Agip Africa (Ltd) v Jackson

Nature of the application

1. This is a separate application in proceedings relating to O'Keeffe Heneghan Pty Ltd (in liq), Aus Life Pty Ltd (in liq) and Rocky Neill Construction Pty Ltd (in liq) ("RNC") (together, "Companies") trading as KNF Group (a firm) ("Partnership"). By Amended Interlocutory Process filed on 14 September 2018, Mr Andrew Spring and Ms Amanda Young ("Receivers") as receivers and managers of the Companies, trading as the Partnership, and IFG Network Australia Pty Ltd ("IFG") sought a declaration that the amount of $224,409 ("OzForex Monies") received from OzForex Ltd ("OzForex") by the liquidators ("Liquidators") for RNC is a Partnership asset secured by a security in favour of IFG. The Plaintiffs also sought an order that the Liquidators pay the OzForex Monies to the Receivers or alternatively an order that an amount payable to the Liquidators by way of remuneration be set-off against the Oz Forex Monies. The Plaintiffs subsequently amended the Interlocutory Process to seek, further or in the alternative, a declaration that transfers of funds from the Partnership's bank accounts to RNC between 12 and 15 March 2017 totalling $240,000 ("RNC Payments") were voidable under s 37A of the Conveyancing Act 1919 (NSW) and were traceable into the OzForex Monies. The Commonwealth Bank of Australia ("CBA"), which was a lender to the Partnership, was subsequently joined as an additional defendant in the application.

Affidavit evidence and factual background

1. The Plaintiffs relied on the affidavit dated 4 May 2017 of Mr Jeremy Zehnwirth which set out the history of dealings between IFG and the Partnership. The Plaintiffs also relied on the affidavit dated 4 September 2018 of one of the Receivers, Mr Spring, which set out the background to the application, which I will summarise below. By a further affidavit dated 3 October 2018, Mr Spring provides further information as to the account from which the RNC Payments were made and notes that that account was held in the name of the Companies trading as the Partnership, and is linked to another account maintained on behalf of the Partnership. Mr Spring also refers to the loan account ledger of the Partnership, which indicates that amounts were repaid by the Partnership to the O'Neill Family Trust prior to 22 December 2016. Mr Spring also refers to other transactions out of the Partnership's accounts between 12 and 15 March 2017, and points to an available inference that larger amounts were transferred out of the Partnership at that time of which only the OzForex Monies have been returned to RNC. The Plaintiffs also relied on an affidavit dated 9 November 2018 of their solicitor, Leath Nicholson, which refers to the circumstances in which the Receivers and IFG became aware of the RNC Payments, after they received the administrators' report referring to those transactions.
2. The Liquidators in turn relied on the affidavit dated 21 September 2018 of one of the Liquidators, Mr Andrew Sallway. Mr Sallway refers to two documents which contain references to a credit in favour of the director of RNC, Mr O'Neill, in the amount of $6,739.49 and to a loan from Mr O'Neill in the amount of $185,000. CBA relied on an affidavit dated 2 November 2018 of Mr Ryan Malloy, a Manager - Asset Realisations in the CBA's Group Credit Structuring Team. Mr Malloy's affidavit exhibited copies of records of the CBA relating to its dealings with the Partnership and set out a chronology of those dealings.
3. I have set out the factual background to these proceedings in an earlier judgment ([2018] NSWSC 1885 ("Earlier Judgment") and need not repeat that background in detail. However, by way of broad outline, the Partnership principally acted as a subcontractor supplying formwork, steel fixing and concreting services to civil engineering and infrastructure companies in the Sydney metropolitan area. Prior to the appointment of voluntary administrators to the Companies, the Partnership operated two bank accounts with CBA. On 13 September 2013, each of the Companies granted a general security interest in favour of CBA ("CBA Charge") including as partners in the Partnership (Malloy 2.11.18 [12], Ex CBA 1, 19-23), which extended to all of the present and after acquired property of each of the Companies and the Partnership. CBA accepts that the CBA Charge was not registered on the Personal Property Securities Register in respect of the Partnership, although CBA registered a general security interest over the property of RNC.
4. In mid 2016, IFG and the Partnership, or the Companies comprising it, entered into documents titled "Terms and Conditions for Purchasing Accounts Receivable" ("Facility Agreement"). IFG and the Partnership, or the Companies comprising it, also entered into a General Security Deed ("IFG Security Deed") on 30 June 2016 (Ex A4, 464-471) which provided that IFG's debt was secured over all the present and after-acquired property of the Partnership and IFG held security over all receivables of the Partnership. IFG perfected its security pursuant to the Personal Property Securities Act 2009 (Cth) ("PPSA") by registering that security interest on 25 July 2016 (Ex A4, 474-477).
5. On 12, 13 and 15 March 2017, the Partnership transferred amounts of $100,000, $50,000 and $90,000 comprising the RNC Payments respectively from its bank accounts to an account operated by RNC with the CBA (Spring 4.9.18 [9]). On 15 March 2017, the OzForex Monies, which were funded from the RNC Payments were (or were proposed to be) transferred from that bank account to an offshore bank account ("OzForex Transfer") (Spring 4.9.18 [10]). Correspondence between Mr O'Neill, the director of RNC, and OzForex Ltd indicates that those monies were to be applied to purchase a property in Ireland (Spring 4.9.18 [11], Ex A1 pp 1-14). There were several other transfers out of the Partnership's accounts at the same time (Spring 3.10.18 [17]-[21]). It appears that the OzForex Transfer failed and OzForex repaid the monies to the administrators of RNC, who subsequently became the Liquidators. On 16 March 2017, the directors of the Companies resolved to place each of them into voluntary administration and appointed voluntary administrators to the Companies, who, as I noted above, subsequently become the Liquidators.
6. On 11 April 2017, IFG appointed the Receivers over the Partnership assets pursuant to its security. In circumstances that I have addressed in the Earlier Judgment, the Receivers subsequently resigned and were reappointed on 19 May 2017. The Companies transitioned to voluntary liquidation following the second meeting of creditors on 28 April 2017. The Partnership owed a debt of $1,166,843.14 to IFG at the commencement of the proceedings (Zehnwirth 4.5.17 [27]).

