In the matter of RCR Tomlinson Ltd (administrators appointed) and Ors [2020] NSWSC 735

Supreme Court of NSW|2020-05-08|Before: Black J

320 FLR 259 - Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd) [2018] WASCA 163 - National Provincial Bank Ltd v Ainsworth [1965] AC 1175 - Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 - Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 - Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2018] VSCA 41 - Re CMI Industrial Pty Ltd (in liq) [2015] QSC 096 - Re Go Energy Group Ltd [2019] NSWSC 558 - Re Hawden Property Group Pty Ltd (in liq) [2018] NSWSC 481 - Re Langdon; Forge Group Ltd (recs and mngrs apptd) (in liq) [2017] FCA 170; (2017) 118 ACSR 434 - Re Maiden Civil (P&E) Pty Ltd (2013) 277 FLR 337 - Re Plutus Payroll Australia Pty Ltd (in liq) [2019] NSWSC 1171 - Shepherd v Commissioner of Taxation (1965) 113 CLR 385 - Stein v Saywell (1969) 121 CLR 529 - Strategic Finance Ltd (in liq) v Bridgman [2013] NZCA 357; [2013] 3 NZLR 650 - SZTAL v Minister for Immigration and Border Protection [2017] HCA 34 - TCE Capital Corporation v Mendlowitz & Associates Inc (Trustee of the Estate of Vesna Kolenc) (1999) 44 OR (3d) 148 - US Claims Inc v Flomenhaft & Cannata LLC 519 F Supp 2D 515 (2006) - Walley; Re Poles & Underground Pty Ltd (admins apptd) [2017] FCA 486 - Warner (liquidator), Re Sakr Bros Pty Ltd (in liq) [2019] FCA 547 - Whitton v ACN 003 266 886 Pty Ltd (controller appointed) (in liq) (1996) 42 NSWLR 123 Texts Cited: - D Brown and A Duggan, Australian Personal Property Securities Law (LexisNexis, 2nd ed, 2012) - R Cummings and R Wood, Alberta Personal Property Security Act Handbook (Carswell, 4th ed, 1998) - D Denomme and J Ziegel, The Ontario Personal Property Security Act: Commentary and Analysis (LexisNexis, 2nd ed, 2000) - C Proctor, Mann of the Legal Aspect of Money (Oxford, 7th ed, 2012) - J Stumbles, 'The Impact of the Personal Property Securities Act on Assignment of Accounts' (2013) 37 MULR 415 Category: Procedural and other rulings Parties: Jason Preston, William James Harris, Robert Conry Brauer and Matthew Wayne Caddy in their capacity as joint and several liquidators of RCR Tomlinson Ltd (in liquidation) (and other Companies) (Plaintiffs) Representation: Counsel: D Cook SC/M Rose (Plaintiffs) V Whittaker SC/B Hancock (CBA Corporate Services (NSW) Pty Ltd) (Lenders) Dr R Higgins SC/P Herzfeld (Commonwealth of Australia represented by the Attorney General's Department (Commonwealth)

Solicitors: King & Wood Mallesons (Plaintiffs) Herbert Smith Freehills (Lenders) Clayton Utz (Commonwealth) File Number(s): 2018/361179

The nature of the application and affidavit evidence

By Amended Interlocutory Process filed, by leave, on 1 May 2020, Messrs Preston, Harris, Brauer and Caddy ("Liquidators") as joint and several liquidators of RCR Tomlinson Ltd (in liq) and several other companies sought directions under s 90-15 of the Insolvency Practice Schedule (Corporations) ("IPSC") as to several legal issues arising in the liquidation of those Companies ("Residential Appointment Entities"), which are of considerable complexity. CBA Corporate Services (NSW) Pty Ltd, as security trustee for a syndicate of secured creditors ("Lenders"), and the Commonwealth of Australia represented by the Attorney-General's Department were each heard as interested parties in the application under r 2.13 of the Supreme Court (Corporations) Rules. I have drawn, in addressing these issues below, on the parties' helpful submissions and on schedules of issues prepared by the parties, at my request, which summarised their respective positions on the several issues and the key arguments underlying those positions.
The Liquidators rely on a first affidavit dated 23 November 2018 of Mr Preston, one of the Liquidators, which was originally read in respect of an earlier application. Mr Preston there provided an overview of the RCR Tomlinson group of companies, which provided engineering, construction and maintenance services to customers in Australia and overseas with particular emphasis on the infrastructure, energy and resources sectors. That affidavit also set out the position in respect of the several companies, employees, contractors and leases and their assets and liabilities and referred to the circumstances which had contributed to the appointment of administrators to the Residual Appointment Entities and to funding which was then to be provided by secured lenders in connection with the administration.
The Liquidators also rely on Mr Preston's second affidavit dated 20 August 2019, which refers to the circumstances of the administrators' appointment on 21 November 2018 and their subsequent appointment as liquidators and to the steps which have been taken in the liquidation since that date. Mr Preston also outlines the factual matters giving rise to the need for directions, including the several permutations of the issue in respect of the Residual Appointment Entities' WIP (as defined [1] ) that I will address below. By his third affidavit dated 28 August 2019, Mr Preston gave evidence of the giving of notice of the application for directions to creditors.
By his fourth affidavit dated 25 February 2020, Mr Preston updated the position as to developments in the liquidation since August 2019. He referred to steps taken by the Liquidators to seek to recover Surplus Proceeds (as defined [2] ) and noted that, although the Liquidators had generally progressed potential recoveries of such proceeds, the amounts owing to any of the Residual Appointment Entities on account of Surplus Proceeds had not then been quantified nor had any date on which an amount of Surplus Proceeds was or would be due to be paid for any of Residual Appointment Entities been identified, Mr Preston also there noted that the Liquidators were continuing negotiations with counterparties and remained hopeful of recovering Surplus Proceeds on certain projects, although their quantum remained uncertain.
Mr Preston noted that it appeared that no performance bonds given by subcontractors had been called on by the Residual Appointment Entities prior to the Appointment Date (as defined [3] ), so as to result in funds being paid to such a company that were held for distribution to creditors. He anticipated that the Liquidators may ultimately call on numerous subcontractor bonds on the basis of pre-appointment date breach of contract claims and warranty claims under relevant sub-contracts, although they could not presently estimate the amount of Subcontractor Proceeds (as defined [4] ) that may ultimately be recovered. Mr Preston also noted that approximately $26.4 million of WIP had been recovered by the Liquidators to date, and that they were continuing efforts to recover other WIP and projected recovery of a further amount of WIP.

The scope of the Court's jurisdiction and assumed facts

The Court's power to give a direction under s 90-15 of the ISPC at least allows the Court to give a liquidator advice as to the proper course of action for him or her to take in a liquidation, and may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion, although it typically will not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision. The power to give directions under this section is wider than its power to give such directions under former s 479(3) of the Act: Walley; Re Poles & Underground Pty Ltd (admins apptd) [2017] FCA 486 at [41]; Warner (liquidator), Re Sakr Bros Pty Ltd (in liq) [2019] FCA 547 at [18]; Re Go Energy Group Ltd [2019] NSWSC 558 at [16]; Re Plutus Payroll Australia Pty Ltd (in liq) [2019] NSWSC 1171 at [4].
In his opening outline of submissions, Mr Cook, who appears with Mr Rose for the Liquidators, fairly described the question which is the subject of the direction as the classification of assets of the Residual Appointment Entities as either circulating or non-circulating assets, and the date on which that classification is to be made. He points out that the outcome of this application will affect the priorities in the distribution of funds in the insolvency between employees with outstanding priority entitlements (or at least the Commonwealth standing in their place) and secured creditors. The Liquidators' evidence (Preston 20.8.19 [18]) was that the Liquidators expect that, based on their most pessimistic scenario as to recoveries, there would be a shortfall in assets available to pay priority employee entitlements in several of the Residual Appointment Entities, and that shortfall will be substantial in some companies. The Liquidators noted the size of that shortfall will depend on the directions that are made by the Court in this application, debtor recoveries, and several other matters.
The Liquidators submit, and I accept, that the questions in issue in this application each constitute a "question" which has arisen in the winding up of the Residual Appointment Entities and that these questions are (with limited exceptions noted below) not hypothetical, where there are real differences between the several interests as to the construction of a complex statutory regime, which will have a significant practical impact on the recoveries of interested parties. I am satisfied that the Court should give directions as to those issues that are the subject of controversy.
The Liquidators and the interested parties rightly agreed assumed facts on which the Court should proceed, adopting a similar approach to that which would be taken in an application for judicial advice under s 63 of the Trustee Act 1925 (NSW). I will set out those assumed facts below in dealing with the several issues as to which directions are sought.

