.

Langdon, in the matter of Forge Group Limited (Receivers and Managers

Appointed)(jin Liq) 120171 FCA 170

FEDERALCOl. JRT OFAUSTRALIA

File number:

Judge:

Date of judgment:

Catchwords:

WAD 642 of 2015

GILMOURJ

I March 2017

Legislation:

CORPORATIONS- debt finance-receivers -secured

creditors - the date for fixing assets the subject ofs 433 ofthe Co}porutions Act 2001 (Cth)(Corporations Act) - thedefinition of'circulating security interest' in s SIC of theGol:pOrdtiOnS Act

SECURITIES - floating charge - definition of 'circulatingasset' pursuantto s 340 of the PersonqlProperty, SecuritiesAct 2009 (Cth) (PPSA) - when a security interest attachesto future property unders 19 of the PPS, I

Companies, 4ct1961(WA)

CoinpQ"wider 1961(NSW)

Companies Act Amendment Bill(WA)

Companies dimendmen!) Bill1971(NSW)

Co, porali0"^ 4.1 2001 (Cth) ss 9, SIC, 424, 433, 439A,556(I)

Goods gridservices Taxrlct 1985 01Z)Feder"/ COMr!Rules 2011

Incorn, TarAss, ssmeniAct 1997 (Cth) Part 3-90, s 170(9)

Personu/ Property Securities Her 2009 (Cth) s 12

Ray/deemeniE. :qp/undioiyMemor"ridt, in, PersonalProperty Scowirt^sBill2009 (Cth)

Taxaiio?I Administration Act 1953 (Cth) Part 11B,s 8AAZLF(I)

Commissioner of TarQtion v 40oonqn Street Coinnsvtl/ePb, Ltd @ liquidation) (2016) 332 ALR 349 consideredCooky /ton"no Faintly Fruit Coinpoizy Pty, Lid (inLiquidation) (2010) 276 ALR 349 cited

General CreditsLtdv ChemineerNomiiteesPty, Ltd (1986)4ALCL 570 considered

I. R. C. v Goldblott[1972] Ch 498 disting"ishedKOIdo v Silkchime Po?Ltd (Receivers andMQnqgers

Cases cited:

,

Appointed)(2010) 243 FLR 269 consideredLewi's & Templeton Win, ehoz{se Sales P^)Ltd (7111iq) vLGElectroni, ,Hit, iroha PtyLtd (2016) 308 FLR 100 citedMOBvoy v/neat fusingrim FD, Ltd (2003) 130 FCR 503cited

Re CMUndM^tradPtyLtd@ Itq)(2015) 105 ACSR 635followed

Re Gr4ffin Hotel Co Lid 1194/1 Ch 129 cited

Re Sinotth" Fabrics Pty, Limited (Tit 1/9) (2012) 92 ACSR542 not followed

Royal BankqfCdnoda VRCdi"s Credit UnionLid 1201013SCR 38 distinguished

Stein v Saywe11(1969) 121 CLR 529 discussed

Strategic Findnce Limited (in receivership grid inI^^"ichiion) v Bridgingn [2013] NZCA 357 citedWhine", ACN003 266 886Po, Ltd (1996) 42 NSWLR123 cited

Date of hearing:

Registry:

Division:

National Practice Area:

Sub"area:

Category:

Number of paragraphs:

Counsel forthe Plaintiffs:

17 May 2016

Western Australia

General Division

Solicitor for the Plaintiffs:

Commercial and Corporations

Corporations and Corporation Insolvency

Catchwords

160

Ms K Banks-Smith

Norton Rose Fulbright

INTHEMATTEROFFORGEGROUPLIMITED(RECEIVERSANDMANAGERSAPPOINTED)(INLIQ)ACN065464226

ORDERS

JUDGE:

DATE OFORDER:

LANGDONAND MENTHA, INTHEiRCAFACiTiES AsRECEIVERSANDMANAGlERSOFFORGEGROUP

LIMITED(RECEIVERSANDMANAGERSAPPOINTED)(INLIQ)(ACN 065 464 226)Plaintiffs

THECOURTORDERSANDDIRECTSTHAT:

(Words and expressionsin these Orders have the same meaning as used in the Reasonsfor Judgment).

(1) Forthepurposes of section 433 of the Cowordtions, 4ci2001 (Cth) and generally:

(a) neither the Refund, nor the rightto claim the Refund, was or is property in the

hands of the plaintiffs in their capacities as receivers and managers of Forge as

at the date of their appointment (being 11 February 2014);

(b) the security interest held by ANZ as Security Trustee PUTSuantto the GSA in

respect of the Refund is not a circulating security interest; and

(0) the plaintiffs are not required to apply the Refund to satisfy priority employee

entitlements in priority to any claims for principal or interest in respect of the

GSA.

(2) The costs of and incidental to this application are an expense properly incurred by the

plaintiffs in the receivership of Forge and are to be paid from the secured assets of

Forge

GILMOl. IRJ

3JANUARY2017

WAD 6420f2015

Note: Entry of orders is dealt with in Rule 39.32 of the Federal CourtRules 2011.

GILMOURJ:

The plaintiffs, as receivers of Forge Group Limited (Forge) (Receivers) seek directions from

this Court, PUTSuant to s 424 of the Coworc!!ions ACi 2001 (Cth) (Corporations Act) as to

whether monies received from the Australian Tax Office (ATO) by way of a refund (Refund)

as a result of the Receivers' application to the ATO are monies which must be paid to satisfy

preferential employee entitlements PUTSuant to s 433 of the Cowor"noris Act or whether they

are to be paid to ANZ Fiduciary Services PtyLtd (ANZ) as Security Trustee

The Receivers have invited the Australian Government Department of Employment

(Department) as the governmental representative of the other principal party with an interest

in the subject matter of this application to act as a contradictor and the Department has agreed

to do so.

REASONSFORJUDGMENT

2

3 Hammersley Iron Pty Ltd was granted leave, as intervenor, to be heard in this proceeding, in

circumstances where there are proceedings pending between it and Forge and other

companies in the Forge Group, in the Supreme Couit of Western Australia, where there is

arguably some overlap as to issues in those proceedings and this proceeding,

The Receivers were appointed under a power contained in an instrument, a General Security

Agreement dated 2 July 2013 (GSA), Accordingly*the statutory elements ofs 424 are met.

The parties accept, correctly in my view, that this application is an appropriate matter for

directions to be given by the Court under s 424.

In the present circumstances if the receivers dealt with the Refund incorrectly it could be

alleged they acted in breach of the Colipor"ttons Act or in breach of trust: Cook v Imjinno

Family Fruit Coinp"ny Ply, Lid fin Liquidation) (2010) 276 ALR 349 at 1801. The use of

directions to protect receivers from such claims is a proper basis formvoking s 424: KOIda v

Silkchime P^, Ltd (Rarer^, ars and Managers Appointed) (2010) 243 FLR 269 at 13/1, The

matters, the subject of this application, involve legal questions of some complexity which

affectthe performance and exercise of the functions of the Receivers.

The directions sought are now confined to two questions:

(a) whatis the date for fixing the assetsthe subject ofs 433; and

4

5

6

7

(b) whether the Refund or associated chose in action is a circulating asset within the

meaning ofs SIC of the Corporations Act?

The Receivers contend that the relevant date is the date of appointment of the Receivers and

that the Refund is not a circulating asset, which therefore is not caught by the reach of s 433

and is an asset available to ANZ as secured creditor.

8

9

The evidence

The application is supported by the affidavit of Scott Langdon, one of the Receivers, sworn

on 2 November 2015 and the affidavit of Robert Black, one of the solicitors for the

Receivers, sworn on 20 April2016

Background

The following background, which is not contentious, was drawn substantially from the

plaintiffs written submissions.

The Administrators were appointed to Forge on 11 February 2014 by ANZ under powers in

the GSA.

Liquidators were appointed to Forge on 18 March 2014 at a meeting convened unders 439A

of the Corporations Her. The Administrators became the Liquidators.

Forge is one of a number of companies referred to collectively as the Forge Group. The

Administrators, Receivers and Liquidators were appointed to each company in the Forge

Group in the same manner and on the same dates as with Forge.

The Forge Group is an Australian income tax consolidated group forthe purpose of Part 3-90

of the Income Tq, :, 48sessme}It Act 1997 (Cth) (ITAA97). Forge is the head company of that

group. In that capacity, it became liable for the tax of Forge Group and lodged assessments

of the group's taxable income.

