What is the date for fixing assets caught by s 433?
56 The first question concerns the date for fixing the assets which are the subject of the statutory entitlement in favour of the priority creditors.
57 Does "property" as broadly defined in s 9 of the Corporations Act 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 of s 433?
58 This question was considered by Mullins J in CMI Industrial. Post receivership, the receivers traded on and made "inventory trading profit". The floating charge became fixed upon the appointment of the receivers: CMI Industrial, 644 [31]-[32].
59 The floating charge was a "circulating security interest" as defined in s 51C(b) of the Corporations Act (CMI Industrial, 638 [7]) 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.
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: CMI Industrial 638-639 [12]; 640 [17]).
61 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]": CMI Industrial, 644 [34]). 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 appointment, even if collected over time: CMI Industrial, 645 [40].
62 Mullins J stated:
[45] Section 433 of the Act is a remedial provision that favours the specified priority creditors giving them a statutory entitlement to be paid from assets that would have otherwise not been available, because those assets would have become the subject of a fixed charge, when the floating charge crystallised on the appointment of the receivers.
[46] The scheme of the priority, in the case of a receivership, revolves around the date of the appointment of the receivers and operates in respect of the assets that are identified on the basis that they would have been the subject of the floating charge, as created, had the charge not crystallised on that date. This is supported by the dicta in Steinberg at 89-90 and 96-97 and Chemineer at 574-5.
[47] The scheme under s 433 of the Act does not extend to conferring any statutory entitlement to the priority creditors in respect of the trading profit made by the receivers conducting the business of the company after the date of their appointment...
63 Accordingly, applying CMI Industrial, "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 of s 433.
64 Nonetheless, the Department submits that this limitation on the scope of s 433 identified in CMI Industrial ought not to be adopted in this instance. Indeed it submits that the decision in CMI Industrial is plainly wrong and that I should not follow it.
65 It makes a number of submissions in this respect.
66 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 terms 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 accept the first proposition but not the 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 but that the 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 [that is property with the character determined by the snapshot] 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, what is 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(1)(b).
69 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 CMI Industrial and other cases there cited.
70 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 conduct its 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.
71 As to the assertion of retrospectivity, the Department amplified this in later written submissions.
72 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.
73 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 IIB 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(1)(b) of the TAA provides that Division 3 of Part IIB deals with credits that an entity is entitled to under a taxation law. It also provides for running balance account (RBA) rules. Pursuant 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) is then refunded under section 8AAZLF. Section 8AAZLH sets out how the refund is to be made.
74 The Department asserts that a copy of Forge's RBA 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 terms of s 172(1) of the ITAA36 which provides that an overpayment is taken never to have been payable for the purposes of the general and shortfall interest charges.
75 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 of s 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.
76 Third the Department submits that, in any event, CMI Industrial is distinguishable on the facts.
77 It submits that, unlike the position in CMI Industrial, 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.
78 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 "coming" 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 control is assumed at the time such as "property to which the receiver is appointed". Rather the expression in its natural meaning includes property which simply "comes into the hands" of the receiver. Such a connotation might indeed be a further reason to distinguish CMI Industrial on the basis of the statutory language. In CMI 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 first three submissions together. The words "coming into his, her, or its hands" were expressly considered in CMI Industrial by Mullins J who at [50] stated:
To the extent that it is argued that the use of the expression "out of the property coming into his, her or its hands" in s 433(3) suggests assets received after the date of appointment of the receivers, those words need to be construed in the context of when 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 designation in s 433(2)(a). That property is identified by the operation of s 433(2)(a) which operates at the date of the appointment of the receivers. The statutory entitlement cannot apply unless the identified property comes into the hands of the receiver: Silkchime at [58], [60] and [61].
80 I respectfully 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 Strategic Finance Ltd (in receivership and in liquidation) v Bridgman [2013] NZCA 357 at [86] involving a similar PPSA priority regime is to like effect.
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 business these 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 accept the submission that the tax funds "ought never to have been paid". They were paid by Forge in meeting its then statutory obligations and whilst it 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 terminated. 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 2012/2013 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 not this 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:
…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.
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 Taxation v 4 Doonan Street Collinsville Pty Ltd (In Liquidation) (2016) 332 ALR 349 at [52] and at [75], where the New South Wales Court of Appeal stated:
Prior to the Commissioner issuing the amended notice of assessment on 14 May 2013, the Company had no entitlement to claim payment of the sum identified in its amended return for the year ended 30 June 2010. After the amended notice of assessment was issued, provided the Commissioner had not had any occasion to act in accordance with Pt IIB of the TAA, the Company would have had administrative law remedies available to it to enforce its entitlement to payment…. But in this case the Commissioner exercised his powers and performed his duties under Pt IIB prior to 14 May 2013 so that on that date the only amount due to the Company was that in fact refunded to it.
And at [76]:
It is true that the Company had a statutory right (which it had exercised) to apply to amend its assessment, and it had other administrative law rights in the event that the Commissioner failed to accede to its application, or even took too long to do so. However, the Company had no right to recover any money until such time as the Commissioner had completed the process mandated by Pt IIB of allocating and applying the amount in credit….
85 Later at [77] 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".
86 I do not regard the factual differences between this case and CMI Industrial 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 termination of the Contracts.
87 That the Receivers did not trade or make any profit supports the Receivers' submission that there was no ordinary course of business following the appointment 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 s 433 the Department's contentions are misconceived. The meaning of this phrase, in my opinion, is as explained in CMI Industrial and particularly in the passage at [50] which I set out earlier.
89 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 CMI 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 point in 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 PPSA, 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 current regime.