Direction as to the Appointment Date

The first issue as to which the Liquidators sought directions related to whether several issues were to be determined at the Appointment Date, using that date as a "snapshot" date. In particular, the Liquidators sought a direction that they were justified in treating an Asset (as defined [5] ) that was the subject of a Circulating Security Interest (as defined [6] ) as at the Appointment Date as property available for the payment of Priority Employee Entitlements (as defined [7] ), although that Asset became subject to a Non-Circulating Security Interest (as defined [8] ) after the Appointment Date; and, conversely, that they were justified in treating an Asset that was the subject of a Non-Circulating Security Interest as at the Appointment Date as not being property available for the payment of Priority Employee Entitlements, although it became the subject of a Circulating Security Interest after the Appointment Date.
The issue raised by this question is, in somewhat plainer language, whether the property that is comprised in or subject to a circulating security interest for the purposes of s 561 of the Act is to be determined at a single date and whether that date is the "relevant date", being the date on which the winding up is taken to have begun under Pt 5.6 of the Corporations Act.
This issue is of practical significance because Assets of the Residual Appointment Entities that were the subject of Non-Circulating Security Interests at the Appointment Date have subsequently been realised and the proceeds are now held as cash at bank, and could arguably be characterised as Circulating Security Interests if that characterisation is determined after the Appointment Date. The Liquidators also identify a wider concern that, if that result is reached, secured creditors who permitted an administrator or liquidator access to circulating assets of a company to allow the business to trade would be disadvantaged, if their non-circulating security interests were later converted to circulating security interests after the date of the administrator's or liquidator's appointment. Plainly, such creditors would likely seek to prevent an administrator or liquidator having access to such assets if that result would follow.
It is common ground between the Liquidators, the Lenders and the Commonwealth that a direction as to this issue should be made. The Court would not ordinarily make a direction as to matters that involve no real controversy. However, it seems to me that it should properly do so here, both because of the importance and complexity of this issue and because the use of an approach involving a "snapshot" date is a necessary premise to the determination of remaining issues, several of which are genuinely controversial.
It is also common ground that the construction of s 561 of the Corporations Act is to be determined by its language and text, read in the relevant context: Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 at 381; Aldi Foods Pty Ltd v Shop, Distributive and Allied Employees Association [2017] HCA 53 at [16]; SZTAL v Minister for Immigration and Border Protection [2017] HCA 34 at [14]. I should also have regard to the history and object of s 561 of the Act which originates from s 2 of the Preferential Payments in Bankruptcy (Amendment) Act 1897 (UK) and has a long statutory history, with its other predecessors including s 264 of the Companies Act 1929 (UK), s 319 of the Companies Act 1948 (UK), s 292 of the Uniform Companies Act 1961, s 446 of the Companies Code 1981 and s 561 of the Corporations Law. The case law has recognised that the object of predecessors of the section was to limit the proprietary rights of a secured creditor holding a floating charge, so that preferential debts were paid out of the property subject to that floating charge, to the extent that non-charged assets were insufficient to meet those debts: Buchler v Talbot [2004] 2 AC 298 at 305. That approach avoids the prejudice that a company's employees, whose work had contributed to its assets, would be deferred to the rights of a secured creditor holding a floating charge; see also Stein v Saywell (1969) 121 CLR 529; Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20; (2019) 93 ALJR 807 at [88].
The Liquidators identify several steps that support their contention that the Appointment Date should be used as a "snapshot" date at which this issue is determined. The starting point is that ss 553-554 and 561 of the Corporations Act relevantly provide: "553 Debts or claims that are provable in winding up (1) Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company. (1A) Even though the circumstances giving rise to a debt payable by the company, or a claim against the company, occur on or after the relevant date, the debt or claim is admissible to proof against the company in the winding up if: (a) the circumstances occur at a time when the company is under a deed of company arrangement; and (b) the company is under the deed immediately before the resolution or court order that the company be wound up. This subsection has effect subject to the other sections in this Division. … 554 General rule - compute amount as at relevant date (1) The amount of a debt or claim of a company (including a debt or claim that is for or includes interest) is to be computed for the purposes of the winding up as at the relevant date. (2) Subsection (1) does not apply to an amount admissible to proof under subsection 553(2). 561 Priority of employees' claims over circulating security interests So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of: (a) any debt referred to in paragraph 556(1)(e), (g) or (h); (b) any amount that pursuant to subsection 558(3) or (4) is a cost of the winding up, being an amount that, if it had been payable on or before the relevant date, would have been a debt referred to in paragraph 556(1)(e), (g) or (h); and (c) any amount in respect of which a right of priority is given by section 560; payment of that debt or amount must be made in priority over the claims of a secured party in relation to a circulating security interest created by the company and may be made accordingly out of any property comprised in or subject to the circulating security interest."
Mr Cook rightly points out that s 561 is found in Subdivision D (dealing with Priorities) in Division 6 of Part 5.6 of the Corporations Act which, inter alia, provides for the pari passu principle and also allows exceptions to that principle, by giving priority to certain debts and claims under s 556 of the Act. Mr Cook points out that s 553(1) (which I have set out above) relevantly provides that all debts payable by, and all claims against, the Company, being debts or claims the circumstances giving rise to which occurred before the relevant date (as defined) are admissible to proof against the Company. Mr Cook aptly describes the effect of that section as to create a "snapshot" of debts and claims at the relevant date, and points out that s 554(1) also provides for the amount of the debtor claim to be computed for the purposes of the winding up at the relevant date, also consistent with a "snapshot" approach. Section 554D(2) also provides that the amount of a secured debt is determined as at the relevant date.
It is common ground that s 561 does not expressly identify the time at which a circulating security interest (as defined) must exist in respect of the relevant property in order to allow that property to be used to pay Priority Employee entitlements. Mr Cook rightly notes that this did not give rise to difficulty prior to the introduction of the Personal Property Securities Act 2009 (Cth) ("PPSA"), because predecessor provisions to s 561 of the Corporations Act distinguished between the position of creditors with fixed charges and those with floating charges and a floating charge became fixed upon the commencement of an external administration. The position under the predecessor provisions was therefore that the pool of assets available to priority creditors was determined at the relevant date, as defined, being the commencement of the winding up.
Mr Cook points out, and I accept, that there is no suggestion in the explanatory materials for the PPSA that the introduction of the concept of a "circulating security interest" in s 561 was intended to bring about substantive changes to the operation of that section in respect of the priority of employee entitlements. Mr Cook and Dr Higgins, who appears with Mr Herzfeld for the Commonwealth, both draw attention to Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth above at [12], where Kiefel CJ, Keane and Edelman JJ observed, with reference to s 433 of the Act, that the change of language when the PPSA was enacted: "… was the consequence of the replacement by the [PPSA] of the concept of a floating charge with the concept of a circulating security interest. The change of language was not intended to affect existing rights under the Corporations Act, including the priority given to employees over unsecured creditors. Other than preserving those floating charges that existed before 2012, a "circulating security interest" is defined in s 51C(a) of the Corporations Act as also including "a PPSA security interest, if: (i) the security interest has attached to a circulating asset within the meaning of the [PPSA] ; and (ii) the grantor (within the meaning of that Act) has title to the asset". A "circulating asset" is defined in s 340 of the [PPSA] in terms similar to the old floating charge, including where, by s 340(1)(b), the "secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor's business, free of the security interest". The change in terminology in s 433 of the Corporations Act from "floating charge" to "circulating security interest" thus aligned the Corporations Act and the [PPSA]." [citations omitted]
Mr Cook in turn points out that circulating assets which came into existence after the relevant date or were generated by subsequent efforts of a receiver, for example by trading on, are not within the scope of s 433 of the Act, and points to the "complementary" relationship between ss 433 and 561 of the Act, while recognising several differences between the sections: Cook v Italiano Family Fruit Co Pty Ltd (in liq) (2010) 190 FCR 474 at [74]; Re CMI Industrial Pty Ltd (in liq) [2015] QSC 096 at [47]; Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2018] VSCA 41 at [367]. Ms Whittaker also contends that ss 433 and 561 of the Act are directed towards the same policy objective, to afford priority to employees from assets that were dealt with and possibly augmented in the ordinary course of a company's business. They also submit that a consistent approach should be adopted by determining that question as the relevant date for the purposes of both ss 433 and 561 of the Act.
Ms Whittaker, who appears with Mr Hancock for the Lenders, takes a broadly similar approach to this issue. Ms Whittaker submits that the starting point for ascertaining the meaning of s 561 is the text of the provision considered in light of its context and purpose. She submits that the policy supporting the employee priority provisions is that a creditor which accepts a floating charge and allows the business of the company to be carried on, and the assets the subject of the floating charge to be altered and possibly augmented by the efforts of a company and its employees, should not be permitted to displace the priority that the legislation accords to employee entitlements. She also submits, and I accept, that that policy rationale has no continued application after voluntary administrators are appointed to a company and its business is no longer operating in the ordinary course.
Ms Whittaker also submits that the introduction of the PPSA was not intended to alter existing rights in relation to employee preferences and Parliament did not intend that secured creditors' positions should be eroded during the period of external administration, as would occur if assets that were subject to Non-Circulating Security Interests (as defined) at the Appointment Date became progressively available to meet employee entitlements as they were converted to cash and became subject to Circulating Security Interests after the Appointment Date.
Dr Higgins also submits that the Appointment Date functions as a "snapshot date", although the Commonwealth's reasoning to reach that result is not precisely the same as the later steps of the Liquidators' reasoning which I have set out above. Dr Higgins refers to Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth above and submits that is unlikely that the introduction of the PPSA disturbed the previous position that the extent of property available to holders of circulating security assets (previously floating charges) and employees was to be determined at the commencement of the administration or the winding up. She also accepts that s 433 and 561 of the Act are cognate provisions, although the former expressly limits the relevant priority to property coming into a receiver's hands, and that it would be anomalous if those two provisions operated in a radically different manner.
Dr Higgins also submits, and I also accept, that the consequences of s 561 applying to any property that became subject to a circulating security interest after the end of the winding up are so unreasonable and unworkable that they cannot have been intended and that on that construction, a creditor would attempt to avoid realisation of any asset that was not a circulating asset by the liquidator, to avoid the consequential risk that it becomes subject to s 561. The Commonwealth accepts, and I also accept, that the object of s 561, in protecting the interests of employees who had contributed to the value of the relevant assets, do not support a wider application of that section beyond the Appointment Date.
I note, for completeness, the the Liquidators originally indicated concern as to whether the decisions at first instance in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd) [2017] WASC 152; (2017) 52 WAR 90; (2017) 320 FLR 259 ("Forge 1") and on appeal in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd) [2018] WASCA 163 ("Forge 2") were inconsistent with a "snapshot" approach. Common ground developed in the course of the hearing of this application, and I accept, that those decisions are not directed to the question of the nature of the rights at a particular point in time, so as to raise that concern. It is therefore not necessary to determine whether, if those decisions had stood for such a proposition, it would be plainly wrong so that a judge sitting at first instance could properly not follow it.
For these reasons, it seems to me that it is necessary to determine the question whether property is comprised in or subject to a circulating security interest for the purposes of s 561 of the Act at the Appointment Date rather than on a continuous basis or at some other unidentified date, adopting the same approach in respect of s 561 of the Act as is adopted in respect of s 433 of the Act. It also seems to me that the practical result of any different construction would be perverse, since it would provide a strong incentive for secured creditors to seek to remove assets from an administrator's or liquidator's control as soon as possible after their appointment, to seek to prevent the conversion of those assets to cash and avert the risk that they could become circulating security interests within the scope of s 561 of the Act at a later date. That would tend to frustrate an administrator's or liquidator's seeking to maintain the business as a going concern so as to maximise employees' prospects of continuing employment and sale proceeds for the benefit of creditors. I will therefore make directions 2(a) and (b) in the Amended Interlocutory Process.
The Liquidators also sought a direction as to whether they were justified in treating New Assets (as defined) as not being property available for the payment of Priority Employee Entitlements. The Liquidators submit that New Assets do not exist at the Appointment Date and that it logically follows that, if regard is to be had to the existence of assets at the Appointment Date, then anything that exists after that date cannot be available to meet preferential claims of employees. Mr Cook submitted, and the Lenders agreed, that this direction is the logical conclusion available where the two directions they seek and that I will make above are made. The Commonwealth submits that this direction should not be made in the terms sought or should at least be confined to an example of such an asset identified in Mr Preston's affidavit dated 20 August 2019 (paragraph 47).
It seems to me that there is no controversy of real and practical significance as to this question at this point, and it would be undesirable to use the Court's directions power to answer a question in broad terms that does not arise, or only arise in narrow terms. If this direction is in truth the necessary consequence of the other directions made, then the Liquidators can form that view with the assistance of their advisers, if and when the resolution of that question is practically necessary. I will not make this direction, not because I express any view as to whether it is correct or not, but because it is not presently necessary or appropriate to do so.