Claim that the OzForex Monies are held on constructive trust for the Partnership

1. The Plaintiffs submitted, first, that the OzForex Monies were held on trust for the Partnership where the RNC Payments were made in breach of duties owed by the Companies to the Partnership, or by the directors to the Companies. They submitted that: "Examination of the facts surrounding the RNC Payments support the conclusion that the RNC Payments were made to siphon funds from the Partnership to [RNC] to the detriment of the creditors of the Partnership and [RNC] and in breach of partnership duties."
2. The Plaintiffs also point to other transfers of substantial sums, in identical amounts to the RNC Payments, out of the Partnership bank accounts on 13 and 15 March 2017 (Spring 3.10.17 [18]-[19]. The Plaintiffs point out, and I accept, that the directors of the Companies plainly knew of, or at least suspected, that insolvency where they had been meeting with the administrators since November 2016 to address the possibility of voluntary administration, and where the appointment was made on the date the Companies were due to pay substantial wages which they had no funds to pay.
3. In their initial submissions in respect of this claim, the Liquidators sought to identify a legitimate basis for the RNC Payments, pointing to business records of the Partnership, including its balance sheet as at 30 June 2016, which showed liabilities to Mr O'Neill, the sole shareholder and director of RNC, of $6,739.49 and a loan from Mr O'Neil in the amount of $185,000 and showed partnership equity of the O'Neill Family Trust, of which RNC was trustee, of $1,622,760.90. The Liquidators also submitted that the Partnership's MYOB Records recorded that, as at 30 June 2017, the loan from Mr O'Neill was $120,000, having been reduced by $65,000 since 30 June 2016. Mr Sallway's affidavit dated 21 September 2018 refers to a credit balance in the amount of $95,000 in favour of the O'Neill Family Trust, recorded in an MYOB file of the Partnership, and to a further credit described as a loan from Mr O'Neill (Ex L13, p 44).
4. The Plaintiffs respond that little weight can be placed on the Partnership's MYOB records, where they record the position as at June 2016, nine months prior to the RNC Payments. The Plaintiffs also point to a reservation as to the accuracy of that information contained in the section 439A report issued by the voluntary administrators appointed to the Companies. It seems to me that little weight can be given to that information, at least because there is no evidence that it was current as at the date of the RNC Payments. The Plaintiffs also point out, and I accept, that the existence of a loan from Mr O'Neill to the Partnership, if established, would not in itself support a payment to RNC which is a different entity. The Plaintiffs also point to the absence of documentation of any loan between the Partnership and RNC, and that the existence of other transfers out of the Partnership at the same time as RNC Payments which suggest that the payments were made for the benefit of the directors of the Companies and in anticipation of insolvency. I am satisfied that the evidence does not provide a basis to characterise the RNC Payments as the repayment of a loan by RNC to the Partnership.
5. It seems to me, in the relevant circumstances, that the RNC Payments, made immediately prior to the Companies being placed in voluntary administration, were made by the Companies in breach of duty to the Partnership and by the directors of the Companies in breach of duty to the Companies, where the Companies were by then insolvent or likely to become insolvent and the interests of creditors had then intervened. Neither the Companies nor their directors could consent to such a breach in those circumstances. I find that the RNC Payments were made in breach of fiduciary duty owed by the Companies to the Partnership, and by the directors to the Companies.
