is no contractual basis for an appointment of WIP, then there is no monetary obligation in respect of any amount in this category as at the Appointment Date. … [Moreover] on the assumed facts, there was no such obligation [to make a payment for the then completed work] at the Appointment Date, conditional or otherwise, because the contract did not provide a right for payment for incomplete work. There was, instead, only a possibility at the Appointment Date that an obligation might arise at a future date, if and only if the relevant work was completed. That was not, in my view, a “monetary obligation” at the Appointment Date.”; and - Permutations 4 and 5
His Honour did not consider that a direction in respect of these permutations was necessary.
Subcontractor Proceeds
In relation to Subcontractor Proceeds, Black J concluded; at [107]:
“In my view, a potential claim in respect of the Subcontractor Proceeds which might or might not arise, while of a monetary character, would not fall within the general usage of the term “monetary obligation” or the term account in ss 10 and 340(5)(a) of the PPSA, because it had no element of obligation about it at the Appointment Date.”
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