Matters that are common to the other directions sought

The Liquidators recognise that their approach to issues as to Surplus Proceeds, WIP and Subcontractor Proceeds, which I address below, assume that position is assessed at the Appointment Date, adopting the "snapshot" approach to which I have referred above. The parties then advance several submissions that are directed to these issues generally. I address some of those issues in dealing with the particular assets and claims below.
However, I should first identify several further aspects of the applicable statutory regime, which is complex. I have referred above to the scope of s 561 of the Corporations Act. As Mr Cook points out, that section directs attention to the nature of property that is the subject of a security interest, and not whether a security interest is a fixed or floating charge, by contrast with its predecessor provisions. Section 51C of the Corporations Act in turn defines a "circulating security interest" as a "PPSA security interest" (as defined) that has attached to a circulating asset or a floating charge and s 51 of the Corporations Act defines a "PPSA security interest" as meaning a security interest within the meaning of the PPSA.
Section 340 of the PPSA in turn defines a "circulating asset", which is necessary to establish a "circulating security interest" under s 51C of the Corporations Act. That section provides as follows: 340 Meaning of circulating asset General definition (1) For the purposes of this Act, if a grantor grants a security interest in personal property to a secured party, the personal property is a circulating asset if: (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 or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor's business, free of the security interest. Exceptions (2) Despite paragraph (1)(a), personal property covered by subsection (5) is not a circulating asset if: (a) an effective registration with respect to the property, in relation to the grantor, discloses, in accordance with the regulations, that the secured party has control of the personal property; and (b) the secured party has control of the personal property. Note: For the meaning of control in this subsection, see section 341. (3) Despite subsection (1), personal property covered by subsection (5) is not a circulating asset if: (a) the personal property is goods; and (b) the security interest is perfected by possession. (4) For the purposes of paragraph (1)(b), personal property is not a circulating asset merely because the secured party has given express authority to transfer specific personal property, or a specific class of personal property, free of a security interest. (4A) Despite subsection (1), if a grantor grants a security interest provided for by a transfer of an account or chattel paper, the account or chattel paper is not a circulating asset in relation to the security interest. Current assets (5) This subsection covers the following personal property: (a) an account that arises from granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided); (b) an account that is the proceeds of inventory; (c) an ADI account (other than a term deposit); (d) currency; (e) inventory; (f) a negotiable instrument. Example: An example of an account mentioned in paragraph (a) is an account that is a credit card receivable. Note: For the meaning of inventory in this subsection, see section 341.
It is common ground, and I accept, that s 340 of the PPSA is directed to two groups of assets, being those specified in s 340(1)(a) and s 340(1)(b), and that the assets falling under s 340(1)(a) are the "Current Assets" listed in s 340(5), subject to the exclusions in s 340(2)-(3). Paragraph 340(5)(a) provides, as an instance of those Current Assets, an account that (i) arises from (ii) granting a right or providing services (iii) in the ordinary course of a business of granting rights or providing services of that kind.
The term "account" is in turn defined in s 10 of the PPSA (emphasis added) as follows: ""account" means a monetary obligation (whether or not earned by performance, and, if payable in Australia, whether or not the person who owes the money is located in Australia) that arises from: (a) disposing of property (whether by sale, transfer, assignment, lease, licence or in any other way); or (b) granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided); but does not include any of the following: (c) an ADI account; (d) chattel paper; (e) an intermediated security; (f) an investment instrument; (g) a negotiable instrument."
It is common ground, and I also accept that, the definition of "account" in s 10 of the PPSA has several elements namely (i) a monetary obligation (I interpolate, "whether or not earned by performance") that (ii) arises from (iii) either (a) a disposing of property or (b) granting a right or providing services (iv) in the ordinary course of a business of granting rights or providing services of that kind.
It is now necessary to turn to the concept of "monetary obligation" in the definition of account in s 10 of the PPSA, which is not separately defined in the PPSA. The Liquidators and interested parties gave close attention to a New Zealand authority and several Australian authorities that deal with this and similar concepts. They also addressed other international personal property legislation and case law, in further submissions by leave, after I had reserved judgment. I bear in mind the real risk of dealing with foreign case law in this respect, including the difficulty which may arise where one or several cases are selected from a wider body of authority, the possibility that there may be divergences of approach within a particular jurisdiction and the real risk that international authority may be "cherry-picked" to support a preferred view.
Dr Higgins drew attention to article 9 of the Uniform Commercial Code (US) ("UCC") which contains a definition of "account", referring to "a right to payment of a monetary obligation, whether or not earned by performance … for services rendered or to be rendered". She also referred to Professor Stumbles' observation, in his article "The Impact of the Personal Property Securities Act on Assignment of Accounts" (2013) 37 MULR 415 at 422, that the definition of "account" in the PPSA and similar definitions in the New Zealand and Canadian provincial Personal Property Securities Legislation have their ultimate origin in that provision. Ms Whittaker in turn sought to distinguish the definition of "account" in article 9 of the UCC as not directly analogous to the definition of "account" in s 10 the of PPSA, on the basis that it expressly extends to a right to payment for property that "is to be sold or otherwise disposed of" and for services that are "to be rendered", and has an express element of futurity.
Dr Higgins also refers to the decision in US Claims Inc v Flomenhaft & Cannata LLC 519 F Supp 2D 515 (2006), which treated an existing contractual right to payment of a contingency fee as an "account", although the amount of the relevant payment was uncertain. Dr Higgins acknowledges that that is a first instance decision of a single United States Federal District Court but submits that it reflects a "consistent position" in United States cases. That proposition highlights the difficulty of dealing with foreign authority, since an Australian judge is not in a position to assess its correctness. Ms Whittaker responds, and I accept, that that decision also does not undertake a substantive analysis of the meaning of the term "monetary obligation" contained in article 9 of the UCC.
Dr Higgins also refers to the definition of "account" in s 4(1) of the Personal Property Security Act 1990 (Ontario) as "any monetary obligation not evidenced by chattel paper, an instrument or a security, whether or not it has been earned by performance" and to a decision of the Superior Court of Justice of Ontario in Agent's Equity Inc v Mendlowitz & Associates Inc (Trustees of the Estate of Hope) (1996) 30 OR (3d) 557 which concerned the question whether an existing contractual right of a real estate agent to receive commissions on sales of property was an "account". That right was held to be an account, although it would not result in payment if a sale of property did not complete, which would depend on decisions made by the vendor and purchaser. However, that decision also appears to have little by way of detailed reasoning to support that result. The Lenders and the Commonwealth both also refer to a decision of the Ontario Divisional Court in TCE Capital Corporation v Mendlowitz & Associates Inc (Trustee of the Estate of Vesna Kolenc) (1999) 44 OR (3d) 148, which referred to the decision in Agent's Equity above. The Lenders point out, and I accept, that there appears to have been little attention given to the meaning of "monetary obligation" in the Canadian decisions.
Dr Higgins also refers to the observations of Professors Cuming and Wood in the Alberta Personal Property Security Act Handbook, 4th ed, 1998, where the authors noted that the term "account" in the Alberta Act "conforms to the business term 'accounts receivable' used by the business community when referring to monetary obligations arising out of the sale of goods or services". The authors also note, that: "In order to fall within the definition, a right need not be an existing debt; and in order to be assigned an account need not be earned." The authors there note that the Alberta Act does not address the issue as to whether an account is created when it is earned or when a contract under which it is to be earned by performance has been executed.
In submissions in reply concerning the Canadian position, the Commonwealth refers to another Canadian text, Ziegel and Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed, 2000, which observes that the words "whether or not [it has been] earned by performance" in the Ontario Personal Property Securities Act, which appear in similar terms in the definition of "account" in s 10 of the PPSA: "make it clear that the definition covers the assignment of future as well as present debts and of payment entitlements contingent on the account creditor meeting continuing obligations under the contract creating the entitlements." The Commonwealth also notes that that text is cited for that proposition in Duggan and Brown, Australian Personal Property Securities Law, 2nd ed, 2012, [2.33]. The Commonwealth submits that the use of those words in the Australian definition were intended to have the corresponding effect to that which they have been given in the corresponding Canadian legislation, and it seems to me that there is force in the submission.
The Commonwealth also points out that there appears to have been no reference to the Canadian case law in the New Zealand decision in Strategic Finance Ltd (in liq) v Bridgman [2013] NZCA 357; [2013] 3 NZLR 650 ("Strategic Finance"), on which the Liquidators and Lenders rely and which I address below. The Commonwealth submits that the approach taken in the United States and Canadian cases is contrary to the "narrow approach" taken in Strategic Finance, although I also note that the observations in Professor Cumming's and Wood's text, to which I have referred above equate the concept of "account" in the Canadian legislation and that of "accounts receivable" on which the Court relied in Strategic Finance, as I note below. The Lenders respond that the Court should hesitate to place significant weight on the reasoning in the Canadian and United States decisions, and instead rely on Strategic Finance.
The Lenders also submit that less weight should also be given to the United States and Canadian authorities because, unlike the position in respect of the PPSA, they do not use the term "account" in the context of a preferential creditor regime, and they submit that a wider construction of the term placed on the Canadian and United States cases would lead to results that are "uncommercial, practically difficult to give effect to, and contrary to the contractual basis of the rights in question when applied in the context of a preferential creditor regime."
As I noted above, the Liquidators and the Lenders rely on, and the Commonwealth largely sought to displace, the decision in Strategic Finance. The New Zealand Court of Appeal there dealt with the concept of a "monetary obligation" as it appears in the definition of "account receivable" in s 16 of the Personal Property Securities Act 1999 (NZ) ("PPSA NZ"), which refers to "a monetary obligation that is not evidenced by chattel paper, an investment security, or by a negotiable instrument, whether or not that obligation has been earned by performance". White J (delivering the judgment of the Court) there observed at [54] that a monetary obligation: "means an existing obligation imposed on, or assumed by, one party to pay a certain amount of money to the other party on a specific or ascertainable future date. An obligation of this nature will involve an existing liability on the part of the first party which is legally enforceable by the second party."
His Honour noted (at [55], [57]), by reference to observations in Mann on the Legal Aspect of Money, that such an obligation will include debts as traditionally understood and executory obligations of a monetary character but does not include a possible liability to pay an unidentifiable sum at an unascertainable future date. His Honour also observed (at [59], [62]) that a monetary obligation would not be established where future performance was required for that obligation to come into existence, since a purely contingent claim does not give rise to a monetary obligation. His Honour summarised that conclusion at [83] as follows: "In this context a "monetary obligation" is an existing legal obligation on another party to pay an identifiable monetary sum to the company on an ascertainable date. The obligation must be legally enforceable by the company [at the relevant date] on the basis that the other party has an existing liability to make the payment."
Ms Whittaker, for the Lenders, submits that that decision expanded the scope of the term "accounts receivable" in s 16 of the PPSA NZ, which she submits is broadly similar to the definition of "account" in s 10 of the PPSA, beyond book debts but treated it as limited to existing legal obligations to pay an identifiable sum by an identifiable date. Dr Higgins, for the Commonwealth submits, and I accept, that s 16 of PPSA NZ uses the term to "account receivable", rather than using the simpler term "account". That, however, does not seem to me to be an essential aspect of the Court of Appeal's reasoning in that case. Dr Higgins accepts that that decision is at least authority that there is not an "account receivable" within the language of s 16 of PPSA NZ before a party has undertaken performance, where it has promised to undertake that performance in exchange for payment.
The decision in Strategic Finance was in turn referred to by Gilmour J in Re Langdon; Forge Group Ltd (recs and mngrs apptd) (in liq) [2017] FCA 170; (2017) 118 ACSR 434 ("Langdon"), to which the Court of Appeal of the Supreme Court of Western Australia in turn referred in Forge 2. That case concerned a tax refund obtained by receivers following the termination of Forge's construction contracts. Gilmour J observed that s 433 of the Corporations Act applied where a receiver was appointed by a secured creditor with a circulating security interest, or where possession was taken or control was assumed on behalf of debenture holders of any property comprised in or subject to a circulating security interest. His Honour held (as I have observed above in respect of the similar issue as to s 561) that whether assets were available to preferred creditors for the purposes of s 433 was to be determined at the date of the receivers' appointment and that, at that date, Forge had no right to the tax refund. His Honour observed (at [115]) that, where neither the relevant 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 were not within s 433 of the Act. Importantly, his Honour also held that the tax refund and corresponding chose in action was not an account for the purposes of s 10 of the PPSA nor or a circulating asset for the purposes of s 340 of the PPSA, because the tax refund and corresponding chose in action arose only after the ordinary course of Forge's business had ceased, adopting a similar approach to that taken in Strategic Finance concerning a GST payment that had been made by mistake after the relevant company went into liquidation: see also the discussion of his Honour's reasoning in this respect in Forge 2 at [195].