Entities within the Forge Group were contracted to perform a range of civil procurement,

design and construction works for major projects in Western Australia, particularly in the

Pilbara. Those entities entered into long term contracts to perfonn such manor works

(Contracts).

A number of those Contracts were tenninated by the other parties after the appointment of the

Receivers and the Administrators. Accordingly, the ATO accepted that it could not expect

- 2 -

10

11

12

13

14

15

16

the Forge Group to perfomi its obligations under any of the Contracts and the estimated

amounts brought to tax were now capable of being ascertained as actual profits and losses

and it was appropriate to apply section 170(9) of the Income Tdx Assessment Act 1936 (Cth)

(ITAA36)to amend the 2012 Assessment and 2013 Assessment.

17 Section 170(9) of the ITAA36 specifically applies to the tax treatment of long-tenn contracts.

That provision provides that:

Notwithstanding anything contained in this section, when the assessment of thetaxable income of any year includes an estimated amount of income, or of profits orgains of a capital nature* derived by the taxpayer in that year from an operation orseries of operations the profit or loss on which was not ascertainable at the end of thatyear owing to the fact that the operation or series of operations extended over morethan one or parts of more than one year, the Commissioner may at any time within 4years after ascertaining the total profit or loss actually derived or arising from theoperation or series of operations, amend the assessment so as to ensure itscompleteness and accuracy on the basis of the profit orloss so ascertained.

As a result of and following the tennination of the Contracts, it became possible to

"tascertainj the total profit or loss actually derived or arising from" those Contracts. The

Receivers instructed PricewaterhouseCoopers (PWC) to review the operation of section

170(9) of the ITAA36 in these circumstances and, ifappropriate, act asthe Forge Group's tax

agentin any objection to the 2012 Assessment and 2013 Assessment.

- 3 -

18

19 Following the PWC review of the position, the Receivers instructed PWC to lodge an

application/objection under s 170(9) of the ITAA36, and that objection was accepted and

resulted in a payment to the Receivers, in that capacity, by the ATO of the Refund, being the

sum of $53,469,010.64. The Refund was paid to Forge in two tranches of $22,690,742.68 and

$30,778,267.96, on 9 and 11 March 2015 respectively.

20 ANZ is owed an amount exceeding $171 million by Forge and is a secured party within the

meaning of the Person"I Properlies Securities AC! 2009 (Cth) (PPSA). There are also

outstanding entitlements due to employees of the Forge Group that comprise priority

payments for the purpose of s 5560) of the CoworQtions Act, as made relevant in this

context by s 433.

21

The Refund: after- acquired property

Untiljust before the hearing the parties had agreed, correctly in my opinion, upon the

following matters. First, the assessment process under s 170(a) of the ITAA36 gives rise to

no more than an expectancy and does not constitute "property" within the definition in s 9 of

the Coiporu!ion Act, Whilstthe Commissioner may amend, no amendment can be assessed

until after such time as the Commissioner is able to "ascertain the total profit or loss actually

derived or arising from the operation or series of operations". Second, a right to a refund

arises upon the exercise by the Commissioner of the power under s 170(9) of the ITAA36.

Once the amended assessment was issued, the Commissioner was obliged to pay a refund

under Part 11B s 8AAZLF(I) of the rumtion Administration A, t 1953 (Cth) (TAA) and

Forge was entitled to enforce that payment. From that time, Forge had a chose in action with

respect to payment. A chose in action is property, Third, accordingly, such chose in action

and the Refund itself are property acquired only after the appointment of the Receivers and

there is no relevant property prior to that date.

BelatedIy the Department*in what appears to be a voltejtice, submitted in oral argument that,

whilst whatit characterised as the inchoate statutory interest in obtaining a tax refund was not

pre-appointment property within the meaning of s 9 of the Coliporttttons Act, nonetheless the

statutory interest was "encompassed by" and therefore "comprised in*' the circulating securityinterest.

22

- 4 -

23 Thus, it contends, that whilst the property arose after the appointment of the Receivers it

nevertheless meets the statutory description of property which was comprised within a

circulating security interest by virtue of the factthatthe statutory interest arose at the time the

parties entered into the GSA.

These oral submissions were somewhat different to the Department's supplementary written

submissions where, for example, at 1281 it submits that the inchoate statutory interest, so

described, "may well be encompassed by the definition of 'property' fin s 9 of the

Coliporatioizs ACil and therefore within the scope ofs 433 lofthat Actl".

Whatever be the correctimport of its submissions, Ido not accept any of them now advanced

by the Department, for reasons which I will explain later in these reasons.

24

25

26

The FFSA reforms

The FFSA and PPS Register took effect from 30 January 2012, The FFSA reforrns followed

refonns in other countries and introduced significant changes to the law of securities. In

particular the refonms tackled the difficulties arising from the distinction between fixed and

floating charges particularly as this related to disputes between secured and preferential

creditors. The refonns created a new regime for security interests in Australia: Lewis &

Templeion 17'4rehoz, se Sates Pty, Ltd (in 12^) v LG Electronics AUSir"lid P^, (2016) 308 FLR

100 t1501.

While pre-PPSA laws focussed on the fonn of security and the sources of law varied

according to such security* the PPSA applies to all"security interests" in personal property,

regardless offonn.

A "security interest" is defined broadly and focuses on function, It is any interest arising

under a transaction that in substance secures payment or perfonnance of an obligation: FFSAs 12.

27

28

29

- 5 -

30

The PPSA introduced a new vocabulary including that of "collateral",

An 'all assets' security granted pre-FFSA by way of a fixed and floating charge is now likely

to be provided by a written "generalsecurity agreement*' which is perfected by registration on

the FFS Register. This is what occurred in this case by the GSA.

The FFSA does not distinguish between fixed and floating security interests and there is no

ongoing relevance for related concepts such as "crystallisation". The concept of floating

charge is not included within the PPSA regime, The term "floating charge"is referred to in

the PPSA only in a limited adjectival, rather than substantive, way, including as a transitional

measure in chapter 9: see PPSA ss 10, 12, 19, 25, 304, 309, 318, 338, 339.

This is not to say that the effect of the PPSA is to abolish the distinction between fixed and

floating damages, including the concept of crystallisation, for all purposes. I do not need to

determine that question.

The Replacement Expl"natoi, J Memorandum, Personal Property Securities Bill2009 (Cth) at

page 11 states that the PPSA "would do away with the equitable concept of crystallisation of

floating charges and interests in after-acquired property which attach on the acquisition of the

property by the grantor".

The ternis of the PPSA reflectthis objective.

Regardless offonn and language, so long as the transaction concerns personal property and,

in substance, secures payment or the performance of an obligation, the FFSA will deem the

charge to constitute a "security interest** and it will be subject to the PPSA: FFSA ss 12(I),

12(2)(a)-(b), A reference to a "floating charge" in a security agreement is deemed a

reference to a "security interest that has attached to a circulating asset**: PPSA s 339(5).

31

32

33

34

35

36 All security interests under the PPSA attach to collateral PUTSuant to s 19(2) as soon as the

grantor has rights in the property. This result does not depend on an event of default or

crystallisation before attachment occurs: Iason Hatris and Nichols Mirzac, Annotated

Per^,"al Property Securities Act 2009 (Cth) (CCH, 2011) 112.5.2.21. A security agreement

may provide for a security interest in after-acquired property and a security interest in such

property attaches without specific appropriation by the grantor. It attaches as soon as the

property is acquired: s 18 and s 19(2). There is no role for 'crystallisation'.

All security interests under the PPSA, are, employing traditional language, "fixed": Wappett,

Whittaker and Edwards, Personal Property Securities in Allstratra (LexisNexis) t1,2450j.

Then, as the learned authors explain, because other legislation and security agreements

continue to refer to "charges", "fixed charges", or "floating charges", the FFSA includes

provisions which explain how these ternis are to be interpreted in the FFSA environment.

Relevantly, it does so in order to preserve the position of particular creditors under the

Coi:Dorations Act: Personal Property Securities ill Alls!r"!ia 14.6.10001

The PPSA does this through Part 9.5. R^reready, ss 339(4) and (5) in Part 9.5 of the FFSA

provide that in a law of the Commonwealth or in a security agreement:

(a) a reference to a fixed charge is taken to be a reference to a security interest that

has attached to personal property that is not a circulating interest; and

(b) a reference to a floating charge is taken to be a reference to a security interest

that has attached to a circulating asset.