6. A constructive trust could be imposed, over the OzForex Monies in RNC's hands, so far as it breached its duties to the Partnership in respect of the monies from which those funds were derived. Alternatively, a constructive trust may be imposed so far as RNC was a knowing recipient of funds derived from the Companies' collective breach of duties to the Partnership: Barnes v Addy (1874) LR 9 Ch App 244; Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 at [152]-[159]; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 ; (2007) 230 CLR 89; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 ; (2012) 87 ACSR 260. A constructive trust could also be imposed, under the principles noted by the Court of Appeal in Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81. Leeming JA (with whom Bathurst CJ and Sackville AJA agreed) there referred to Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391 and Agip (Africa) (Ltd) v Jackson [1990] Ch 265, aff'd [1991] Ch 547 and observed (at [45]) that: "… liability under the first limb of Barnes v Addy is not the only way in which a recipient of trust property may become bound in conscience to account for it. A person who receives trust property, otherwise than as a bona fide purchaser for value without notice, but innocently, and thereafter acquires notice of the trust and deals with it in a manner inconsistent with the trust, will also be liable as a constructive trustee. Although this is similar to first limb Barnes v Addy liability, it is conceptually distinct, because it is the subsequent dealing, rather than the receipt of property, that founds liability, as Professors Dietrich and Ridge have observed: J Dietrich and P Ridge, Accessories in Private Law, (2015, Cambridge University Press) at 203. This class of liability was identified by Millett J in Agip (Africa) Ltd v Jackson [1990] Ch 265 at 291 and by the Court of Appeal in Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391 at 474; see also L Tucker et al, Lewin on Trusts (19th ed 2015, Sweet & Maxwell) at 2103-9. The distinction drawn by Millett J in Agip was cited with evident approval in Sze Tu at [143]."
7. In Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc above at 474, the Court of Appeal referred to a category of constructive trust where a party received trust property, other than as a purchaser for value without notice of the trust, and acquired notice of the trust and dealt with it in a manner inconsistent with the trust, which it described as a "wrongful dealing constructive trust". In Agip Africa (Ltd) v Jackson above, Millett J referred to two categories of knowing receipt, the first being where a person receives trust property transferred to him in breach of trust and the second category, which Millett J observed was distinct, as referable to (at 291): "the person, usually an agent of the trustees, who receives the trust property lawfully and not for his own benefit but who then either misappropriates it or otherwise deals with it in a manner which is inconsistent with the trust. He is liable to account as a constructive trustee if he received the property knowing it to be such, though he will not necessarily be required in all circumstances to have known the exact terms of the trust."
8. Mr Newton, who appears for CBA, contested the imposition of a constructive trust, so far as the Plaintiffs sought to rely on a constructive trust to improve IFG's security position over CBA's security position in a dispute as to priority to which I refer below. Mr Newton pointed out, uncontroversially, that a constructive trust ought not be imposed if there are other orders capable of doing full justice between the parties: Farah Constructions Pty Ltd v Say-Dee Pty Ltd above at 172. Mr Newton also submitted the constructive trust would not be imposed without taking into account CBA's interests which may be affected by the grant of that remedy. It seems to me that a constructive trust is an appropriate remedy, in present circumstances, where money has been misappropriated from the Partnership. For the reasons noted below, that trust has no adverse impact upon the priority of CBA.
9. In this case, whether the liability is treated as one of constructive trust or as arising under broader equitable principles, it seems to me that RNC held the relevant funds on trust for the Partnership when it received them; OzForex held those funds on trust for the Partnership, at least once it became aware of the circumstances of the transaction, prompting it to return the funds to RNC; and RNC and the Liquidators are bound by that trust when the OzForex Monies were returned to the Liquidators.