The Liquidators and interested parties in turn relied on the first instance decision in Forge 1, although they read it in different ways. Hamersley there sought to set-off certain claims that it had against Forge against claims that Forge had against it, relying on contractual or equitable set-off and insolvency set-off under s 553C of the Corporations Act. A question arose as to whether the interest of a secured lender to Forge, ANZ, was subject to s 80 of the PPSA on the basis that Forge's claims against Hamersley constituted accounts for the purposes of s 10 of the PPSA. Tottle J (at [247]-[250] and [254]-[257]) referred both to the ordinary meanings of the concept of account and "monetary obligation" and to the decision in Strategic Finance. His Honour observed (at [250]) that: "The ordinary meanings of the words 'account' and 'monetary obligation' support the view that for the purposes of the PPSA an 'account' requires that there be an existing binding legal obligation to pay an ascertainable amount of money at some ascertainable future time arising from the disposal of property, the granting of a right, or the providing of services in the ordinary course of a business of granting rights or providing services of that kind."
His Honour also referred (at [260]) to Strategic Finance and held that a "monetary obligation" was: "an existing legal obligation on one party to pay an identifiable monetary sum to another on an ascertainable date arising from the disposing of property or the granting of a right or providing services in the ordinary course of granting rights or providing services of that kind subject to the specified exceptions".
His Honour also observed (at [261]) that: "I consider that a claim for payment for services provided pursuant to an agreement is capable of constituting a monetary obligation provided that the agreement contains a mechanism for ascertaining the amount to be paid and the payment date. If there is a legally enforceable obligation and a corresponding existing liability to make payment then it is immaterial that enforcement by court proceedings is required or that a court is required to resolve a dispute as to the amount to be paid or the payment date. Contractual claims of this nature may be contrasted with a right to claim damages in tort or equity, which the court in Strategic Finance held did not constitute monetary obligations. In the case of a right to claim damages in tort or equity a legally enforceable obligation and corresponding liability does not arise until judgment. By way of contrast, a legally enforceable contractual obligation and corresponding liability arises when there is performance in accordance with the terms of the contract."
His Honour there held (at [265]) that the claims described in the judgment as "progress claims" were "accounts" within the meaning of s 10 of the PPSA, where they were claims for debts in amounts governed by the contracts, or alternatively claims for contractual damages where the loss comprised identifiable monetary sums and interest. His Honour also held that the "securities claims" in issue in that case were not accounts within the meaning of s 10 of the PPSA, because they were not claims for identifiable monetary sums due by ascertainable dates arising from the disposing of property or grant of rights in the ordinary course of business. As I will note below, the Court of Appeal took a different view as to the latter question in Forge 2 (at [197]-[198]) on the basis that the securities claims involved an obligation to pay an amount of money, being the proceeds of a wrongful call by Hamersley, arising from guarantees provided in the ordinary course of providing relevant services.
Ms Whittaker, for the Lenders, submits that Tottle J's reference to Strategic Finance in Forge 1 is consistent with the accepted approach that the interpretation of provisions of the PPSA should at least have regard to decisions of the Courts of Canada and New Zealand which had adopted earlier Personal Property Securities legislation, at least in somewhat similar terms: Re Maiden Civil (P&E) Pty Ltd (2013) 277 FLR 337 at [32]. However, the Lenders somewhat retreated from their enthusiasm for foreign case law when the Commonwealth sought to rely on the several other US and Canadian decisions to which I referred above.
The parties also rely on the appellate decision in Forge 2. The Western Australian Court of Appeal (at [183]ff) there considered the decisions in Strategic Finance and Langdon, without any indication of disapproval. However, the Court held (at [196]) that, in those cases, the assets found not to be available for the benefit of preferential creditors were characterised as "effectively arising wholly from post‐receivership, or post‐liquidation, circumstances" and that they provided no real assistance in dealing with the issues on appeal in Forge 2. The Court of Appeal there held (at [198]) that the securities claims were accounts within the meaning of s 10 of the PPSA. The Court observed that an obligation to repay the money received as a result of a wrongful call on a performance guarantee was an account (as defined) because: "It is an obligation to pay an amount of money, being the proceeds of the wrongful call. Further, the obligation arises from the maintenance of bank guarantees to which Forge gave Hamersley rights of recourse under [a contractual provision]. The maintenance of the guarantees for recourse by Hamersley was an aspect of providing building services in the ordinary course of providing services of that kind (building services). Alternatively, the maintenance of the guarantees for recourse by Hamersley was itself a service provided by Forge in the ordinary course of a business of providing services of that kind (the securing of the performance of building work). Further or alternatively, the granting by Forge of the right to Hamersley to have recourse to the guarantees pursuant to [a contractual provision] was the granting of a right in the ordinary course of a business of granting rights of that kind (the granting of rights to secure the performance of building work). Forge's contention that the 'Securities Claims' are not 'accounts' because Forge's business from which it earned income 'was construction work and engineering work' and not 'income [derived] from the provision of bank securities', cannot be accepted."
Dr Higgins, for the Commonwealth, submits that the Western Australian Court of Appeal in Forge 2 did not confine the notion of an "account"; that any confining of that proposition to an existing legal obligation on one party to pay an identifiable monetary sum to another on an ascertainable date is an "unwarranted narrowing" of the terms of the PPSA; and that the Court of Appeal also did not take a narrow approach to the requirement that the monetary amount "arises from" granting a right or providing services in the ordinary course of business. Ms Whittaker, for the Lenders, takes issue in reply with that submission and submits that the Court of Appeal found that there was an obligation to pay an amount of money, being the proceeds of the wrongful call by Hamersley, but submits that that was a factual determination rather than a wider approach to the concept of an "account". Ms Whittaker also points out that the Court of Appeal did not there find the decision of Strategic Finance to be of particular assistance in resolving the questions in issue but did not advance any criticism of the approach adopted in that case.
Turning now to the Liquidators' and interested parties' wider submissions as to the concepts of "monetary obligation" and of "account" in ss 10 and 340(5)(a) of the PPSA, Mr Cook submits that the concept of an "account" is intended to apply to what were traditionally referred to as "book debts", namely a monetary obligation that constitutes a current obligation to pay a known sum of money at a known date. He submits that that concept would include a sum of money that can be calculated by a contractual mechanism which fixes that sum (such as a formula), but would not include the progress claims that Tottle J found were accounts in Forge 1 where those progress claims did not give rise to an obligation to pay a fixed sum of money until Hamersley had reached an opinion as to what should be paid and then issued a payment certificate in the amount determined by Hamersley.
Ms Whittaker submits that the observations of Tottle J in Forge 1 were directed to progress claims which had there arisen in accordance with the terms of the relevant contracts, and his Honour there concluded that the amounts due were debts due under the contract. The Lenders also submit, in their schedule of issues, that: "For there to be a monetary obligation existing at a particular point in time a third party must have an existing liability to make a payment to the company. The amount of the liability and the date for payment must be known or then ascertainable by a mechanism set out in the contract. The Lenders agree with the Liquidator's position that the Court of Appeal's decision in Forge supports a definition of "account" in s 340(5)(a) consistent with what was traditionally referred to as book debts, which would not result in claims being accounts until the amount of payment was ascertained. This definition is consistent with the Forge cases, which consider without disapproving the decision of the New Zealand Supreme Court in Strategic Finance.
Ms Whittaker in turn submits that the concept of an "account" accords with the natural meaning of "monetary obligation" and the concept of an "obligation" connotes something that is presently in existence, and the additional word "monetary" should not change the ordinary meaning of an obligation. Ms Whittaker submits that a monetary obligation primarily exists where a debtor is bound to pay a fixed, certain, specific or liquidated sum of money, referring to Proctor, Mann on the Legal Aspects of Money, 7th ed 2012 [3.03], quoted in Conley v Deputy Commissioner of Taxation (1998) 152 ALR 467 at 470. Ms Whittaker also refers to the definition of "account debtor" in s 10 of the PPSA as "a person who is obligated under an account or chattel paper". She submits, and I accept, that that definition plainly contemplates that an obligation exists at that time.
Ms Whittaker submits that this construction is supported by the authorities including Strategic Finance and that to define a monetary obligation as requiring an existing obligation to pay a fixed sum of money is no broader than the approach taken by the Court in Strategic Finance. She also submits that this approach to defining a "monetary obligation" is the most practical and workable approach and would not result in any radical change to the law as it existed prior to the introduction of the PPSA. Ms Whittaker also draws attention to the observation in the Final Report of the Statutory Review of the Personal Property Securities Act 2009 (2015) that obligations falling within the concept of "monetary obligations" are, or at least generally are, obligations that are "akin to a business's trade receivables or book debts".
Dr Higgins, for the Commonwealth, takes issue with the position adopted by the Liquidators and the Lenders and submits that, first, there is no basis in either the legislation or the authorities for limiting the term "monetary obligation" to "book debts" or an "existing liability" to pay a "fixed, certain, specific or liquidated sum of money", as it is put by the Lenders or "a current obligation to pay a known sum of money at a known date" as is put by the Liquidators. The Commonwealth instead advances a wider meaning for the concept of "monetary obligation" in its schedule of issues, as that: "Properly construed, a monetary obligation is an obligation whose subject matter relates to money or currency; but which obligation need not be unconditional or in respect of a fixed sum."
Dr Higgins also submits that, as a matter of ordinary language, the words "monetary obligation" merely denotes an obligation whose subject matter "relates to" money or currency, as distinct from some other kind of performance, such as the delivery of goods or provision of services, and that there is nothing in the words "monetary obligation" which requires that the obligation be unconditional or for a fixed sum. Notwithstanding this submission, it seems to me that the word "obligation", in its ordinary usage, does at least require that there exist a right to payment at a particular time.
The Commonwealth also refers to other examples of monetary obligations, drawn from Mann on the Legal Aspects of Money, including executory obligations of a monetary character such as an obligation to pay the price of goods not yet delivered. That submission also does not seem to me to assist, because no obligation of that character is in issue in this case. It also does not assist to point to the prospect that a "monetary obligation" can extend to an unascertained, but ascertainable, sum of money, where the amount is uncertain at the date on which the obligation is incurred but will be certain by the date the obligation falls for performance. That analysis provides no assistance here, because the Court must determine the position as at the Appointment Date.
Dr Higgins submits that the Liquidators' and the Lenders' approach treats the term "monetary obligation" as equivalent to a "debt", which was a word that the legislature did not use, and that it could have used the word "debt" or "liquidated sum" to limit amounts to cases involving fixed sums. That submission does not seem to me to assist the Commonwealth, since the Court must construe the terms that are used, which may or may not be synonymous with other terms that could also have been used.
The Commonwealth in turn relies on the decisions in Forge to support this position and Dr Higgins contends that those decisions do not limit the term "monetary obligation" in the manner for which the Liquidators and the Lenders contend. Dr Higgins also submits that the decision in Strategic Finance considered a materially different statutory provision and is not applicable to resolving the proper construction of the definition of "account" in s 10 of the PPSA, where s 16 of the PPSA NZ uses the different term "accounts receivable", and that that decision only goes so far as to reject the submission put in that case that, where a contracting party had promised to undertake some performance in exchange for payment, there was an "account receivable" before the party had undertaken any such performance.
Dr Higgins also submits that the Liquidators' and Lenders' construction of the term "account" would undermine the policy of s 561 of the Corporations Act, although that submission seems to me both to presuppose that policy can be derived other than from the terms of the Act, and that the construction of the PPSA can be determined by working backwards from its effect on the Corporations Act.
This review of the structure of the relevant provisions of the PPSA, the case law and the parties' submissions as to those matters instead provides the background to the specific issues as to which the Liquidators seek a direction from the Court, to which I now turn.