Therefore, s 339 FFSA, as stated in Person"/ Property Securities in dustrttli" at 14.6.9001:

... effectiveIy changes the language of security agreements entered into after theregistration commencement time -it provides that a reference to a floating charge is aref^Tence to a security interest that 11as attached to a circulating asset. .. Describing acharge as a floating charge only has the effect of rendering the assets subject to itcirculating assets, and thus making the charge a "circulating security interest" inrespect of those assets forthe purpose of the Corporations Act

Relevantly to this proceeding, ss 433(2) and (3) of the Coworotions Act refer to a receiver

paying, relevantly, priority employees out of property comprised in or subject to a

"circulating security interest', Section SIA of the Coliporctions Her defines "security

interest" to include a "PPSA security interest", Section 5 IC of the Corporations Act defines

a "circulating security interest" by reference to a PPSA security interest which has attached to

a circulating asset within the meaning of s 340 of the FFSA or a floating charge. To that

37

- 6 -

38

39

40

extent, the notion of a general law floating charge appears to survive although the PPSA

security interest regime overrides the general law consequence of crystallisation: Ford, Austin

& RuinsQy's Principles of Coworqtions Law (LexisNexis) t19.190.31.

I have considered the written submissions lodged by Hammersley, It is unnecessary to

traverse these in detail. It is sufficientthat I express my acceptance of its submission that it is

not necessary, in this proceeding, to detennine any issues which it has raised in the Supreme

Court proceedings. I acceptthat it remains an open question whether or not the PPSA has

abolished the distinction between fixed and floating changes for all purposes.

41

42

The CSA

By the GSA, Forge granted a security interest over allits "Collateral" to ANZ. I will

consider its tenns below, but relevantly for s 433, it is said, at clause 3.1(2)(b) of the GSA, to

operate as a floating charge over "Revolving Assets" but as a fixed charge over all other

Collateral. Collateral is defined broadly in the GSA at clause 1.10).

Section 433 - priority creditors

The parties both submit, correctly in my opinion, that the relevant provision for present

purposes is s 433 of the Co}:Dorqtions Act. Where receivership commences after the

appointment of administrators but before a resolution is passed to wind up the company,

s 433 applies and continues to operate post liquidation, although s 561 comes into operation

upon liquidation: Re Great Southern Lid, . E^parr^ Tha, hay 120121 WASC 59; Re CMl

Indus!"imply^ Ltd fin by) (2015) 105 ACSR 635.

Importantly, it is by reference to the PPSA and s 433 that the operation of the GSA, set within

the particular factual context, is to be considered. The use of terms such as "fixed" and

"floating" charges does not avoid the operation of the PPSA.

Section 433 relevantly provides:

433(2) This section applies where:

(a) a receiver is appointed on behalf of the holders of any debentures of acompany or registered body that are secured by a circulating security interest,or possession is taken or controlis assumed, by or on behalfofthe holders ofany debentures of a company or registered body, of any property comprised inor subject to a circulating security interest; and

(b) at the date of the appointment or of the taking of possession or assumptioncontrol.

- 7 -

43

44

45

. 8 .

(i) the company orregistered body has not commenced to be wound upvoluntarily; and

(ii) the company orregistered body has not been ordered to be woundupby the Court.

433(3) filthe case of a company, the receiver or other person taking possession orassuming control of property of the company must pay, out of the propertycoming into his, her or its hands*the following debts or amounts in priority toany claim for principal or interest mrespect of the debentures:

next* any debt or amountthat in a winding up is payable in priority to otherunsecured debts parsuantto paragraph 556(I)(e), (g) or 00 ...'

The section first sets out, in sub-section (2), the circumstances in which the provision applies.

It is common ground that at the date of the Receivers' appointment, the winding up of Forge

had not commenced and therefore sub-section (2)(b)is applicable.

Sub-section (3) then prescribes the obligations that are imposed when those circumstances

exist. The receiver, or the person assuming control(Controller), must pay certain stipulated

statutorily preferred creditors "out of the property coming in10 hz^, her or its hands"

The authorities concerning s 433(3) have limited the property subject to the obligation under

this provision by reference to the purpose and policy of the provision. See eg: MOBvoy v

Inca/ fusingni" Pty Ltd (2003) 130 FCR 503 at t241 and Stitchime

Le Miere I in Silkc/lime at 1461 described the policy of the statutory provision as being one

"to protectthe position of preferential creditors by giving preferential claims priority over the

claims of floating chargees who would otherwise have "scooped the pool" of the chargor's

assets .

46

(c)

47

48

49

50 Such a limitation of the assets covered was earlier deterrnined by Bryson I in minion v ACN

003 266 886 P!y Ltd (1996) 42 NSWLR 123 where his Honour at 1135-1361 concluded that

notwithstanding the literal meaning of the provision, it"applies. .. only to property subject to a

floating charge",

Since the introduction of the FFSA, the sub-section is similarly limited to those assets

covered by the "circulating security interest" as defined in ss SIA and SIC of the

Cow01ationsAC!.

Section 340 of the PPSA deals with circulating assets and states in part:

(1) For the purposes of this Act, ifa grantor grants a security interest in personalproperty to a secured party, the personal property is a circulating assetif:

51

52

(a)

(b)

the personal property is covered by subsection (5) (unless subsection(2) or (3) applies); or

in any other case--the secured party has given the grantor express orimplied authority for any transfer of the personal property to bemade, in the ordinary course of the grantor's business, free of thesecurity interest

(5) This subsection coversthe following personal property

(a) an accountthat arises from granting a right, or providing services, inthe ordinary course of a business of granting rights or providingservices of that kind (whether or notthe account debtor is the personto whom the rightis granted or the services are provided);

(b) an accountthatistheproceedsofitivenlory;

(c) an ADlaccount(other than a termdeposit);

- 9 -

(d) currency;

(e) inventory;

(f) anegotiableinstrument

Example: All example of an account mentioned in paragraph (a) is an account thatis a credit card receivable

53 Relevantly, forthe purpose of this proceeding, a circulating asset means either:

(a)

(b)

54

property that comes within s 340(5) of the PPSA; or

property which the secured party (ANZ) gave the grantor (Forge) express or

implied authority to transfer in the ordinary course of the chargor's business,

free of the security interest.

Thus, any statutory obligations under s 433 relevantly would arise where:

(a) a receiver is appointed under an instrument PUTSuantto which a loan is secured

by a circulating security interest; and

any "property" comes into the receiver's hands and such property is covered by

s 340(5) of the PPSA or is property which the lender has authorised the

borrower (expressly or impliedIy) to deal with, in the ordinary course of the

borrowers business, free of the security.

(b)

55 The obligation on the receiver or Controller is a continuing one, The operation of s 433(2),

111<e the provisions that foreran it, continues notwithstanding the subsequent winding up of the

company and notwithstanding that the receiver may have paid in fullthe indebtedness to the

~10-

appointing secured creditor: see the discussion of one forerunning provision, s 331(2) of the

Companies (Victoria) Code, in General Credits Ltd v Chemineer Nominees FD? Ltd (1986) 4

ALCL 570, 574-575.

Whatisthe date for fixing assets caught by s 433?

The first question concerns the date for fixing the assets which are the subject of the statutory

entitlement in favour of the priority creditors.

Does "property" as broadly defined in s 9 of the Colipordiions del mean that even future

property, the subject of a floating charge, which does not exist at the time of the appointment,

is caught by the operation ofs 433?

This question was considered by Multins I in CMll?loft!strial. Post receivership, the receivers

traded on and made "Inventory trading profit", The floating charge became fixed upon the

appointment of the receivers: CM/Industrial* 644 13/1-t321.

The floating charge was a ''Circulating security interest" as defined in s SIC(b) of the

Coliporqtions Act (CM/ Industrial, 638 171) and so the question arose, relevantly, as to

whether the inventory trading profit was to be applied by way of s 433 to preferential

creditors.

56

57

58

59

60 The Court noted that whilst case law to date had made it relatively clear that (relevantly) an

employee's entitlement to priority was fixed as at the date of appointment of the Receivers,

the issue of the date for fixing the property under the floating charge which might be

available to preferential creditors remained undecided: CMl/ridz!stria1 638-639 1/21; 640

I171).

The liquidator asserted that the priority position extends to property acquired post-

crystallisation of a floating charge, "irrespective of whether it belonged to the company, or

was even in existence, at the time of appointment [of the receiver]": CMl/ridt, stria/, 644

t341). However, the secured creditor contended successfully that the property, for the

purpose of s 433, was only property coming into the hands of the receiver at the date of

uppointingnt, even ifcollected overtime: CM//ridusiria/, 645 1401.