Claim that the RNC Payments were voidable under s 37A of the Conveyancing Act

1. The Plaintiffs also initially submitted that the RNC Payments were voidable under s 37A of the Conveyancing Act and were repayable to the Partnership from the OzForex Monies that had been repaid to the Liquidators. That section relevantly provides that: "1. Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced. 2. This section does not affect the law of bankruptcy for the time being in force. 3. This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors."
2. The decision of the High Court of Australia in Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 546 establishes that an actual intent to defraud is required for the purposes of s 37A of the Conveyancing Act, notwithstanding that intent may be proved by inference from the evidence. The High Court there observed (at [20], [31]-[32]) that the section is to be accorded a "liberal construction" and extends to prohibit conduct which may "delay, hinder or defraud" a creditor or potential creditor, and the Court may infer an intention by the transferor of property to defeat or delay creditors, even in the absence of direct evidence of that intention, where that outcome was the necessary consequence of a voluntary settlement. The relevant principles were summarised in Patel v Lal [2011] NSWSC 603; (2011) 16 BPR 30,265 at [6], where Biscoe AJ observed that: "Section 37A should receive a liberal construction in effecting its purpose of suppressing fraud. The term "defraud" in s 37A means to delay, hinder or otherwise defraud: Marcolongo v Chen [above] at [19], [20], [58]. It is unnecessary to show that the debtor wanted creditors to suffer a loss or that the debtor had a purpose of causing loss. It is necessary to show the existence of an intention to hinder, delay or defeat creditors and in that sense to show that accordingly the debtor had acted dishonestly. If the debtor disposes of an asset which would be available to creditors with the intention of prejudicing them by putting it, or its worth, beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor. In cases of voluntary disposition that intention may be inferred: at [32]. A person may have acted dishonestly, judged by the standards of ordinary, decent people, without appreciating that the act in question was dishonest: at [33]. The party seeking to avoid the disposition bears the onus of proving an intent to defraud. While the existence of the intent may be inferred from the evidence, it is to be found as a fact: at [34]. Sections [sic] 37A does not require the intent to defraud to be the sole or predominant intent: at [57]."
3. I would have held that the RNC Payments were voidable under s 37A of the Conveyancing Act had I not found that their proceeds, the OzForex Monies, were held on trust for the Partnership. No such order is necessary where that trust has been established. CBA submits that any relief granted under s 37A of the Conveyancing Act should reverse the effect of the original transaction and would treat the OzForex Monies as returned to the Partnership accounts or the RNC account controlled by CBA, as to which, CBA contends, the CBA Charge has priority over any security interest held by IFG. It is not necessary to address that submission where it has not been necessary to make orders under s 37A of the Conveyancing Account.