Direction as to "Surplus Proceeds"

The Liquidators next seek a direction that they are justified in treating the Surplus Proceeds (as defined above) as Circulating Assets (as defined [9] ) available to pay Priority Employee Entitlements (as defined above). Mr Cook points out that this issue arises where the Residual Appointment Entities' financiers had provided Bonds (as defined [10] ) to their customers to secure performance of their obligations under various contracts. In some cases, a surplus of funds is expected to remain after those Bonds are called on by a customer and applied to discharge the Residual Appointment Entities' liabilities. Mr Cook, for the Liquidators, submits that the Surplus Proceeds are not Circulating Assets at the Appointment Date. Ms Whittaker, for the Lenders, supports that submission and also submits that there was no property referable to the Surplus Proceeds as at the Appointment Date. The Commonwealth contests both of those submissions.
The Liquidators and interested parties agreed that the Court should proceed on the following factual assumptions in respect of this issue: 1. Financiers of certain of the Residual Appointment Entities provided Bonds to various Principals to secure performance of the Residual Appointment Entities' obligations under the Principal Contracts. 2. It was within the ordinary course of business of each Residual Appointment Entity to grant the Principal the right to draw on the Bond and retain the proceeds drawn in accordance with the terms of the relevant Principal Contract. 3. In each case, the Principal was entitled to call on the Bond if they asserted a right to payment of money by the relevant Residual Appointment Entity under or arising under the relevant Principal Contract. 4. Under each Principal Contract, the Principal was entitled to be paid or deduct from the proceeds of the Bond amounts for liquidated damages and any other amount owing to the Principal under the Principal Contract. 5. Post-Appointment Date, certain of the Principals called on the Bonds which ultimately gave rise to the Surplus Proceeds. 6. In some cases, after discharge of the relevant Residual Appointment Entity's liabilities to the Principal, Surplus Proceeds exist or the Liquidators expect will exist. 7. At least some of the Bonds were called by the Principals on the basis of the insolvency of the Residual Appointment Entities. 8. In each case, the Principal was obliged to account to the relevant Residual Appointment Entity for any surplus in one of four ways: 8.1 the Principal Contract contained an express obligation to repay excess amounts drawn under the Bond; or 8.2 the Principal was obliged to indemnify the relevant Residual Appointment Entity from all damages, losses and expenses resulting from a claim under the Bond to the extent the Principal was not entitled to make the claim; or 8.3 the Principal was required to make restitution to the relevant Residual Appointment Entity for all damages, losses and expenses resulting from a claim under the Bond to the extent the Principal was not entitled to make the claim; or 8.4 an implied contractual term in the Principal Contract to account for the Surplus Proceeds. 9. There are no instances in which a Residual Appointment Entity held an enforceable right to the return of a particular amount of Surplus Proceeds as at the Appointment Date. 10. At least as at the Appointment Date: 10.1 there were no instances in which the amount owing to any of the Residual Appointment Entities on account of Surplus Proceeds was quantified; and 10.2 there were no instances in which the date on which a Surplus Proceeds amount was or would be due to be paid to any of the Residual Appointment Entities had been identified. 11. None of the Residual Appointment Entities had express or implied authority from the Lenders to transfer any right to, or any contingent right to, the Surplus Proceeds in the ordinary course of their business, free of the Lenders' security interest.

Whether the Surplus Proceeds are personal property for the purposes of the PPSA

Ms Whittaker rightly submits that, prior to the identification of any right or claim that is a "monetary obligation", an "account" under ss 10 and 340 of the PPSA and a "circulating asset" for the purposes of s 340 of the PPSA and is subject to a "circulating security interest" for the purposes of s 561 of the Corporations Act, an anterior question arises whether that right or claim is personal property under the PPSA. Ms Whittaker submits that the Residual Appointment Entities' rights to Surplus Proceeds were so contingent that they did not constitute property at the Appointment Date. She also submits that the contingencies that, as at that date, attended any right to repayment of surplus proceeds were such that the subject matter of the obligation to make a payment may never have come into existence and that, consistent with the reasoning in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 ("Norman") at 26, as explained in Shepherd v Commissioner of Taxation (1965) 113 CLR 385 ("Shepherd"), the right to receive payment in respect of the Surplus Proceeds was not of a proprietary nature at the Appointment Date.
It is necessary to address the cases to which Ms Whittaker refers in more detail. The question in Norman was whether a lender had effectively assigned the interest he would or might earn on a loan for the tax year commencing 1 July 1957. The relevant loan had commenced on 30 June 1955 with annual interest payments. It had no fixed term; and although the lender could only require repayment with 18 months' notice, the borrower could repay the amount owed at any time it chose. The lender executed a deed on 21 December 2016 seeking to assign future interest under that loan for no consideration. As at the date of the assignment deed, interest falling within the tax year commencing 1 July 1957 was not yet payable and had not yet accrued and, even after the assignment deed was executed, the borrower could choose to repay the entirety of the amount owed before any interest accrued for that tax year. The Court held (at 22) that, at the time the assignment deed was executed, interest for the tax year commencing 1 July 1957 was not an existing right in the form of a debt or chose in action, but "nothing but an expectancy", and the voluntary assignment of the interest without consideration was ineffective in equity.
In Shepherd, the High Court considered the assignment by deed by a patent holder to certain recipients of an amount equal to ninety per cent of income he would receive under a licence he granted to a castor manufacturer. Under the licence, the manufacturer would each month pay royalties calculated as a percentage of the gross sale price of castors sold in the preceding month. The majority held that the deed assigned an existing chose in action, being the patent holder's rights to royalties. Kitto J (at 395ff) distinguished Norman on the basis that the relevant tax year there commenced six months after the date of the assignment deed, and the borrower had complete discretion whether to repay the amount owed before the date on which any interest would accrue for the relevant tax year. By contrast, in Shepherd, and absent cessation of the patent, the obligation to pay royalties would exist throughout the three year term that the assignment deed was in force. That obligation would still be on foot throughout that period, even if the manufacturer did not make any castors and the quantum of the royalties payable was nil.
Ms Whittaker, for the Lenders, submits there was no enforceable right in the Residual Appointment Entities until a Principal drew on the relevant Bond, and the Residual Appointment Entities had at most a mere expectancy and not an existing chose in action in respect of the recovery of any Surplus Proceeds. Dr Higgins, for the Commonwealth, accepts that the PPSA only operates with respect to "personal property", but submits that a contingent right is a chose in action, including where the contingency is an uncertain event such as the completion of performance, and that the right to Surplus Proceeds was personal property at the Appointment Date.
On balance, it seems to me that Ms Whittaker is correct that any "right" to Surplus Proceeds was so contingent that it was "nothing but an expectancy", in the language of Norman, and not an existing contractual right and that it did not have the nature of personal property. The uncertainty in that respect was not merely the completion of performance by a Residual Appointment Entity, but whether a third party, the relevant Principal, would call on a Bond, which it may or may not do for its own commercial reasons. This is not a case where a Principal was bound to call on the Bond, still less where it had done so, and the only question was the quantum of the Surplus Proceeds. Where that expectancy is not personal property within the scope of the PPSA, no further question arises whether it is a "monetary obligation" so as to be an "account" for the purposes of ss 10 and 340 of the PPSA, or a circulating asset that can fall within the scope of 340 of the PPSA and can be subject to a circulating security interest for the purposes of s 561 of the Corporations Act. I will nonetheless address those questions below against the contingency that an appellate court may take a different view of this question.