Mullins I stated:

61

62

1451 Section 433 of the Actis a remedial provision that favours the specified prioritycreditors giving them a statutory entitlement to be paid from assets that would haveotherwise not been available, because those assets would have become the subject of

1461 The scheme of the priority, in the case of a receivership* revolves around thedate of the appointment of the receivers and operates in respect of the assets that areidentified on the basis that they would have been the subject of the floating charge, ascreated, had the charge not crystallised on that date. This is supported by the dicta inSteinberg at 89-90 and 96-97 and Clientineer at 574-5

1471 The scheme under s 433 of the Act does not extend to conferring any statutoryentitlement to the priority creditors in respect of the trading profit made by thereceivers conducting the business of the company after the date of theirappointment.

Accordingly, applying CM/Indwstrial, "property'*the subject of a floating charge, which may

have been future property at the time the floating charge was granted, must exist and be

identifiable as at the date of the receivers' appointment to be caught by the operation ofs 433,

a fixed charge, when the floating charge crystallised on the appointment of thereceivers

63

64 Nonetheless, the Department submits that this limitation on the scope of s 433 identified in

CMll}Idtistria/ ought not to be adopted in this instance. Indeed it submits that the decision in

CM//ridt!strialis plainly wrong and that Ishould not follow it.

65

66

It makes a number of submissions in this respect.

First, the Department submits that neither the wording of the section nor its evident purpose

supports or mandates such a restriction. It submits that the tenns of the section do not

suggest a temporal limitation of that kind. Rather, if the floating charge or circulating

security interest expressly encompasses future property, the plain meaning of the provision is

that it comes within the scope of the priority when it"comes into the hands" of the receiver.

Thus, the Departments contends, it is not necessary to impose an unexpressed temporal

limitation on the section in order to identify the property which is subject to the priority- it is

readily identifiable from the security interest or charge.

67 The Department submits that there should be a "snapshot" taken of the assets of the

Company, first* either just prior to the commencement of the receivership, or, second, as at

the date of creation of the GSA. I acceptthe first proposition but notthe second.

68 It contends that this snapshot serves to identify "the character" of the property which is

"comprised in or subject to a circulating security interest": s 433(2) of the Corporations Act

butthatthe snapshot does not otherwise confine the obligation of the receiver. It submits that

the obligation upon the receiver under s 433(3) is to pay "out of the property tthat is property

with the character determined by the snapshotl coming into the receivers hands" priority

debts. Thus, it submits that, for the purposes of s 433(3), it does not matter that the property

comes into existence after the receiver's appointment. Rather, it contends, whatis required is

that it meets the "character" of the property set by subsection (2). Relevantly, it says, this

means that it is property that can be transferred in the ordinary course of the grantor's

business: PPSA s 340(I)(b).

I do not accept this analysis or the submissions which flow from it. It is an unacceptable

gloss upon s 433, and is contrary to the decision in CM/Industrial and other cases there cited.

The Department further submits as to policy that the object of the provision is to prevent the

debenture holder from taking assets that would otherwise have been available to the company

to conductits business in the ordinary course but which are scooped up by the charge when

financial problems cause an event of default to occur. It submits that policy is no less

applicable in respect of assets covered by the GSA that first come into the Receivers' hands

after the appointment. Indeed, it contends that the Refund represents tax funds that, in

retrospect, ought never to have been paid and would have represented cash in the hands of

Forge. It then POSits a hypothetical circumstance that the Refund had been paid the day

before the Receivers were appointed, and then submits that in that circumstance these issues

would not have arisen and that cash would have been available to the employees.

As to the assertion of retrospectivity, the Department amplified this in later written

submissions.

It submits that the legislative regime which governs the Refund and the manner in which the

Refund was in fact dealt with by the Commissioner reflects precisely that position.

It describes that legislative regime in the following way. Under s 172 of the ITAA36, the

Commissioner was obliged to apply the amount of any tax overpaid (ultimately the amount

which became the Refund) in accordance with Divisions 3 and 3A of Part 11B of the TAA.

These divisions of the TAA provide for the establishment of a running balance account

between the taxpayer and the ATO. Section 8AAZL(I)(b) of the TAA provides that Division

3 of Part 11B deals with credits that an entity is entitled to under a taxation law. It also

provides for running balance account (RBA) rules, Fursuant to that division, the

Commissioner must first apply overpayments against either the RBA debts (s 8AAZLA) or

non-RBA debts (s 8AAZLB). The excess (called an excess non-RBA credit)1sthen refunded

under section 8AAZLF. Section 8AAZLH sets outhow the refund 1sto be made

69

70

71

72

73

.

74 The Department asserts that a copy of Forge's I^. BA is contained with the amended

assessments and that Forge's running account balances disclose that the Commissioner treated

the Refund as being money in the hands of Forge from a date before the appointment of the

Receivers (identified in the RBA as the "effective date"). It is, the Department submits, in

that way, retrospective. Thus, it submits, the Commissioner's conferral on Forge of the

benefits of the Refund from the various "effective dates" gives the Refund a retrospective

nature. It further contends that the retrospective nature of the Refund is given further force

by the tenns ofs 172(I) of the ITAA36 which provides that an overpayment 1staken never to

have been payable forthe purposes of the general and shortfallinterest charges

Second, the Department submits that there is no warrant to add a temporal limitation when

the statute necessarily provides a temporal limitation of a different kind. Namely that, the

scope ofs 433 is limited to property that is subject to a circulating security interest at the time

it comes into the hands of the receiver, This, it contends, is the plain meaning of the section.

Third the Department submits that, in any event, CM/ Industrial is distinguishable on the

facts.

75

76

77 It submits that* unlike the position in CMl/ridz!styiol, the Receivers here did not trade or

make any profit. Rather, they merely recovered from the ATO tax overpayments. It

contends that the tax overpayments giving rise to the Refund were made from circulating

assets of Forge (cash), and in part, are attributable to an income tax year earlier than the date

of ANZ's security interest.

It submits that the wording of CA, s 433 "out of the property coming into his, her or its

hands", gives rise to two relevant considerations:

(a) the word "coining"in its ordinary meaning sits most uncomfortably with the

temporal limitation contended for by the Receivers. The expression is not"that

came" or "that has come" or even "that comes". The notion of "coming"

suggests a continuing notion that would apply to property that comes into the

receiver's hands at some later point;

(b) the use of the word "coming" also connotes a sense of passivity. The statute

does not define the property the subject of the obligation by reference to the

property over which controlis assumed at the time such as "property to which

the receiver is appointed*'. Rather the expression in its natural meaning includes

78

.

,

property which simply "comes into the hands" of the receiver. Such a

connotation mightindeed be a further reason to distinguish CM/ Inof 11strin/ on

the basis of the statutory language. In CM/Industrial the money did not simply

"come" into the receiver's hands; it was actively pursued and created by the

receiver's trading efforts.

79 I will deal with these firstthree submissions together, The words "coining into his, her, or its

hands" were expressly considered in CMl/ridt, sing/ by Mallins J who at 1501 stated:

To the extent that it is argued that the use of the expression "out of the propertycoming into his, Iler or its hands" in s 433(3) suggests assets received after the date ofappointment of the receivers, those words need to be construed in the context ofwhen s 433 applies, as expressly set out in s 433(2)(a). The property "coming into"the hands of the receiver must be property that falls within the desi, nation in s433(2)(a). That property is identified by the operation of s 433(2)(a) which operatesat the date of the appointment of the receivers. The statutory entitlement cannot applyunless the identified property comes into the hands of the receiver: Silkc/lime at 1581,t601 and t611.

Irespectfully agree with her Honour's conclusion. They are consistent with conclusions in

like cases considered at length by her Honour. The decision of the New Zealand Court of

Appeal in Strcztegtc Finance Ltd (in receivership and in liquidation) v Byidgmon 120131

NZCA 357 at 1861involving a similar PPSA priority regime is to like effect.

- 14-

80

81 Were it otherwise a floating charge would, in effect, float indefinitely even after the

appointment of Receivers. This would be to ignore the agreement between the secured party

and the grantor that assets, subject to a floating charge, could be dealt with only in the

ordinary course of business. The secured party would be denied recourse to assets which

upon the appointment of a Receiver were subject to a fixed charge. Nor is there any policy

conflict. Where there are assets the subject of a floating charge at the time the grantor was

carrying on the ordinary course of businessthese cannot be "scooped up", However upon the

appointment of receivers, there is no longer a floating charge. The Refund is captured by the

fixed charge.