Declaration that the OzForex Monies are a Partnership asset secured by security in favour of IFG

1. The Plaintiffs alternatively contend that the RNC Payments by the Partnership and the transfer by RNC through OzForex were in breach of the Facility Agreement between the Partnership and IFG and that the funds are an asset of the Partnership and are secured by IFG's security over the Partnership assets. They claim a consequential declaration that the OzForex Monies are a Partnership asset secured by security in favour of IFG. The Plaintiffs also submitted that, if the RNC Payments were not made in breach of trust or voidable under s 37A of the Conveyancing Act, IFG's security interest over the transferred monies had priority over all other interests, including CBA and the Liquidators.
2. The Plaintiffs submit that the CBA accounts were circulating assets of the Partnership. Under cl 3 of the IFG Security Deed, the Partnership was permitted to deal with circulating assets in the ordinary course of business. The Plaintiffs submit that a transfer of funds out of the CBA accounts that was not in the ordinary course of business would be transferred in breach of the IFG Security Deed. The Plaintiffs submit that the IFG Security Deed itself did not permit disposal of the relevant property by the transaction, where it was outside the ordinary course of the Partnership's ordinary business, and where IFG was not aware of and had not provided consent to the transaction at the relevant time. It is not necessary to address their further submissions as to the content of the concept of "ordinary course of business", where there can be no suggestion that a transfer of the funds to RNC, and from RNC to OzForex to purchase a property in Ireland, would fall within that concept. The Plaintiffs also submit, and I accept, that IFG's interest is traceable into the OzForex Monies, where the account of RNC into which funds were transferred had a near zero balance before receipt of funds from the Partnership, and after the attempted transfer of those funds to OzForex. The Plaintiffs submit that, on that basis, the Oz Forex Monies are payable by the Liquidators to the Receivers. The last step in that submission does not take account of CBA's security interest or its claim to priority over the OzForex Monies.
3. In their submissions dated 9 October 2018, the Liquidators accepted at least that the credit balances in the Partnership accounts, being debts owed by the CBA to the Partnership, were personal property that could be the subject of security by the IFG Security Deed and were "collateral" within the meaning of s 10 of the PPSA. The Plaintiffs submit that, to the extent that funds from the CBA accounts have been converted to monies, IFG's security interest attaches to those monies and is traceable into them under ss 31 and 32 of the PPSA. The Liquidators at one point submitted that the funds in the RNC account were not proceeds of the collateral, for the purposes of s 31 of the PPSA, where the Partnership did not have rights in the funds in the RNC account. I will address the operation of those sections below.
4. I do not consider it necessary to determine this claim or make the declaration sought by the Plaintiffs in respect of it, where I would order the return of the OzForex Monies to the Partnership consequential on my finding that a constructive trust should be imposed, and the declaration sought by the Plaintiffs would not resolve the priority dispute that exists as between CBA's and IFG's claims to the OzForex Monies.