Whether the Surplus Proceeds are a "monetary obligation" and an "account" for the purposes of ss 10 and 340 of the PPSA

The Liquidators rightly recognise that, assuming (to the contrary of the view I reached above) the Surplus Proceeds are personal property for the purposes of the PPSA, whether they are a circulating asset within s 340 of the PPSA and subject to a circulating security interest for the purposes of s 561 of the Corporations Act depends on whether they are an account as defined in s 10 of the PPSA for the purposes of s 340(5)(a) of the PPSA at the Appointment Date. I have addressed the concepts of "monetary obligation" and "account" under ss 10 and 340(5)(a) of the PPSA and the applicable authorities above.
Mr Cook submits that, at the Appointment Date, the Surplus Proceeds were not a monetary obligation because there was no current obligation to pay a fixed sum of money at a fixed time. In opening submissions, Mr Cook accepts that the Surplus Proceeds are now capable of constituting an obligation on the relevant Principal to repay those proceeds to a Residual Appointment Entity; that obligation is now a "monetary obligation", since it concerns the payment of money by the Principal to that entity; and it arises from granting a right (being the right to draw on the Bond under the Principal Contract and retain the proceeds of the Bond) in the ordinary course of a business granting such rights. However, Mr Cook submits that, at the Appointment Date, the Surplus Proceeds did not constitute a monetary obligation, an account or a circulating asset, because the relevant claim and hence the account only arose after the Appointment Date.
The Lenders similarly submit in their summary of issues that: "The beneficiaries under the Bonds had not yet drawn on them. It could not be said that they had an obligation to pay any amount arising from drawing on the Bonds when that had not yet occurred, and when it might never have occurred. For an obligation to exist within the meaning of that term in the definition of account, the third party must be obliged in the sense of having an existing liability."
In opening submissions, Ms Whittaker similarly submits that the Surplus Proceeds were not an "account" under ss 10 and 340(5)(a) of the PPSA at the Appointment Date and were therefore not a "circulating asset" under s 340 of the PPSA at that date, because there was no extant monetary obligation at that date and any such obligation did not arise from the grant of rights or provision of services on the ordinary course of a business of granting rights or providing services of that kind. She submits that, at the Appointment Date, all the relevant companies had was the benefit of an express or implied contractual term which would require a Principal to make a payment to the relevant company, if the Principal subsequently called on the Bonds and recovered more than the amount to which it was entitled. She also submits that the time for performance of any corresponding obligation was unknown and not ascertainable; the quantum of the corresponding obligation was unknown and not ascertainable; and the obligation on the counterparty to make payment did not arise until after the Appointment Date.
The Commonwealth in turn contends, in its summary of issues, that the Liquidators' approach proceeds on an incorrect construction of the term "monetary obligation" and that: "[T]he Surplus Proceeds were 'accounts' as at the [Appointment] Date, because there was as at that date an express or implied contractual right on the part of a Residual Appointment Entity to be paid any Surplus Proceeds. That analysis is on all fours with the treatment of the "Securities Claims" considered in Forge (in each case, the relevant entitlement arises from an excessive call on the performance securities) …".
Ms Whittaker responds that the Commonwealth's submission that the Surplus Proceeds correspond to the securities claims in Forge should not be accepted, on the basis that it was an agreed or assumed fact in Forge 2 that Hamersley had no entitlement to call on the guarantees and that its call was wrongful, so an existing entitlement to repayment was there established. I do not accept the Commonwealth's submission that the Residual Appointment Entities' claims in respect of the Surplus Proceeds correspond to the securities claims considered by the Western Australian Court of Appeal in Forge 2 to be "accounts". The critical distinction is that the securities claims in Forge 2 related to existing claims, whereas the claims to Surplus Proceeds would not arise unless and until the relevant call was made. Ms Whittaker also submits that, even on the Commonwealth's wider view of "monetary obligation", it was uncertain what the quantum of the Surplus Proceeds would be at the Appointment Date, and it was also not known whether there would be any call on the Bonds such that any question of surplus would ever arise and, if there was such a call, whether there would be a surplus, where it was a matter for the relevant Principal to determine whether to draw on the Bonds and, if so, in what amount.
On balance, it seems to me that the Surplus Proceeds cannot properly be characterised as a monetary obligation at the Appointment Date. First, it seems to me that the term "monetary obligation" must retain something of its character in general usage, and a potential claim in respect of the Surplus Proceeds which might or might not arise depending on the actions of a third party, while of a monetary character, had no element of "obligation" about it. If a claim of that character were treated as a "monetary obligation", there would be no principled basis on which to exclude other contingent claims which might or might not arise. So, for example, would a possible monetary claim under an insurance policy that could arise if a factory was in future destroyed by fire also be treated as a "monetary obligation" and an account under ss 10 and 340(5)(a), where the policy and the factory exists and a fire and a claim on the policy are a possibility, albeit a remote one? Although I am conscious that concepts used in the PPSA should arguably not be construed by reference to their outcome for the operation of s 561 of the Corporations Act, it would still be an extraordinary result if employee priorities under that section extended to any amount that might be recovered if a contingency occurred, without regard to whether it occurred before or after the Appointment Date. That result would also likely not be to the advantage of employees, given its potential impact on the willingness of financiers to extend secured credit or the costs of obtaining such credit.
Second, it seems to me that I should give weight to the analysis of the concept of "monetary obligation" and "account receivable" in Strategic Finance, although it is not binding on me, where that decision is a considered analysis of the broadly similar concepts in s 16 of the PPSA NZ and was reviewed at length and without disapproval in Forge 2, although not on point as to the matters in issue in that case. The Surplus Proceeds do not satisfy any of the requirements there identified for a "monetary obligation", since they were not an existing legal obligation (at the Appointment Date) on a Principal (which had not then called on the Bonds or received their proceeds) to pay an identifiable monetary sum to the company on an ascertainable date or at all, and a Principal did not then have (and, absent a call on the Bonds, would never have) an existing liability to make the payment. Third, the concept of "account" in s 10 of the PPSA seems to me to have at least its core meaning in common with that of "account receivable" in s 16 of the PPSA NZ, as recognised in the academic commentary to which I have referred above. The Surplus Proceeds are so contingent in character that they would not properly fall within that concept or any expansion of it that can reasonably be drawn from the use of the simpler term "account".
Fourth, the phrase "whether or not that obligation has been earned by performance" in the definition of "account" in s 10 of the PPSA does not extend the operation of that concept to the Surplus Proceeds, since the right to Surplus Proceeds depended on whether the Principal decided to call upon the Bonds for its own reasons, not on any future performance by the Residual Appointment Entities. Fifth, the result in Forge 2 does not seem to assist the Commonwealth, since the securities claims in Forge arose from a wrongful claim on the securities that was made by Hamersley prior to the relevant date in that case. Here, the assumptions on which the parties proceed include that the relevant Principals called on the Bonds which ultimately gave rise to the Surplus Proceeds after the Appointment Date, and no right to receive a surplus could arise unless they did so. Even if, as the Commonwealth submits, any uncertainty as to the amount of any surplus would be resolved by the time of repayment of the surplus, if such a call was later made, that is not sufficient to give rise to a "monetary obligation" at the Appointment Date, for the reasons noted above.
For these reasons, I will direct the Liquidators that they are justified in proceeding on the basis that the Surplus Proceeds (as defined) were not an "account" for the purposes of ss 10 or 340(5)(a) of the PPSA or a "circulating asset" for the purposes of s 340 of the PPSA, and were not property subject to a "circulating security interest" and were not property available under s 561 to pay Priority Employee Entitlements as at the Appointment Date.

Whether the monetary obligation arises from the grant of rights etc in the ordinary course of a business of granting rights of that kind

The Liquidators note that there is a further potential area of controversy, in relation to the requirement in the definition of "circulating asset" in s 340(5) of the PPSA, that the monetary obligation must arise from the granting of rights or the provision of services in the ordinary course of a business of granting rights or providing services of that kind. Mr Cook submits that the definition includes only monetary obligations that are the natural result of the ordinary trading of the particular business, not those that arise indirectly by reason of additional factors. The Lenders in turn submit, in their schedule of issues, that: "The requirement that the monetary obligation arises from the provision of services, or the granting of rights, in the ordinary course of a business of doing so, greatly restricts the types of obligations that fall within the definition. The archetype of such an obligation is a book debt or trade receivable. Taken together, ss 340(5)(a) and (b) indicate an intention to limit the nature of accounts to those monetary obligations arising from the company supplying its normal goods and services to its customers. This is consistent with the legislative history of the provision. The legislative intention was to make the definition of account narrower. Given the term's purpose was to narrow the meaning of account, the Court should not strain to give the term the broad meaning contended for by the Commonwealth."
Ms Whittaker also submits that, even if a monetary obligation in connection with the Surplus Proceeds existed at the Appointment Date, that obligation did not arise in the ordinary course of the Residual Appointment Entities' business and was therefore not an asset within s 340(5) of the PPSA. The Commonwealth responds, in its schedule of issues, that: "The submissions by the Lenders … that, for a monetary obligation to 'arise from' the granting of a right or providing of services in the ordinary course of a business of granting rights or providing services of that kind, there must be a direct causal connection between the monetary obligation and the granting of a right or provision of a service by a Residual Appointment Counterparty (cf a subcontractor) is an unduly narrow construction of the definition of account in s 10 of the PPSA, and a construction which was considered, and rejected, by the Court of Appeal in Forge (at [198])... The Commonwealth submits that, as in Forge, Subcontractor Proceeds arise from the maintenance of the Subcontractor Bonds for recourse by the Residual Appointment Entities in the ordinary course of their business."
It is not necessary to address this further question given the conclusions I have reached above. For completeness, the Liquidators also note that s 340(1)(b) of the PPSA refers to any assets which the secured creditor has given authority to the debtor to transfer, free of a security interest, in the ordinary course of business. It is common ground that paragraph is not relevant here, since it is an assumed fact that the Surplus Proceeds (and also the WIP and Subcontractor Proceeds) were not property of that character.