82 As to the Refund, I do not acceptthe submission that the tax funds "ought never to have been

paid". They were paid by Forge in meeting its then statutory obligations and whilstit was

carrying on its business. The Refund, on the facts of this case, was the product of Forge's

insolvency and was made after the Contracts were terniinated. As I explained earlier the

Refund would not, indeed could not, have come into existence in the ordinary course of

Forge's business. The Contracts would have remained on foot. Forge would have continued

to receive payment under the Contracts and incurred tax liabilities, as contemplated in the

original 20/2/2013 Assessments. It is not to the point that a tax refund may have been

available to Forge in the ordinary course of business. That is notthis case.

83 As to the Department's contentions concerning retrospectivity, the "Effective Date" is no

more than a date for calculation of the general interest charge as is set out under the

"explanation of terms" section on the back of the statement of account, for example in the

affidavit of Scott Langdon sworn 2 November 2015, which states at page 588 that the

"Effective Date"is:

84 Forge had no property until after the issuing of the amended assessment notices, the

allocating of the credit to an RBA and the application of the credit to particular primary tax

debts or general interest charges within the RBA: see Commissioner of Taxq!ion v 4 Doon"n

Street Coffinsvt/!e PlyLid (lit Liquidation) (2016) 332 ALR 349 at 1521 and at 1751, where the

New South Wales Court of Appealstated:

the date we use for the calculation of general interest charge and other penalties or

interest. It is also the due date of any liabilities.

Prior to tlie Commissioner issuing the amended notice of assessment on 14 May2013, the Company had no entitlement to claim payment of the sum identified in itsamended return for the year ended 30 June 2010. After the amended notice ofassessment was issued, provided the Commissioner had not had any occasion to actin accordance with PtllB of the TAA, the Company would have had administrativelaw remedies available to it to enforce its entitlement to payinent, ... But in this casethe Commissioner exercised his powers and performed his duties under PtlLB priorto 14 May 2013 so that on that date the only amount due to the Company wasthat infact refunded to it.

And at 1761:

It is true that the Company had a statutory right (which it had exercised) to apply toamend its assessment, and it had other aministrative law rights in the eventthattheCommissioner failed to accede to its application, or even took too long to do soHowever, the Company had no right to recover any money untilsuch time as theCommissioner had completed the process mandated by Pt 11B of allocating andapplying the amount in credit, ,,,

Later at 1771 the Court of Appeal concluded that the allocation and application process, "did

not affect any property of the Company. '* Accordingly, the "conferral of benefits", referred

to by the Department, neither used nor affected any of Forge's "property'*.

85

86 I do not regard the factual differences between this case and CMl/rid"strial as material. The

Receivers did not merely recover tax overpayments from the ATO. It was the product of the

application which occurred only by reason of Forge no longer carrying out its business and

upon the torrnination of the Contracts.

87 That the Receivers did nottrade or make any profit supports the Receivers' submission that

there was no ordinary course of business following the appointrnent of the Receivers and

liquidators. This is the vital point.

88 So far as concerns the expression "out of the property coming into his, her or its hands" in

s433 the Department's contentions are misconceived. The meaning of this phrase, in my

opinion, is as explained in CM//ridz{sinc!I and particularly in the passage at 1501 which I set

out earlier,

89

- 16-

Fourth, the Department submits that even if a temporal limitation on the scope of the

obligation under s 433(3) could be distilled in the circumstances considered in CMl

Industrial, such a limitation can no longer apply under a security Instrument that is crafted to

accommodate the regime that now prevails under the PPSA (such as the GSA itself), because

the PPSA abolishes the distinction between a fixed charge and a floating charge and it directs

attention solely to the nature of the property secured, not the nature of the security. It

contends that prior to the introduction of the PPSA a temporal element may have been

significant as there was a pointin time at which the nature of the security changed by virtue

of the crystallisation of the charge, as this was the very nature and function of a floating

charge, It contends that under the FFSA, the focus is on the nature of the property secured

and, in particular, whether it is a circulating asset and that no temporal element arises under

the currentregime.

90 Whilst, in telTns, there is no crystallisation under the PPSA, the incident of a floating charge

pemiitting disposal of identified assets in the ordinary course of business remains under the

FFSA regime. The important question is as to when the ordinary course of business ceased

thereby rendering the grantor unable to deal with the secured assets. As I have sought to

explain earlier, an asset is only circulating within the meaning of s 340 when it circulates in

the ordinary course of business as peruiitted by the secured party.

91 Fifth, the Department submits that even to the extentthatthe nature of a floating charge may

still continue to be relevant, the definition of 'floating charge' in s 9 refers to 'a charge that

conferred a floating security at the time of its creation' which directs attention to the nature of

the charge at the time of its creation rather than at the time the receiver is appointed. It relies

for this proposition upon Re SinouhciF"brics P!yLimited dn Liq) (2012) 92 ACSR 542, 552

1331~t341 per Blank I.

The definition of floating charge means, in effect, that an asset that was subject to a floating

charge is still available to priority creditors where the floating charge fixes upon it prior to the

appointment of a receiver or liquidator, fithen becomes fixed at the time of appointment.

To the extent that Sinoz, hu Fqbrics at 1331-t341 may characterise a floating charge which,

upon the appointment of administration or receivers, remained in effect a floating charge, I

would not follow it. I do not regard the definition of "floating charge" in s 9 of the

Coinor"noris itat as having that effect.

Section 433 of the COLDor, !tions Act has a long and interesting history going back to

companies' legislation in Western Australia and New South Wales. It was the subject of

historical review by Finklestein J in MeEvoy at 181-t161 which was, in turn* referred to with

apparent approval by MultinsI in CMUnd"stint at 639 1/31.

Sections 196 and 292(4) of the CoinpQnies ACi 1961 (WA) were in the same (or similar)

tenns as those sections in the Coinpcinies Act 1961 (NSW) (both having adopted the UK

provisions referred to in In re Gridin Hotel Co Ltd 1194/1 I Ch 129) until shortly after the

judgment in Skin , Saywe!/(1969) 121 CLR 529 was handed down.

818in concluded that s 292 of the CoinpQnies Act 1961 (NSW) did not confer priority to debts

within s 292(I)(d) overthe claims of debenture holders under a floating charge which became

specific after the presentation by a creditor of a winding-up petition but before the making of

a winding-up order.

Both Western Australia and New South Wales amended their respective Companies Acts

which included provisions to reverse the effect of the judgment in Siein.

Section 196(2) was amended to read:

For the purposes of this section:

(a) "floating charge*' includes a floating charge within the meaning of section

t2921; and

(b) The periods of time mentioned in section 12921 shall be reckoned from the date

of the appointment of the receiver or of possession being taken, as the case may

be.

92

93

94

- 17 -

95

96

97

98

Section 292 was amended to insert the definition of "floating charge'* to the same effect as is

now set outin s 9 of the Golpor"!ionsrlct,

99 These amendments were effected in New South Wales by the Companies 44mendment) Act

1971 (NSW), and in Western Australia, the Companies Act, 4mendmentrlc! 1973 (WA).

100 The second reading speech for the Companies dimendmen!) Bill 1971 (NSW) in the

Legislative Assembly on 9 September 1971 stated, relevantly, as follows (at p 936):

The remaining amendments made to section 292 are designed to reverse thejudgment of the High Court in Stein v Saywe/! which held that the provisions aspresently drafted deprive employees of the preferential rights in a winding up whichit was always intended to confer upon them, ... The amended section also providesfor preferential claims in respect of wages and pay in lieu of leave to have priorityover a floating charge, whether or not the charge crystalIized and became a fixedcharge before the relevant date.

And in the Legislative Council on 29 September 1971 (at p 1590):

-18.

101

The Government has followed with the greatest concern the litigation CUIminatirig ina judgment of the High Court, which revealed that section 292, was defective inseveral important respects, depriving employees of a company which is wound up ofthe preference in respect of salaries, wages and leave which are their richtful due.Under the amendments made to the section preferential debts will have their prioritydetermined at the date of the winding up order

The amended section will provide also that preferential claims in respect of wagesand pay in lieu of leave have priority over floating charges, including floatititrcharges which have crystalIized at the date of the winding up order. Under theexisting law, the crystallization of a floating charge immediately before the windingup order would defeat employees' preferences over claims undert!Ie charge. "

The second reading speech of the Companies AC! Amendment Bill(WA) in the Legislative

Assembly on 21 September 1972 (at p 3534) and in the Legislative Council on 12 September

1973 (at p 3 135) relevantly stated as follows:

102

A further amendment is proposed to the section to ensure that wages and salariesearned between the date of the presentation of the petition for a winding-up and thedate of the making of the winding-up order are entitled to priority to the same extentas wages and salary earned preceding the presentation of the petition to wind up acompany. The expression "floating charge'*is defined and tile effect of that definitionis that the priority extended to wages and salaries overthe holder of a floating chargeis not defeated by the crystallisation of the floating charge on a date prior to thecollunencement of the winding-LIP.