Issue as to priority as between IFG and CBA

1. The Liquidators raised a possibility that CBA had a general security over all circulating and non-circulating assets of the Companies and the Partnership, although this was only registered against the Companies under the PPSA; CBA had control of RNC's account under s 25 of the PPSA; and any security interest that the CBA had in the RNC account had priority over that of IFG under s 75 of the PPSA. CBA was joined to the proceedings after that possibility was raised and now submits that it has security over the OzForex Monies in priority to any security held by IFG.
2. The Deed of General Security Interest between the Companies and CBA incorporates CBA's Security Interest Provisions (Ex CBA 1, 24ff) which relevantly provide that that security interest binds all of the Companies (as partners in the Partnership) jointly and severally and permits the Companies (as partners) to sell or otherwise deal with circulating interests (as defined) but only in the ordinary course of their business on reasonable commercial terms, and prior to any default or the CBA giving notice to the partners not to do so. It is common ground that CBA's security interests are not registered against the Partnership, as distinct from the Companies that are partners in the Partnership, since those security interests have not been registered against the Australian business number of the Partnership under s 153 of the PPSA and Pt 1.4 of Schedule 1 of the Personal Property Securities Regulations 2010 (Cth).
3. However, CBA submits that each of the bank accounts maintained by the Partnership with CBA and the account maintained by RNC with CBA are "ADI accounts" as defined in s 10 of the PPSA. That definition relevantly provides that: "ADI account means an account, within the ordinary meaning of that term, kept by a person (whether alone or jointly with one or more other persons) with an ADI that is payable on demand or at some time in the future (as agreed between the ADI and the person or persons)." A note to that section gives examples of ADI accounts as including a savings account, or a term deposit, kept with an ADI. An "ADI" is defined in s 10 of the PPSA as having the same meaning as in the Banking Act 1959 (Cth) and it is common ground that CBA is an ADI.
4. CBA submits that each of the accounts held with it is "collateral" within the meaning of s 10 of the PPSA to which its security interest attached and, by reason of the CBA Charge granted by the Companies (as partners) to it, its security interest attached to each of the accounts and was enforceable against each of the Companies (as partners in the Partnership) jointly and severally under s 19 of the PPSA. The term "collateral" is defined in s 10 of the PPSA as, relevantly, personal property to which a security interest is attached. Section 19 of the PPSA provides that a security interest is enforceable against a grantor in respect of particular collateral only if the security interest has attached to the collateral, and specifies rules as to when attachment occurs.
5. CBA submits that, under s 12(4) of the PPSA, a bank that is an ADI is able to take a security interest in an ADI account held with it and perfect that security interest by control under s 21(2)(c)(i) of the PPSA and that it perfected its interest in, relevantly, the Partnership accounts by control under s 21(2)(b) and s 21(2)(c)(i) of the PPSA. Section 12 of the PPSA defines the concept of "security interest" and s 12(4)(b) of the PPSA provides, inter alia, that an ADI may take a security interest in an ADI account that is kept with the ADI. Section 21(1) of the PPSA provides that a security interest in particular collateral is perfected if, relevantly, s 21(2) applies. Section 21(2) applies, relevantly, if, for an ADI account, the secured party has control of the collateral. Section 25 of the PPSA deals with the concept of "control" and provides that: "A secured party has control of an ADI account for the purposes of section 21 (perfection - main rule) if, and only if, the secured party is the ADI."
6. I should also note, for completeness, that s 341A of the PPSA, introduced by the Personal Property Securities (Corporations and Other Amendments) Act 2011 (Cth), specifies how an ADI can control an ADI Account for the purposes of s 340(2) which deals with when personal property will be a circulating asset. Although CBA relies on that section, it does not appear to have wider application than for the purposes of s 340(2) and the concept of control of an ADI account for the purposes of perfection by control appears to be separately defined under s 25 of the PPSA. CBA in turn submits that its perfection of its security by control prevails over that section by other means, including perfection by registration, by reason of ss 57 and 75 of the PPSA. It appears to be common ground that CBA would have such priority, if its security applies to the OzForex Monies in the hands of the Partnership.