Direction as to WIP

The Liquidators also sought a direction as to whether the proceeds of "WIP" (as defined above) should be treated as Circulating Assets (as defined above) available to pay Priority Employee Entitlements (as defined), and as to whether Intangible WIP (as defined [11] ) is "inventory" for the purposes of s 340(5)(e) of the PPSA. The Liquidators note that this issue arises where, at the Appointment Date, certain companies were undertaking works, rendering services and producing goods in performance of contracts, or had entered into contracts to do so, where no associated invoice or demand or request for payment had been issued to the relevant contractual counterparty at that date. They point out that the five permutations of WIP to which they refer cover a range between where everything other than the issue of an invoice or demand had been done, to the position where a head or umbrella contract existed but no underlying works order had been placed by the Appointment Date.
The Liquidators and the interested parties agreed that the Court should proceed on the following assumptions in respect of this issue (retaining the numbering in these assumptions): 12 In respect of each WIP permutation below: 12.1 the Residual Appointment Entity produced goods or rendered services in the ordinary course of business of granting rights in such goods or providing services pursuant to contracts with counterparties (Construction Contracts); 12.2 under each Construction Contract, there were express provisions governing the determination of the amount and due date for payment to the Residual Appointment Entities in respect of those goods and services ("Standard Contractual Payment Mechanism"); 12.3 at the Appointment Date, the Residual Appointment Entity was not entitled to payment under the Standard Contractual Payment Mechanism for the goods and services; 12.4 after the Appointment Date, a right to payment under the Standard Contractual Payment Mechanism arose on the part of the relevant counterparty in favour of the Residual Appointment Entity in respect of the granting of a right in respect of the goods produced or provision of the services; 12.5 the obligations under the Standard Contractual Payment Mechanism to make payments to a Residual Appointment Entity that arose after the Appointment Date were contractual obligations in respect of liquidated amounts (at such time that those obligations arose); 12.6 the Liquidators recovered proceeds after the Appointment Date in relation to the goods and services; 12.7 where the Residual Appointment Entity produced goods, the goods produced were not inventory of the Residual Appointment Entity; and 12.8 the Residual Appointment Entities did not have express or implied authority from the Lenders to transfer any right, or any contingent right, in respect of the goods and services in the ordinary course of their business, free of the Lenders' security interest. 13. In respect of: 13.1 WIP Permutation 1: 13.1.1 The production of the goods or the rendering of services had been completed by the Appointment Date and all that remained to give rise to a right to payment on the part of the Residual Appointment Entity under the Standard Contractual Payment Mechanism was for an associated invoice or demand or request for payment (together an "Invoice") to be issued to the relevant contractual counterparty. 13.1.2 Post-Appointment Date, the Residual Appointment Entity raised an Invoice that was subsequently paid in full or in part by the contractual counterparty. 13.2 WIP Permutation 2: 13.2.1 The production of the goods or the rendering of services had been completed by the Appointment Date, but pursuant to the Standard Contractual Payment Mechanism certification or approval was required before an Invoice could be issued by the Residual Appointment Entity to the contractual counterparty or a right to payment otherwise arise under the Standard Contractual Payment Mechanism. 13.2.2 Post-Appointment Date, certification, approval or confirmation occurred, following which the Residual Appointment Entity was paid in full or in part by the counterparty for the goods and services. 13.3 WIP Permutation 3: 13.3.1 The production of goods or rendering of services had commenced before the Appointment Date but was only completed after the Appointment Date and no right to payment under the Standard Contractual Payment Mechanism arose on the part of the relevant counterparty until after the Appointment Date. 13.3.2 Post-Appointment Date, the production of the goods or rendering of services was completed, following which the Residual Appointment Entity was paid in full or in part by the counterparty. 13.4 WIP Permutation 4: 13.4.1 At the Appointment Date a contract for the production of goods or the rendering of services was on foot, but the relevant Residual Appointment Entity had not yet commenced producing the goods or rendering the services. 13.4.2 Post-Appointment Date, the Residual Appointment Entity produced the goods or rendered the services, following which the Residual Appointment Entity was paid in full or in part by the counterparty. 13.5 WIP Permutation 5: 13.5.1 At the Appointment Date there was a head or umbrella contract in place, but no order for the production of goods or for the rendering of services had been placed with the Residual Appointment Entity under the head or umbrella contract. 13.5.2 Post-Appointment Date, such an order was placed by the counterparty and goods were produced or services rendered by the Residual Appointment Entity. 13.5.3 Post-Appointment Date, the Residual Appointment Entity was paid in full or in part by the contractual counterparty.
The Commonwealth submits that the right to payment of WIP within the first through fourth permutations of WIP was "personal property" within the scope of the PPSA at the Appointment Date, and the Lenders did not contend to the contrary. It is not necessary to determine that question where there is no controversy about it. The Lenders submit that the contingencies and uncertainties that attended any rights in respect of the fifth permutation of WIP are such that they are not "personal property" for the purposes of the PPSA. It is also not necessary to determine that question where it is common ground that WIP in that permutation is not a monetary obligation or an account for the purposes of the PPSA.
It is again common ground that, for WIP to be a "circulating asset" within the meaning of s 340 of the PPSA, it must be an "account" within s 340(5)(a) of the PPSA at the Appointment Date, subject to the additional question raised by the Commonwealth whether WIP can fall within the concept of "inventory" under s 340(5)(e) of the PPSA, which I address below. The Liquidators submit (and the Lenders agree) that, at the Appointment Date, a monetary obligation did not exist in respect of any of the permutations of WIP because paragraph 12.3 of the assumed facts records that no entitlement to payment under the Standard Contractual Payment Mechanism existed and, unless another basis could be found to give rise to a current obligation to pay a fixed sum of money at a fixed time outside of the Standard Contractual Payment Mechanism, any rights or claims in respect of WIP were not a monetary obligation and therefore not an account within ss 10 and 340(5)(a) of the PPSA and were therefore not a circulating asset within s 340 of the PPSA and were not property subject to a circulating security interest that was available to pay employee entitlements under s 561 of the Corporations Act. In opening submissions, Mr Cook also submits that none of the relevant categories of WIP comprise circulating assets, as there was no monetary obligation in existence as at the Appointment Date in respect of any of those categories, because such an obligation depended in each case on the relevant company taking a further step. Conversely, Dr Higgins again submits that approach proceeds on a construction of the phrase "monetary obligation" which is unsupported by the legislation or the authorities for the reasons that I have addressed above in dealing with the Surplus Proceeds. The Commonwealth did not press an earlier contention that such a monetary obligation could arise on the basis of a claim for unjust enrichment.
Turning now to WIP Permutation 1, where all that remained was for a Residual Appointment Entity to issue an invoice or demand or request for payment for work done, the Liquidators submit that no monetary obligation or account here existed at the Appointment Date because the issue of an invoice, demand or request was required before a monetary obligation arose. The Commonwealth submits that, on the assumed fact that each contract for goods or services rendered by a Residual Appointment Entity contained provisions governing the determination of the amount and due dates for payment, all work in progress attributable to the period prior to the Appointment Date constitutes a monetary obligation and therefore an account for the purposes of ss 10 and 340(5) of the PPSA. The Commonwealth also submits that WIP Permutation 1 involved only the remaining step of the issue of an invoice or demand for payment, and that was of a lesser degree of conditionality than that applicable to the progress claims held to be accounts in Forge 1 and not challenged on appeal. The Lenders submit that, contrary to the Commonwealth's submission, the progress claims in Forge are not analogous to WIP Permutation 1, because the progress claims in that case were pleaded as, and accepted at first instance as, being debts due. It is not necessary to determine the strength of that distinction in order to determine whether to give the direction sought.
It seems to me that the amounts falling within WIP Permutation 1 were "monetary obligations" and an "account" within ss 10 and 340(5)(a) of the PPSA and therefore a "circulating asset" within s 340 of the PPSA to which s 561 of the Act can apply. First, the extension of the concept of "account" to amounts still to be earned by performance suggests that it would at least include amounts that had been earned by performance that were yet to be invoiced. Second, consistent with the reasoning in Forge 1, the amounts that were still to be invoiced were governed by the contracts and any dispute as to the amount invoiced could be determined on that basis. It seems to me that it is not to the point that, under paragraph 12.3 of the assumed facts, the entitlement to payment had not arisen where that reflects no more than the fact that an invoice or demand had not yet been issued. The position in this respect seems to me to be different in nature, and not only in degree, from the position in respect of the Surplus Proceeds where any future right of the Residual Appointment Entities depended on uncertain future actions of a third party.
Now turning to WIP Permutation 2, this arises where the production of the goods or the rendering of services had been completed by the Appointment Date, but a contractual certification or approval was required before an invoice could be issued by the Residual Appointment Entity to the contractual counterparty or a right to payment otherwise arise under the contract. The Lenders submit that no monetary obligation arose here until an invoice had been rendered and there was no obligation and no account as at the Appointment Date. The Commonwealth submits that WIP Permutation 2 is substantively identical to the progress claims considered in Forge, which also required certification or approval before payment, which had not been completed in respect of those claims and any dispute as to certification or approval could be resolved in accordance with the contract. It seems to me that the position here is the same as for WIP Permutation 1, since any dispute as to certification and the amount invoiced could be determined under the contract. On that basis, these amounts also constituted an account under s 10 and 340(5)(a) of the PPSA, a circulating asset under s 340 of the PPSA and fall within the scope of s 561 of the Act.
WIP Permutation 3 arises where the production of goods or rendering of services had commenced before the Appointment Date but was only completed after the Appointment Date and no right to payment under the Standard Contractual Payment Mechanism arose on the part of the relevant counterparty until after the Appointment Date. The Lenders here submit that there cannot have been an account because no monetary obligation had arisen until after the Appointment Date and that the provision of services after that date would be outside the scope of the ordinary course of business. The Commonwealth in turn submits that WIP Permutation 3 gave rise to a monetary obligation as at the Appointment Date, the quantum of which is limited to the unbilled WIP as at the Appointment Date, and that there is no conceptual or practical difficulty with assigning a value to unbilled WIP as at that date. The Lenders respond, and I accept, that this submission is not consistent with the assumed contractual regime for recovery of WIP and, if there is no contractual basis for an apportionment of WIP, then there is no monetary obligation in respect of any amount in this category as at the Appointment Date.
The Commonwealth also submits that, in order to establish a monetary obligation and an account for the purposes of s 10 and 340(5)(a) of the PPSA: "It is sufficient that there is, at the Appointment Date, an obligation (albeit conditional upon completion of further work) to make a payment of money with respect to the completed work." It seems to me that submission assumes the existence of an obligation, treated as conditional, prior to the completion of the relevant work, contrary to the factual assumptions set out above. On the assumed facts, there was no such obligation at the Appointment Date, conditional or otherwise, because the contract did not provide a right for payment for incomplete work. There was, instead, only a possibility at the Appointment Date that an obligation might arise at a future date, if and only if the relevant work was completed. That was not, in my view, a "monetary obligation" at the Appointment Date for the reasons noted above. The Commonwealth did not submit that the phrase "whether or not earned by performance" in the definition of account in s 10 of the PPSA advanced its position, and it seems to me that it did not do so, where there is no reason to read it as recognising an obligation that did not arise under the parties' contractual arrangements.
The Commonwealth fairly concedes that, if a relevant contract did not permit a Residual Appointment Entity to require payment for the work completed prior to the Appointment Date until further work was completed, then the decision in Strategic Finance would indicate that that degree of conditionality meant there is no "monetary obligation", but submits that case should not be followed. As I have noted above, it seems to me that I should give weight to the analysis of the concept of "monetary obligation" in Strategic Finance, for the reasons noted above. On that basis, WIP Permutation 3 is not a monetary obligation and account on the basis of that concession.
It seems to me that Ms Whittaker is also correct that, to the extent that part of the work done in WIP Permutation 3 arises after the Appointment Date, it does not arise from the provision of services in the ordinary course of a business of doing so, because work undertaken by administrators or liquidators is not work done in the ordinary course of a company's business and does not fall within the concept of an "account": Langdon above at [128]-[129]. For this reason also, the entitlement to payment that ultimately arose outside the ordinary course of the Residual Appointment Entity's business is not a "circulating security interest" for the purposes of s 340 of the PPSA or within the scope of s 561 of the Corporations Act.
Turning now to WIP Permutations 4 and 5, the Lenders submit that any monetary obligation under WIP Permutation 4 arose after the Appointment Date and that, as at that date, the counterparty was under no obligation to make any payment to a Residual Appointment Entity. While the Commonwealth submits that this permutation gave rise to a monetary obligation as at the Appointment Date, it accepts that its quantum is nil. All parties accept that WIP Permutation 5 did not give rise to a monetary obligation as at the Appointment Date. I do not consider that there is a real controversy as to these permutations and do not consider that a direction in respect of them is necessary.
Turning now to the position as to Intangible WIP (as defined above), the Liquidators submit that this is not "inventory" for the purpose of s 340(5)(e) of the PPSA. Mr Cook rightly submits that "inventory" for the purposes of that paragraph has its ordinary meaning and the definition under s 10 of the PPSA does not apply. He submits that the ordinary meaning of inventory does not encompass a chose in action arising out of the performance of a contract for the supply of services or production of goods and that, in the ordinary usage of the term "inventory", tangible work in progress would be classified as a circulating asset on the basis that it is inventory, but intangible work in progress would not be classified in that manner. The Lenders support that submission and add that the concept of "inventory" contemplates only physical assets; a company does not "hold" services that have not yet been billed and does not "produce" services. Ms Whittaker points to the ordinary usage of that term, recognised in both the Macquarie and Oxford dictionaries as the stock of goods held or in use at a particular time and also submit that the definition of "inventories" in AASB 102, by reference to "assets", inter alia, held for sale in the ordinary course of business, is not consistent with the treatment of unbilled services as inventory.
Dr Higgins conversely submits that any Intangible WIP rendered prior to the Appointment Date constituted "inventory" according to the ordinary meaning of that word for the purposes of s 340(5)(e) of the PPSA. She contends that the word "inventory" is capable as a matter of ordinary language of covering work in progress constituted by unfinished services. I do not accept that submission, as a matter of ordinary usage, and there is nothing more that can be said about it. I therefore conclude that Intangible WIP rendered prior to the Appointment Date did not constitute "inventory" according to the ordinary meaning of that word, and did not fall within the definition of circulating asset in s 340(5)(e) of the PPSA.
For these reasons, I will direct the Liquidators that they are justified in acting on the basis that WIP Permutations 1 and 2 are circulating assets for the purposes of s 340 of the PPSA and fall within the scope of s 561 of the Corporations Act, and that WIP Permutation 3 and Intangible WIP (as defined) are not circulating assets for the purposes of s 340 of the PPSA and do not fall within the scope of s 561 of the Corporations Act. I give no direction as to WIP Permutations 4 and 5.