The same definition of "floating charge*' has existed in the various iterations of companies

legislation in force in Western Australia since 1974 and nationally, first by s 9 of the

103

corporations law established under the Co}polotions Act 1989 (Cth) and then by s 9 of the

ColipordtionsACi

104 The definition in s 9 of the Coliporations Act protects the position of priority creditors where

a security interest which is "floating" becomes "fixed", before but not upon or 4/18r the

appointment of a receiver and/or liquidator.

105 Sixth, the Department submits that the fact that a floating charge can extend to future

property for the purpose of s 433 is consistent with the definition of 'property' in s 9, which

defines property to mean:

.19.

106

any legal or equitable estate or interest(whether present or future and whether vestedor contingent) in real or personal property of any description and includes a thing inaction. .,

It contends that a floating charge continues to attach to assets acquired after crystallisation:

"Itlhe crystallised charge continues to cover present and future assets held oracquired by the chargor during the course of the receivership. Even in the case ofwinding up, the crystalrised charge should in principle also extend to assetsacquired during the course of the winding up through the exercise of the limitedtrading powers of the liquidator or otherwise, ": W I Gough, Company Charges(2"' ed) Butterworths at 123. (emphasis added)

I have assumed the Department's submission as to "future property" means property acquired

after the Receivers' appointment. Gough, in the passage quoted, is concerned with a charge

that has crystallised and become specific, Then, as a fixed charge or "crystallised charge" it

catches assets acquired post appointment because the charge expressly extends to after

acquired property. Following crystallisation, the charge continues to extend to present as

well as future property and attaches as a fixed charge to then future assets from the time of

crystallisation. Gongh goes on to explain that ".,, any suggestion that a charge crystallises

only as to present assets but remains floating as to future assets cannot be sustained.

Crystallisation terminates the business dealing licence of the chargor, which would be

necessary for continuance of the charge in any floating phase": Coinp"11y Charges at 125.

107

108 Seventh, the Department submits that the fact that the priority creditor provisions extend to

property acquired post-crystallisation of a floating charge is consistent with the approach

taken in I. R. C V Goldbltttt 11972j Ch 498 in respect of analogous employee entitlement

provisionsin the United Kingdom.

109 In Goldb/aji, on 6 April, 1961, a debenture holder appointed a receiver to be receiver and

manager of the company but subsequently revoked the appointment. The receiver, at the

- 20 -

request of, and having obtained an indemnity from the debenture holder, transferred the sum

of;86,134 16s 3d and other assets which he had collected to the company.

Thereafter, the company, the debenture holder and two directors acting as sureties entered

into an agreement whereby they assigned goods, certain leasehold properties in BeXIeyheath,

Kent and the sum of ^6,134 16s 3d to the debenture holder in full satisfaction of the claims

under the debentures.

The preferential creditor commenced proceedings against the receiver and debenture holder

for breach of statutory duty under section 94(I) of the Companies Act 1948 (the analogue ofs

433)

The receiver and debenture holder submitted that the section did not apply as against the

debenture holder to the sum of;66,134 16s 3d because it became an asset of the company after

crystallisation of the floating charge. The Department pointed in this context to the following

passage from GoffJ'sjudgment in Goldblatt at 507:

in my judgment, however, whilstthe section only becomes operative when a receiveris appointed, or possession is taken, the ambit of the section has to be ascertainedwhen the debenture is created

I do not regard this passage as an acceptance by his Honour that the asset of the company,

being monies due to it in the sum of ;E6134 16s 3d, came into existence after the floating

charge crystallised. Indeed his Honour, at 506, described the monies due as part of the assets

of the company prior to the appointment of the Receiver. They were thus caught by s 94(I).

This fact distinguishes that case from the present one' Mullins J in CM//ridz{stria{ considered

Goldb/oil at t161, 1421, and 1481, and correctly concluded that it was not relevant to the

controversy under consideration. Nor does it assist the resolution of this case.

I have, for these reasons rejected the Department's submissions. CM/ Inof I'Striq/, in my

opinion, was correctly decided and I will apply it in this case. It is the date of the appointment

of the Receivers which is relevant in applying provisions ofs 433.

Neither the chose in action northe Refund existed at the time of any floating charge or when

there were circulating assets. They were not property in the hands of the Receivers upon

their appointment and are not caught by s 433.

It is not, by reason of this conclusion, strictly necessary to consider whether the chose in

action or the Refund could have comprised a circulating asset. Senior counsel for the

110

I I I

1/2

1/3

1/4

1/5

1/6

Department conceded, in argument, subject to one matter concerning the Refund which I

have resolved against the Department, that for his client to succeed would require me to

conclude that the decision in CM/Industridlwas clearly wrong. I have riotso concluded. To

the contrary, as I have said already, I consider it to be correct and I have followed it in this

case. Nonetheless, jest I should be wrong in my conclusion, I will consider the Department's

further submissions.

117

Were the Chose in action and Refund circulating assets?

There is ito controversy that future-acquired property came within the scope of the security

interest created by the GSA. The issue, as articulated by the Department, is whether, at the

time the property came into the hands of the Receivers, it was a circulating asset even though

this was at a time 4/1er the appointment of the Receivers. Relevantly, the Department

identifies the question as to whether for the purposes of s 340(I)(b) of the FFSA, ANZ gave

Forge express or implied authority for the transfer of the Refund to be made in the ordinary

course of Forge's business free of ANZ's security interest, This, the Department submits, is

purely a matter of statutory construction.

It is convenient to set out at length the Department's submissions concerning s 340(I)(b)

PPSA as follows:

-21-

1/8

(1) Clauses 4.1 and 4.2 are the applicable provisions of the GSA. They provide:

4.1 Res""icieddea/ings

The Grantor must noido, or figree to do, tiny of tilefollowing unless irispennitted todo so by clawse 4.2 or another provision !71 a Find"ce Doer, men!

(1) create or allow another Interest in Colla!a'alincluding any SecurityIntorest, ' or

(2) dispose, orpcirt with possession, of any Collateral

(2) The definition of 'Finance Document'is contained in clause 1,102) of the GSA and

extends to includethe Common Tomus Deed. The Common Tenris Deed is, therefore,

a relevant document in determining the extent of ANZ's express or implied authority

to Forge to deal with its entitlement to the Refund.

(3) The Common Ternis Deed, by clause 5.9, imposes obligations on Forge to pay taxes

and outgoings.

(4) Clause 5.10 of the Common Terrns Deed requires anthe members of the Forge group

to be part of a Tax Consolidated Group and be parties to the Tax Sharing Agreement

and the Tax Funding Agreement. Clause 5,100) restricts changes from being made

to those agreements in any material respect without prior written consent.

The Tax Sharing and Funding Agreement dated 18 June 2007 provides by clause 3.2:

3.2 Rqfimds

(1) Wirere the Head Company I'S issued with an amended assessmenireducing its income tax 11/1bi!to, <1ny r4i!rid must be disiribiited to theContribwttng Member w/!o38 toxcib/e income was reduced edusing lire issueoff/re amended CSSessmen!

The ternis of clause 5.10(3) of the Common Tenris Deed* when read with the Tax

Sharing and Funding Agreement dated 18 June 2007, amount to at least an implied

peruiission by ANZ for Forge to perform the Tax Sharing and Funding Agreement,

That porniission includes transferring refunds received from the ATO for income tax

liability thus falling within an exception to the clause 4.1 GSA restriction and

amounting to an implied authority forthe purposes ofs 3400)(b) of the PPSA.

That position is reinforced by the ternis of clause 5.5 of the Common Tenris Deed

which requires the business of each obligorto be carried on and conducted in a proper

and efficient manner.

Accordingly, Forge was entitled, at least impliedIy, to deal with its immediate

entitlement to the Refund once it arose that is once the amended assessment was

issued.