90 Whilst, in terms, there is no crystallisation under the PPSA, the incident of a floating charge permitting disposal of identified assets in the ordinary course of business remains under the PPSA 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 permitted by the secured party.
91 Fifth, the Department submits that even to the extent that the 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 Smouha Fabrics Pty Limited (In Liq) (2012) 92 ACSR 542, 552 [33]-[34] per Black J.
92 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. It then becomes fixed at the time of appointment.
93 To the extent that Smouha Fabrics at [33]-[34] 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 Corporations Act as having that effect.
94 Section 433 of the Corporations 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 McEvoy at [8]-[16] which was, in turn, referred to with apparent approval by Mullins J in CMI Industrial at 639 [13].
95 Sections 196 and 292(4) of the Companies Act 1961 (WA) were in the same (or similar) terms as those sections in the Companies Act 1961 (NSW) (both having adopted the UK provisions referred to in In re Griffin Hotel Co Ltd [1941] 1 Ch 129) until shortly after the judgment in Stein v Saywell (1969) 121 CLR 529 was handed down.
96 Stein concluded that s 292 of the Companies Act 1961 (NSW) did not confer priority to debts within s 292(1)(d) over the 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.
97 Both Western Australia and New South Wales amended their respective Companies Acts which included provisions to reverse the effect of the judgment in Stein.
98 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 [292]; and
(b) The periods of time mentioned in section [292] shall be reckoned from the date of the appointment of the receiver or of possession being taken, as the case may be.
Section 292 was amended to insert the definition of "floating charge" to the same effect as is now set out in s 9 of the Corporations Act.
99 These amendments were effected in New South Wales by the Companies (Amendment) Act 1971 (NSW), and in Western Australia, the Companies Act Amendment Act 1973 (WA).
100 The second reading speech for the Companies (Amendment) 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 the judgment of the High Court in Stein v Saywell which held that the provisions as presently drafted deprive employees of the preferential rights in a winding up which it was always intended to confer upon them. …The amended section also provides for preferential claims in respect of wages and pay in lieu of leave to have priority over a floating charge, whether or not the charge crystallized and became a fixed charge before the relevant date.
101 And in the Legislative Council on 29 September 1971 (at p 1590):
The Government has followed with the greatest concern the litigation culminating in a judgment of the High Court, which revealed that section 292, was defective in several important respects, depriving employees of a company which is wound up of the preference in respect of salaries, wages and leave which are their rightful due. Under the amendments made to the section preferential debts will have their priority determined at the date of the winding up order.
…
The amended section will provide also that preferential claims in respect of wages and pay in lieu of leave have priority over floating charges, including floating charges which have crystallized at the date of the winding up order. Under the existing law, the crystallization of a floating charge immediately before the winding up order would defeat employees' preferences over claims under the charge."
102 The second reading speech of the Companies Act 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 3135) relevantly stated as follows:
A further amendment is proposed to the section to ensure that wages and salaries earned between the date of the presentation of the petition for a winding-up and the date of the making of the winding-up order are entitled to priority to the same extent as wages and salary earned preceding the presentation of the petition to wind up a company. The expression "floating charge" is defined and the effect of that definition is that the priority extended to wages and salaries over the holder of a floating charge is not defeated by the crystallisation of the floating charge on a date prior to the commencement of the winding-up.
103 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 corporations law established under the Corporations Act 1989 (Cth) and then by s 9 of the Corporations Act.
104 The definition in s 9 of the Corporations Act protects the position of priority creditors where a security interest which is "floating" becomes "fixed", before but not upon or after 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:
any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action...
106 It contends that a floating charge continues to attach to assets acquired after crystallisation:
"[t]he crystallised charge continues to cover present and future assets held or acquired by the chargor during the course of the receivership. Even in the case of winding up, the crystallised charge should in principle also extend to assets acquired during the course of the winding up through the exercise of the limited trading powers of the liquidator or otherwise.": W J Gough, Company Charges (2nd ed) Butterworths at 123. (emphasis added)
107 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. Gough 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": Company Charges at 125.
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 Goldblatt [1972] Ch 498 in respect of analogous employee entitlement provisions in the United Kingdom.
109 In Goldblatt, 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 request of, and having obtained an indemnity from the debenture holder, transferred the sum of £6,134 16s 3d and other assets which he had collected to the company.
110 Thereafter, the company, the debenture holder and two directors acting as sureties entered into an agreement whereby they assigned goods, certain leasehold properties in Bexleyheath, Kent and the sum of £6,134 16s 3d to the debenture holder in full satisfaction of the claims under the debentures.
111 The preferential creditor commenced proceedings against the receiver and debenture holder for breach of statutory duty under section 94(1) of the Companies Act 1948 (the analogue of s 433).
112 The receiver and debenture holder submitted that the section did not apply as against the debenture holder to the sum of £6,134 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 Goff J's judgment in Goldblatt at 507:
In my judgment, however, whilst the section only becomes operative when a receiver is appointed, or possession is taken, the ambit of the section has to be ascertained when the debenture is created.
113 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 £6134 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(1). This fact distinguishes that case from the present one. Mullins J in CMI Industrial considered Goldblatt at [16], [42], and [48], and correctly concluded that it was not relevant to the controversy under consideration. Nor does it assist the resolution of this case.
114 I have, for these reasons rejected the Department's submissions. CMI Industrial, 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 of s 433.
115 Neither the chose in action nor the 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.
116 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 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 CMI Industrial was clearly wrong. I have not so concluded. To the contrary, as I have said already, I consider it to be correct and I have followed it in this case. Nonetheless, lest I should be wrong in my conclusion, I will consider the Department's further submissions.