7. The effect of the relevant provisions in the PPSA in favour of an ADI has been described by DC Turner, in "Debtor-Induced Payments" (2014) 35 Adelaide Law Review 97 at 124 as follows, although the author plainly disapproves of their policy implications: "An ADI under the [PPSA] is able to take a security interest in the deposit account and perfect it by control [PPSA ss 12(4)(b), 21(2)(c)(i), 25, 57(1)]. For policy reasons, and to ensure a level playing field, the current position is untenable as it gives the Bank a super-priority because of its status as an ADI. If it controls the ADI Account of its debtor it has priority simply because of its status as an ADI. … As a result of the ability of an ADI to take a security over a bank account of its debtor, it will be in a superior position and be able to defeat any debtor-initiated payment. An ADI security interest is automatically perfected by control under [PPSA] s 25. That security interest will have priority over any other security interest in the ADI Account under [PPSA] s 75. The ADI will also have priority because of [PPSA] ss 21(2) and 57. If the debtor has granted a security interest in his account to his ADI, the ADI will necessarily have priority over any proceeds deposited to the account by its debtor."
8. The Plaintiffs submitted that CBA does not have control of the monies transferred from the OzForex Ltd account and held by the Liquidators. CBA responds, adopting substantially the same argument as the Plaintiffs adopt for other purposes, that the CBA's security interest in the collateral falls within ss 31 and 32 of the PPSA. Section 31 of the PPSA relevantly provides that "proceeds" of collateral to which a security interest is attached mean identifiable or traceable personal property of specified types, including personal property that is derived directly or indirectly from a dealing with the collateral (or proceeds of the collateral), and subject to ss 31(2) and 31(3). Those sections relevantly provide that: (2) Proceeds are traceable whether or not there is a fiduciary relationship between the person who has a security interest in the proceeds, as provided in section 32, and the person who has rights in or has dealt with the proceeds. (3) However, personal property is proceeds only if: (a) either: (i) the grantor has an interest in the proceeds; or (ii) the grantor has the power to transfer rights in the proceeds to the secured party (or to a person nominated by the secured party) …
9. Section 32 of the PPSA in turn provides that, subject to the PPSA, if collateral gives rise to proceeds (by being dealt with or otherwise), the security interest continues in the collateral, unless the secured party expressly or impliedly authorised a disposal giving rise to the proceeds; or the secured party expressly or impliedly agreed that a dealing giving rise to the proceeds would extinguish the security interest; and attaches to the proceeds, unless the security agreement provides otherwise. One commentator has noted that the provision for a security interest to continue in collateral allows a secured party to follow collateral into the hands of a third party transferee and the provision for that interest to attach to the proceeds, unless the security agreement provides otherwise, allows a secured party to trace or follow the collateral proceeds into a third party's hands: DC Turner, "Debtor-Induced Payments" above at 99. Here, it seems to me that the collateral that was subject to CBA's and IFG's securities over Partnership assets gave rise to the proceeds in the OzForex Monies, when held by RNC or repaid to the Partnership, as both CBA and IFG contended for different purposes, and their respective securities attached to those proceeds.
10. The Plaintiffs also submit that s 31 of the PPSA does not apply to the OzForex Monies so far as they are held with the Liquidators, since the Partnership needs an order of the Court to obtain the return of the funds to it. It is not necessary to address that submission since the Court could readily make an order for repayment of the funds to the Partnership's account in which they were held prior to the impugned transactions. The Plaintiffs also submit that CBA "permitted" funds to leave its ADI accounts (as defined), both in respect of the RNC Payments and the OzForex Transfer, and has expressly or impliedly authorised the disposal. I do not accept that submission, where the disposal of those funds was and remained prohibited by CBA's security, as outside the ordinary course of business, and there is no suggestion that CBA's permission was otherwise sought or given for the transactions. It is therefore not necessary to address the Receivers' further submissions as to the implications of such authority under s 32 of the PPSA.
11. The Plaintiffs also submit that amounts held on trust by RNC for the Partnership are excluded from the application of the PPSA by s 8(1)(c) of the PPSA, although that submission did not address the position as to those funds when repaid by the Liquidators to the Partnership. In their supplementary outline of submissions dated 8 November 2018, the Plaintiffs submitted that: "If the RNC Payments were made in breach of duties, including the partners' duties to creditors and their duties to each other to adhere to the IFG Security Deed, the funds are held on trust by [RNC] and do not fall within CBA's security interest pursuant to s 8(1)(c) [of the PPSA]. They are repayable to the Partnership by way of payment to the Receivers, and are subject to the IFG security interest." In their submissions in reply dated 20 November 2018, the Plaintiffs characterised this argument as their "primary argument", and in further supplementary submissions dated 30 November 2018, Mr Brown emphasised that that submission was not directed at the Partnership's interest by way of trust or any exclusion of a security interest granted by the Partnership in that trust. Mr Brown then repeated the Plaintiffs' earlier submission that: "Once it is determined that the Payments were made in breach of duties and the Funds are held on trust by [RNC], the Funds are then repayable to the Partnership … and re-form part of the property of the Partnership."