Moreover, by clause 5.14 of the Common Tenris Deed, Forge was subject to certain

undertalcings in relation to the Secured Property, Relevantly, by clause 5.14(2) of the

Common Tenris Deed, Forge was at leastimpliedly pennitted to dispose of an assetif

the disposal was a 'Pennitted Disposal' as defined in clause 1.1(125) of the Common

Tenris Deed,

The effect of Clauses 5.14(2) and 1.1(125) is to allow Forge, intor alto:

(a) by sub-paragraph (b), to dispose of assets, in the ordinary course of its business

and on ami's length tenns where the greater of the book value and sale value of

the assets is less than $2m and the aggregate value of all assets disposals by

Forge in the immediate preceding 12 months period is lessthan $10m; and

(b) by sub-paragraph (c), to make 'a disposal of an asset in eXchange for another

asset having similar or improved function and of coinparable or superior type

value and quality',

(5)

(6)

- 22 -

(7)

(8)

(9)

(10)

.

- 23 -

(11) Clause 5.14(6) of the Common Ternis Deed is also relevant. It pennits, inter ana*the

disposal of an asset on ami's length tenns and in the ordinary course of Forge's

business.

(12) The practical effect of these clauses is to pennit Forge to transfer all or part of the

right to the Refund (the personal property) so long as the transaction occurs in the

ordinary course of business and is at arm's length (and otherwise meets the

requirements of the exceptions), For example, Forge is pennitted to:

(a) transfer the value of its rightto receive the Refund up to the limit of $2m in any

single transaction and $10m annually in eXchange for another asset or as

payment of amounts owing by it; or

(b) transfer its right to receive the Refund to a third party in eXchange for some new

plant and equipment.

(13) These exceptions to the negative undertaking in clause 5.14(2) of the Common Terms

Deed operate as exceptions to the restriction imposed by clause 4.1 of the GSA. The

exceptions authorise (expressly or, alternatively impliedIy) Forge to transfer the right

to the Refund free of the security interest.

The Department further submits that the question whether authority is granted to transfer in

the ordinary course of a company's business is not answered by examining the position when

the company is not conducting its business in the ordinary course, but rather by examining

the position when the company is conducting its business in the ordinary course.

It also contends that applying the proper approach in this case does not require the Court to

inquire whether the Refund came into existence as result of an event outside Forge's ordinary

course of business or can be transferred outside Forge's ordinary course of business. Rather,

it requires the Court to ask:

Has ANZ given Forge express or implied authority for the transfer of the refund (taxrefuids) in the ordinary course of Forge's business free of the security interest?

The answer to that question is, the Department contends "yes" including because ANZ

pennitted Forge to pay to its downstream companies' tax refunds in accordance with the

group tax arrangements.

This approach, the Department submits, is consistent also with the wording of the provision

which applies "if a person grants a security interest. ..", as the plain import of those words

suggests that the relevant point in time in respect of the question is when "a grantor grants a

1/9

120

12 I

122

security interest in personal property" and, where relevant, such later time when there may be

a course of dealings between the parties that may constitute implied authority. It contends

that the section is not concerned with the particular prevailing circumstances of the grantor.

Finally the Department submits that, if the Receivers submissions were right, then s 433

could never apply to property that arose after the appointment because at that point a

company would have ceased to conductits business in the ordinary course. Yet, as it points

out, s 433 by reference to the definition of property in s 9 of the Corporations 401 expressly

includes in its scope, future property.

I do not forthe reasons which follow, acceptthese submissions

"Circulating security interest"is defined in s 5 IC of the Corpor"lions Her. Whether there is a

"circulating security interest" within that definition requires consideration of whether the

relevant property is a "circulating asset". "Circulating asset"is defined in s 340 of the PPSA.

I will for ease of reference, set out again s 340 as relevant.

Section 340 relevantly states in part:

(1) Forthe purposes of this Act, ifa grantor grants a security interest in personal property

to a secured party, the personal property is a circulating assetif:

(a) the personal property is covered by subsection (5)(unless subsection(2) or (3) applies); or

(b) in any other case-the secured party has given the grantor express orimplied authority for any transfer of the personal property to bemade, in tlie ordinary course of tlie grantor's business* free of tliesecurity interest.

123

124

125

- 24 -

126

(5)

Current assets

This subsection covers the following personal property:

(a) an accountthat arises from granting a right, or providing services, inthe ordinary course of a business of granting rights or providingservices of that kind (whether or notthe account debtor is the personto whom the rightis gy. anted or the services are provided);

(b) ariaccountthatistheproceedsofinventory;

(c) an ADl account(other than a term deposit);

(d) currency;

(e) inventory;

- 25 -

(1) anegotiableinstrument.

Example: An example of an account mentioned in paragraph (a) is an accountthatisa credit card receivable.

Whether the ANZ expressly or implicitly authorised Forge to deal with the Refund in the

ordinary course of its business free of the security interest is substantially a question of fact.

It is not, as the Department submits, merely a matter of statutory construction.

The Department's submissions ignore some important facts. The Refund was the product of

particular circumstances which, on no view, arose in the ordinary course of Forge's business,

Its performance under the Contracts did not proceed, due to its insolvency, which resulted in

their tennination. The Receivers, who self-evidently were not acting in the ordinary course

of Forge's business, made an application referrable to s 170(9) of the ITAA36 which resulted

in the Refund.

The Refund would never have come into existence in the ordinary course of Forge's business.

It is no answer to point to tax refunds which could arise in the ordinary course of business.

The Refund was not of that kind.

These factual circumstances do not give rise to an implied authorisation by ANZ, for Forge,

in the ordinary course of its business, to deal with the Refund free of the security interest. To

conclude otherwise defies the factual and legal context out of which the Refund arose.

Indeed the GSA by clause 7.2 expressly prohibits any dealings by Forge with assets

following the appointment of receivers. The tenns of the CSA cannotbe ignored. The PPSA,

in s 18(I), provides that the GSA will take effect"according to its tenns*'.

I will now consider the Department's submissions concerning provisions in the GSA, the

Common Tenris Deed and the Tax Sharing and Funding Agreement, which, itsubmits, asset

out above, disclose an implied authorisation by ANZ for Forge to perform the Tax Sharing

and Funding Agreement to deal with the Refund in the ordinary course of Forge's business

free of the security interest.

No such implied authorisation arises. Clauses 5.14(2) and 1.1(125) were not engaged after

the appointment of the Receivers. As from that time Forge was not in the ordinary course of

business. Ideal further with these provisions below.

127

128

129

130

13 I

132

133

134 The Refund came into existence, as I have explained, after the date of the Receivers'

appointment. Moreover, ANZ is not a party to any tax sharing agreements which, in any

event are not "Finance Documents". Accordingly they could never constitute a perrnission

under clause 4.1 GSA. Nor do they comprise any authorisation to transfer any part of a

Refund. The Obligors under the Common Tenns Deed agree that they will comply with a

certain tax regime. As the Receivers submit correctly, these obligations do riot infonn the

question as to whether Forge may deal with the Refund outside the ordinary course of

business, in circumstances where it is the subject of a security interest and where Forge's

powers to deal with any assets including proceeds have been expressly circumscribed by

clause 7.2.

135

- 26 -

Clause 5.5 of the Common Tenris Deed does not alter this position. Upon the appointment of

the Receivers, Forge was no longer carrying on business in the sense employed in this

provision. In any event, a general obligation to conduct a business in a proper and efficient

manner does not constitute an implied authority to transfer the Refund free of security given

the express constraints upon disposals of assets contained in the GSA.

Clause 5.14 of the Common Tenris Deed provides that an Obligor must not dispose of orpart

with possession of any of its assets other than a "Permitted Disposal*'. The Department

submits that this provision peruiits a transfer of the chose in action or Refund.

By clause 5.14(2) of the Common Terms Deed, read together with the definition ofPerrnitted

Disposal, Forge can dispose of its assets only in limited circumstances:

(a) if the assets are damaged, obsolete or redundant; or will be exchanged for

another asset of coinpaTable or superior type, value and quality; or to another

Obligor where the asset will be the subject of a Security; or a disposal which

occurs by the creation of a Peruiitted Security Interest (c1 1.1(142)(a), (c), (d)

(^));

(b) in the ordinary course of its business and on ann's length tenns, where the

greater of the book value and sale value of the asset is less than A$2,000,000 (or

its equivalentin another currency) and the aggregate value (being the greater of

the book value and sale value of each asset) of all asset disposals by the

Obligors in the immediately preceding 12 month period is less than

As 10,000,000 (or its equivalent in another conency) (of 1.1(142)(by); or

(c) with the priorwritten consent of the Majority Lenders (GII. I(142)(f)).