Direction as to Subcontractor Proceeds

A fourth issue, directed to "Subcontractor Proceeds", involves the Liquidators' application for a direction that they are justified in not treating the "Subcontractor Proceeds" (as defined above) as Circulating Assets (as defined above) available to pay Priority Employee Entitlements. The Liquidators point out that this issue arises where certain of the subcontracts required that the subcontractor procure from their financiers one or more subcontractor bonds in favour of one of the Residual Appointment Entities to secure performance of the subcontractors' obligations under the subcontract and, before the Appointment Date, a right on the part of that entity arose to make a call on the subcontractor bonds but that right had not been exercised by that date.
The Liquidators and the interested parties agreed that the Court should proceed on the following assumptions in respect of this issue (again retaining the numbering in these assumptions): 14 Certain of the Residual Appointment Entities entered into Subcontracts with Subcontractors. 15 The Subcontracts required that the Subcontractor procure from their financier one or more Subcontractor Bonds to secure performance of the Subcontractor's obligations under the Subcontract. 16 Each relevant Residual Appointment Entity's right to call on the relevant Subcontractor Bond arose pre-Appointment Date. 17 The terms of each Subcontractor Bond prohibited assignment of the Subcontractor Bond. 18 None of the Subcontractor Bonds are for a sum certain in money and instead all are payable up to a specified maximum amount. 19 It was part of the ordinary course of business for each Residual Appointment Entity to engage Subcontractors to assist with the performance of Principal Contracts and for Subcontractors to procure the Subcontractor Bonds. 20 The Liquidators have not called on any Subcontractor Bonds, but it is likely that they will as a result of the relevant goods or services not being provided, or alleged to have not been provided, by the Subcontractor in accordance with the terms of the relevant Subcontract. 21 The Residual Appointment Entities did not have express or implied authority from the Lenders to transfer any right to, or any contingent right to, the Subcontractor Bonds in the ordinary course of their business, free of the Lenders' security interest.
It will by now not be a surprise that the Commonwealth submits that a Residual Appointment Entity's right to payment of Subcontractor Proceeds was personal property at the Appointment Date. The Lenders did not press an earlier contention to the contrary and I need not determine that question.
It is common ground that, for the Subcontractor Proceeds to be a "circulating asset" as defined in s 340 of the PPSA, they must be an account under s 340(5)(a) of the PPSA or a negotiable instrument under s 340(5)(f) of the PPSA. Mr Cook submits that Subcontractor Proceeds are not an account under s 340(5)(a) of the PPSA because there was no monetary obligation at the Appointment Date. He submits that, where no demand had been made by the Residual Appointment Entities at the Appointment Date, there was no obligation on the issuer of the Subcontractor Bond to make payment. He submits that, absent a monetary obligation at the Appointment Date, the Subcontractor Proceeds are not an account under s 340(5)(a) of the PPSA and therefore not a circulating asset for the purposes of s 340 of the PPSA and were not property subject to a circulating security interest that was available to pay employee entitlements under s 561 of the Corporations Act.
It will also by now be no surprise that the Lenders support that submission. They add, in their schedule of issues, that: "Because the Subcontractor Bonds were payable up to a specified maximum amount, rather than being for a fixed sum, the amount of any obligation is also unknown until the bond is called. Until the time when the issuer of the bonds was under an existing obligation to make a payment to the [Residual Appointment Entity], it could not be said that a monetary obligation was in existence."
Ms Whittaker in turn submits that there was no monetary obligation in the sense that term is used in the definition of an account in s 340(5)(a) of the PPSA before a Residual Appointment Entity called on a subcontractor bond. She submits that, while the issuer of a bond may have had an obligation to make a payment if the bond was called, it was unknown whether the occasion for performance of that obligation would arise, and there cannot be a monetary obligation in respect of which the company had a relevant right until the bond was called. Ms Whittaker also submits that the time for performance was also not known and the amount of any obligation was not ascertainable until the time the bond was called, where the relevant bonds were payable up to a specified maximum amount.
It will also by now be no surprise that the Commonwealth responds that the Subcontractor Proceeds were accounts as at the Appointment Date, because the assumed facts record that the Residual Appointment Entity's right to call upon the Subcontractor Bond (being an unconditional right to require the payment of money pursuant to the terms of the subcontractor bonds) had arisen prior that date. Dr Higgins submits that, on that basis, a Residual Appointment Entity had an unconditional right to require the payment of money pursuant to the terms of the subcontractor bonds at the Appointment Date, and that was both personal property and a monetary obligation. I do not accept that submission. It seems to me that an unexercised right to require the payment of money is not the same as a right to receive the payment of money and does not give rise to an obligation on the counterparty to make such payment until the relevant call is made, and an obligation to pay cannot have arisen before the bond was called, which had not in fact occurred, and where there may be many reasons why such a bond would not be called.
While I have noted above that caution should be exercised in construing ss 10 and 340 of the PPSA by reference to results under s 561 of the Corporations Act, it would nonetheless be a perverse result if monies which would never be received, because such bonds were not in fact called, were taken into account in determining employees' preferential entitlements.
In my view, a potential claim in respect of the Subcontractor Proceeds which might or might not arise, while of a monetary character, would not fall within the general usage of the term "monetary obligation" or the term account in ss 10 and 340(5)(a) of the PPSA, because it had no element of obligation about it at the Appointment Date. I have noted above that, I consider that I should give weight to the analysis of the concept of "monetary obligation" in Strategic Finance, and the Subcontractor Proceeds did not satisfy the requirements identified in Strategic Finance for a "monetary obligation", since they were not an existing legal obligation at the Appointment Date to pay an identifiable monetary sum to the company, particularly where they were referable to a maximum and not a specified amount.
The Lenders also submit that, even if a monetary obligation in connection with the Subcontractor Proceeds existed at the Appointment Date, that obligation did not arise from the provision of services in the ordinary course of a business of providing services of the relevant kind. They submit that any relevant rights granted or services provided were provided by the counterparty, not the Residual Appointment Entity, and that s 340 of the PPSA indicates that an account must arise in the ordinary course of the security provider's business. It is not necessary to determine this question given the conclusion that I have reached above is sufficient to support the direction sought by the Liquidators.
In my view, the subcontractor bonds also do not fall within s 340(5)(f) of the PPSA because they are not a "negotiable instrument", on the factual assumption that they are payable up to a specified maximum amount rather than payable in a sum certain. I can also see no basis on which the subcontractor bonds would possess the characteristic of negotiability which is necessary to a negotiable instrument.
For these reasons, I will direct the Liquidators that they are justified in proceeding on the basis that the Subcontractor Proceeds (as defined above) were not an "account" for the purposes of s 10 of the PPSA or a circulating asset for the purposes of s 340(5)(a) of the PPSA, and were not property subject to a "circulating security interest" and were not property available under s 561 of the Corporations Act to pay employee entitlements as at the Appointment Date.

Orders

I direct the parties to bring in agreed short minutes of order to give effect to this judgment within 14 days or, if there is no agreement, their respective short minutes of orders and short submissions as to the differences between them.

Endnotes

The term "WIP" is here defined as work done, services rendered or goods produced by a relevant company in performance of a contract, in respect of which no invoice or demand or request for payment has been issued to the relevant contractual counterparty as at the Appointment Date.
The term "Surplus Proceeds" is defined by reference to the position where, after the Appointment Date, a contractual counterparty of one of the companies called upon a bond, bank guarantee or similar instrument provided prior to the date on which the administrators were appointed ("Appointment Date") to that counterparty by a company's financier or similar institution ("Bonds"), and the contractual counterparty then paid surplus proceeds from that Bond to that company.
The term "Appointment Date" refers to 21 November 2018, being the date on which voluntary administrators were appointed to the Companies.
The term "Subcontractor Proceeds" was defined as the proceeds of bonds, bank guarantees or similar instruments payable up to a specified amount which were provided to a relevant company pre-Appointment Date and were called upon after the Appointment Date.
The term "Asset" is defined as a legal or equitable estate or interest in real or personal property of a Residual Appointment Entity, including cash at bank or equivalent derived from the sale of an Asset ("Proceeds") but not including any legal or equitable estate or interest in real or personal property acquired after the Appointment Date that is not cash at bank or equivalent derived from the sale of an Asset in existence at the Appointment Date ("New Asset").
The term "Circulating Security Interest" is defined to have the meaning given under s 51C of the Corporations Act and I will return to that definition below.
The term "Priority Employee Entitlements" is defined as debts and amounts referred to in s 561 of the Corporations Act 2001 (Cth) which must be paid in priority over the claims of a secured party in relation to a Circulating Security Interest created by the relevant company. I will also return to that section below.
The term "Non-Circulating Security Interest" is defined, logically enough, as an interest that was not a Circulating Security Interest, as defined.
The term "Circulating Assets" is defined by reference to s 340 of the Corporations Act, to which I refer below.
The term "Bonds" means bonds, bank guarantees or similar instruments provided pre-Appointment Date to a contractual counterparty by a Residual Appointment Entity's financier or similar institution.
The term "Intangible WIP" is defined as WIP which arises from work done or services rendered only and does not result in the production of goods. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 June 2020

Companies Act 1961(NSW)

Companies (New South Wales) Act 1981(NSW)

Corporations Act 1989(NSW)

Corporations Act 2001(Cth)ss 433, 553, 553C, 554, 561

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