12. Section 8(1)(c) of the PPSA, on which Mr Brown relies, relevantly provides that the PPSA does not apply to a lien, charge or any other interest in personal property that is created, arises or is provided for by operation of general law. Mr Newton, who appears for CBA, recognises that that subsection reflects the principle that an interest arising from equitable relief granted by a Court is not consensual and not a security interest for the purposes of the PPSA and not registrable: Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd (2014) 285 FLR 267 at [98]-[99]; National Australia Bank Ltd v Garrett (2016) 340 ALR 532 at [30]-[32]. However, Mr Newton submits that CBA's security interest arises from the Deed of General Security Interest dated 13 September 2013, to which I have referred above, and is not excluded by s 8(1)(c) of the PPSA and was (as I have noted above) perfected by control so far as the Partnership is concerned. Mr Newton also submits that s 8(1)(c) of the PPSA does not have the effect that an interest in personal property arising by operation of law cannot itself be "personal property" so as to fall within the scope of CBA's security: Commonwealth v Byrnes (in their capacity as joint and several recs and mgrs of Amerind Pty Ltd (recs and mgrs apptd) (in liq)) (2018) 354 ALR 789 at [316].
13. It may be accepted that the constructive trust under which the Receivers contend that RNC holds the relevant monies for the Partnership need not be registered under the PPSA, in order to give effect to that trust. However, when effect is given to that trust, and those monies are treated as property of the Partnership, each of IFG and the CBA would need to rely on their security rights in order to assert an interest in those monies, which would otherwise be treated as Partnership property and applied to meet claims of unsecured creditors of the Partnership and for the distribution of any surplus, after meeting such claims, to the Companies as partners in the Partnership. It seems to me that s 8 of the PPSA does not exclude the application of the PPSA at the time at which the CBA or IFG rely on their relevant securities.
14. The Plaintiffs also submit that CBA lost any perfection of its security interest, by way of control, when the funds left its ADI accounts, whether the accounts were the Partnership's accounts or RNC's account and that the funds are presently held by the Liquidators. The Plaintiffs submit that the funds which are the subject of the application are not repayable to one or more of the Partnership's ADI accounts, and are repayable to the Receivers in circumstances where they have been appointed overall property of the Partnership. I do not accept those submissions. The Court could make an order, in giving effect to a constructive trust, for repayment of the OzForex Monies to the Partnership's account held with CBA, from which they were withdrawn. It seems to me that it should do so, where there is no reason that the Receivers or IFG should be entitled to take advantage of the transactions which they contend were wrongful to establish a priority that would not have been available to them absent those transactions.
15. I also do not accept the Plaintiffs' further submission that, if CBA's submissions were correct, the same result would follow for a recovery made by a liquidator in respect of voidable transactions under s 588FF of the Corporations Act, allowing a secured creditor to claim those funds in priority to unsecured creditors. That result does not follow because the statutory entitlement to set aside voidable transactions under Pt 5.7B of the Corporations Act is that of the liquidator, although an order for repayment is made in favour of the relevant company, and those funds will properly be paid into an account under the control of the liquidator rather than an account controlled by an ADI which was previously a lender to the company. By contrast with the OzForex Monies, the funds recovered by a liquidator in such a claim are new monies, not the repayment of funds improperly removed from an existing ADI account of the relevant company.
16. For these reasons, I am satisfied that CBA's security has priority over IFG's security in respect of the OzForex Monies presently held by the Liquidators, arising from RNC Payments. There is nothing surprising in this result, where CBA's security would have had that priority over IFG's security had the funds remained in the Partnership's ADI account (as defined), and there is no reason in principle that that result should differ because those funds were wrongly transferred out of that account, at least where RNC (by the Liquidators) continues to hold then on trust for the Partnership and could be ordered to repay them to that account.

Orders and costs

1. The parties should bring in agreed short minutes of order to give effect to this judgment and as to costs within 7 days or, if there is no agreement between them, their respective draft short minutes of order and short submissions as to the differences between them.

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