136

137

138 The Receivers submit that having regard to the references in subparagraphs 1.1(142)(a), (c),

(d) and (e) of the definition of Peruiitted Disposals to physical characteristics of assets (for

example, obsolete or damaged assets, or the quality of assets), together with the references in

subparagraph (b) to "book value" and "sale value", the Pontiitted Disposal in subparagraph

(b) is actually concerned with the disposal of tangible assets (such as plant and equipment),and not an asset of the nature of the chose in action.

Alternatively, the Receivers submit that if subparagraph (b) of the definition of Peruiitted

Disposal does cover such an asset* there are still restrictions in place, so that Forge can only

dispose of such assets:

(a) in the ordinary course of its business and on ann's length tenns, where the value

of each asset is less than A$2,000,000 and the aggregate value of all asset

disposals by all Obligors in the immediately preceding 12 month period is less

than A$10,000,000; or

(b) with the priorwritten consentofthe M:^ionty Lenders.

Apart from the question of what other assets may have been disposed of and for what

aggregate value, two questions arise. As to these I accept the Receivers' submissions. First,

a sale or other disposal of a chose in action is not in the ordinary course of Forge's business

Second* the value of the chose in action and Refund exceeds $2,000,000. Thus Forge could

not have disposed of the chose in action without the prior written consent of the MajorityLenders.

139

- 27 -

140

141 Moreover, as the Receivers submit, because the sale or disposal of the chose in action is not

in the ordinary course of Forge's business, clause 5.14(6) of the Common Tenris Deed, which

allows Forge to dispose of an asset on arm's length tenns and in the ordinary course of its

ordinary business, has no application.

The Department's submission that the Refund could be split into separate $2m payments in

order to fall within the Pennitted Disposal definition is a contrivance. However structured it

would still constitute a disposal of the Refund in circumstances which, as I have explained,

fall outside the ordinary course of Forge's business. Even this assumes, as the Receivers

have pointed out, that the ATO could be compelled to distribute the payment in instalments

or to entities other than the taxpayer to whom it is obliged to make the refund* and it does not

142

- 28 -

explain how other disposals (bearing in mind the $10m aggregate limit) would affect such a

device

143 The submission by the Department that a disposal could be achieved under subparagraph

1.1(142)(c)is without substance. It is to stretch language beyond acceptable limits to contend

that there is plant and equipment that would have a similar or improved function and be of

coinparable or superior type, value and quality to a chose in action.

Under the tenns of the GSA and Common Terms Deed, Forge could not dispose of or

transfer the chose in action or Refund without the consent of ANZ, No such consent was

given expressly nor can it be implied. Accordingly, these assets do not constitute circulating

assets on the first basis advanced.

As to the Department's submission concerning afteracquired property, it is only such

property that comes into existence 4/1er the OPPoinimeni of receivers fond liquid"tor's) and

therefore 41ter the ordinqiy of business has ceused which is not within the scope of s 433.

This is consistent with CMllndustrirrl.

Alternatively, the Department submits that Forge's entitlement to the Refund is a monetary

obligation that arose from Forge's disposal of money by way of taxation payments and that it

is therefore an "account" within the meaning set out in s 10 of the PPSA.

It contends that this monetary obligation arose from the right of objection granted to Forge as

discussed above which is in the ordinary course of the business operations of the

Commissioner and the ATO. Accordingly, itsubmitsthatthe thing in action is an account for

th^ pu"pose ofs 340(I)(a) and s 340(5)(a) of the FFSA.

Further, or alternatively, the Department submits that the monetary obligation arose from

services provided by Forge in the ordinary course of Forge's business operations, It therefore

comes within s 10(b) of the PPSA definition of"account". It is plain from that definition that

the account debtor (here the ATO)is not required to be the person to whom the services were

provided. The Refund arose as a direct consequence of Forge providing services to its

customersin the ordinary course of its business and overpaying tax.

There was, as learner explained, no obligation on the part of the ATO to pay any due amount

at the time of the Receivers* appointment. I have explained the particular circumstances

which gave rise to the amended assessments resulting in the Refund. This occurred post

appointment and after any ordinary course of business ceased. The "right of objection" did

144

145

146

147

148

149

not arise in the ordinary course of business. The right to an amended assessment did not arise

out of providing services but because of Forge's inability to continue to provide services.

The Refund was notthe product of an overpayment of tax, SImpliciter, but wasthe product of

an amended assessment in the particular circumstances of this case. The Refund is not an

account within the meaning of s 340(5)(a). It is not, on this further asserted basis, a

circulating asset.

The New Zealand Court of Appeal, in Styciiegic Find?Ice, was of the same opinion in an

analogous case, relevantly, concerning a GST refund which came into existence post

receivership. The Court concluded that at the date of liquidation the Commissioner was

under no obligation to pay a GST refund. The fact that it did so pursuant to certain

provisions of the Goods andServtces Tax, 4ct 1985 (NZ) did not mean that the Commissioner

had a retrospective obligation to do so. Conversely, at the time of the appointment of the

Receivers, the company has no right to recover a refund and accordingly it was not an

existing monetary obligation at that time: Strategic Finance t151, t981-t1001.

The Department then submitted that its proposition that the assets were circulating assets is

supported by a decision of the Supreme Court of Canada in Royq/ Bqiik of Canada v R"dins

Credit UnionLtd 120101 3 SCR 38.

This case, the Department submitted, considered equivalent provincial FFSA legislation in

Canada. The court considered the exact nature of the interest acquired by the secured creditor

in after-acquired collateral, At 13/11he Court referred to s 10 of the Saskatchewan Period

Property Security ,4ci 1993 (SppSA) which, in substance, provides for a security interest to

cover afteracquired property. The Department submits that, in substance, s 20 of the PPSA

is to the same or similar effect and that at the time of the execution of the GSA there was an

inchoate proprietary interest in the after acquired property, namely the Refund such that when

the Receivers were appointed to, or assumed control of the property, being the Refund, this

answered the description of property within the terms ofs 433(2)(a) of the Corporationsrtci.

This submission fails for a number of reasons.

The decision in Royal Bank does not reflect the position in Australia. It involved

consideration of differing Acts and quite different facts.

The present case is not concerned with competing PPSA and non-FFSA interests and rules

that may apply in such cases to dotemiine priority. More importantly, and contrary to the

150

- 29 -

15 I

152

153

154

155

- 30 -

Departtnent's submission, the Australian equivalent of s 10 of the SppSA* being s 20 of the

FFSA, which prescribes when security interests are enforceable against third parties, is

materialIy different from s 10 of the SppSA. It provides, relevantly, that security interests are

only enforceable againstthird parties when they attach to the collateral.

Therefore, as the Receivers correctly submit, under the FFSA, a security interest being a

proprietary interest in the collateral arises at the time of attachment, In the case of future

property, it can only attach when the property exists. This reflects the concept of attachment

which recognises that a security interest is proprietary in nature and must fasten to specific

collateral on attachment.

Here there was no attachment of the Refund prior to the Receivership. It did not constitute

part of the collateral. This is because, as I have explained, it did not exist when the Receivers

were appointed.

In any event, s 433 of the Cowor"nons ACirelates to property "comprised in or subject to a

circulating security interest". Such an interest is defined in s SIC, relevantly as a security

interest that is a PPSA security it

(a) the security interest has attached to a circulating asset: s 19 of the PPSA; and

(b) the grantorhastitletotheasset.

Here there was no property over which Forge had title or to which ANZ security interest

could attach untilMarch 2015 when the amended assessments were issued.

156

157

158

159

160

Conclusion and Order

I will, forthe preceding reasons, order and direct as follows:

(1) Forthepurposes of section 433 of the Coliporo!tonsrlct 2001 (Cth) and generally:

(a) neither the Refund, northe rightto claim the Refund, was or is property in the

hands of the plaintiffs in their capacities as receivers and managers of Forge as

at the date of their appointment(being 11 February 2014);

(b) the security interest held by the Security Trustee pursuant to the GSA in respect

of the Refund is not a circulating security interest; and

(c) the plaintiffs are not required to apply the Refund to satisfy priority employee

entitlements in priority to any claims for principal or interest in respect of the

GSA.

(2)

-31-

The costs of and incidental to this application are an expense properly incurred by the

plaintiffs in the receivership of Forge and are to be paid from the secured assets of

Forge.

I certify that the preceding onehundred and sixty (160) numberedparagraphs are a true copy of theReasons for Judgment herdn of theHonourable Justice Gilmour.

I I ,/~'

c?""/~~1.11':'~------ 1:1~'~-,_.-'_,,.. *

11

Associate:

Dated: I March 2017