The Supreme Court of New South Wales has helpfully given guidance to the liquidators of the RCR Tomlinson Group on a number of unsettled questions that have challenged insolvency practitioners (particularly liquidators of construction companies) when assessing whether certain intangible rights and assets are circulating assets.
The questions include:
- What is the relevant date ('snapshot date') for making this assessment for the purposes of determining the property available to pay priority employee entitlements pursuant to section 561 of the Corporations Act?
- Is work-in-progress under a construction contract a circulating asset?
A link to the full decision is here.
For a company placed into liquidation following an administration the relevant date for assessing whether property is a circulating asset is the date of appointment of the administrators. This is consistent with the snapshot date for making the same assessment under s433.
This is consistent with the approach taken in Re Amerind Pty Ltd (recs and mgrs apptd)(in liq)  VSCA 41 where it was held that the correct date for assessing under s433 whether property is subject to a circulating security interest is the date the receiver and manager is appointed.
The Court considered five different permutations of WIP ranging from the situation where, at the date of appointment, all that was required to be done was for the company to issue an invoice for the goods supplied and services rendered to the principal before the appointment date, to the situation where an umbrella contract existed but no order for the works had been placed by the company under the contract.
For the purpose of determining whether each of the permutations of WIP were circulating assets, the Court accepted that the answer to the question turned on whether the WIP permutation fell within the definition of 'account' for the purposes of s.340(5) of the Personal Property Securities Act 2009 (Cth) (PPSA) and whether a 'monetary obligation' existed at the date of appointment of administrators. The Court gave weight to the New Zealand Court of Appeal's interpretation of 'monetary obligation' in Strategic Finance Ltd (in liq) v Bridgman  NZCA 357 - that there be an existing legal obligation (at the date of appointment) on a party to the contract to pay an identifiable monetary sum to the other party on an ascertainable future date.
Directions on three of the five permutations of WIP were made by the Court and details of the Court's classification are set out in the table below.
WIP 1: As at the appointment date:
|Circulating asset||The amounts had been earned by performance and the amount of the invoice could be determined in accordance with the relevant contract.|
WIP 2: As at the appointment date:
|Circulating asset||The amounts had been earned by performance and any dispute as to certification or the amount to be invoiced could be determined under the contract.|
WIP 3: As at the appointment date:
|Not a circulating asset||
There was no obligation to make payment at the date of appointment because the contract did not provide a right for payment for incomplete work.
WIP 4: at the appointment date:
|No direction made by the Court||It was accepted by the opposing party that the quantum of WIP 4 as at the appointment date was nil. Accordingly the Court made no directions in respect of WIP 4.|
|No direction made by the Court||All parties had accepted that WIP 5 did not give rise to a monetary obligation as at the appointment date.|
Proceeds from performance bonds
The Court also considered whether surplus proceeds repayable to the company from performance bonds issued before the appointment date which had not been called upon by the principal prior to the appointment date were circulating assets. The proceeds in question were:
- surplus proceeds payable to a company arising from performance bonds called upon after the appointment date (surplus proceeds); and
- proceeds from subcontractor bonds issued in favour the company which it could call on after the appointment date (subcontractor proceeds).
The Court held that neither surplus proceeds nor subcontractor proceeds were circulating assets as at the date of appointment. In respect of the surplus proceeds, there was no existing contractual right of the company to be paid any proceeds at the appointment date and any right to the proceeds was contingent on a third party calling on the performance bond, which the third party may or may not do for its own commercial reasons. In respect of subcontractor proceeds, there was no obligation to pay out on the bond at the appointment date because no call had been made and there was no certainty that the bond would be called upon.
The Commonwealth (FEG) took an active part in the proceeding and advanced a counter position to the directions made by the Court. It remains to be seen whether FEG will appeal this decision in the coming weeks. We expect that, given some aspects of the Court's analysis may be seen to be in conflict with the decisions in the Forge1, it is likely FEG may seek to appeal the decision.
1 Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd)  WASC 152; Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd)  WASCA 163
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