The 2020 case of In re RCR Tomlinson (administrators appointed) [2020] NSWSC 735 (RCR Tomlinson) is a very important authority in relation to circulating assets. It provides helpful guidance on the meaning of the term “account” under the PPSA, and the characterisation of accounts as circulating or non-circulating assets.

In RCR Tomlinson, administrators were appointed to the mining services and engineering business run by this company, in circumstances where the business had substantial “work-in-progress” (unfinished work) at various stages of completion as at the appointment of administrators, which fell to be completed by the administrators and invoiced for payment (WIP Amounts).

In addition, RCR Tomlinson had (through its financiers) procured the provision of various bank guarantees and bonds to its counterparties to secure its performance under construction and similar contracts. Upon the return of these bank guarantees or bonds, for example after warranty periods for services or work expire, money was repayable back to the RCR Tomlinson group companies, and these repayments fell for payment after appointment of administrators (Bond Refund Amounts).

The questions arose, were the WIP Amounts and the Bond Refund Amounts circulating assets? This turned on whether they were “accounts” for the purposes of PPSA section 340(5). This in turn, turned on whether these amounts were “monetary obligations” as defined in PPSA section 10, given the term “accounts” is defined in section 10 to be monetary obligations with certain features.

Further and importantly, at what point in time is this characterisation as circulating or non-circulating, made? Is it the time of appointment of administrators, or is the characterisation a continuing one throughout the life of the appointment of administrators?

These questions are important in receiverships, administrations and liquidations, given Corporations Act sections 433 (receivership) and 561 (administration; liquidation) require the ring-fencing of circulating assets to pay certain priority amounts including certain employee entitlements and administrators costs and expenses, ahead of other security interests. This is similar to the pre-PPSA floating charge jurisprudence.

The court in RCR Tomlinson determined that a “snapshot” test is used to determine whether assets are circulating or non-circulating, and this is done at the date the administration or liquidation is taken to commence (Snapshot Test). By contrast, the court held that it is incorrect to conduct a continuing characterisation of assets as either circulating or non-circulating, as assets arise during the course of the administration or liquidation, for example by completion of WIP or collection of amounts owing as they materialise. The reason is to provide stakeholders with certainty. Determining assets as circulating or non-circulating at the outset of an administration or liquidation provides certainty for the duration of the administration or liquidation that later unfolds.

By contrast, a continuing analysis as assets arise or materialise, would create significant uncertainty for all concerned. For example, if otherwise non-circulating assets were realised by administrators or liquidators and then held by them as cash-at-bank (one form of circulating asset), does that change the characterisation of the assets from non-circulating to circulating?

The answer to this according to RCR Tomlinson is “no”, given the determination of the question of whether assets are circulating is made only once, conducting the Snapshot Test, at the date the administration or liquidation is taken to commence. This way, at the date the Snapshot Test is conducted, the asset(s) in question at that date are either non-circulating, or circulating, and that is the end of the matter for the entire administration or liquidation, regardless of whether the assets later change legal form or characterisation (such as accounts being collected and held as cash-at-bank).

RCR Tomlinson also provides very helpful consideration of different types of accounts and whether they are circulating or non-circulating assets. This is described below.

In relation to the Bond Refund Amounts, the court in RCR Tomlinson held that the companies’ rights to receive these amounts at the Snapshot Date remained highly contingent and uncertain, given it was not yet known whether any amounts would be returned to the companies under the bonds, or whether the parties holding the bonds would cash the bonds and keep the amounts on account of defective work performance (for example). As such, the court held these rights to be so contingent that they were “nothing but an expectancy”, and therefore did not constitute a “monetary obligation”, and following the High Court authority of Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, held that rights that are mere expectancies have no character as property¹ . The Bond Refund Amounts not even being personal property for the purposes of the PPSA (given the rights were too uncertain and were mere expectancies), the court held that no question of whether the rights were circulating assets even arose. The result was that the Bond Refund Amounts, as at the Snapshot Date, were not circulating assets.

The court in RCR Tomlinson was also influenced by the New Zealand decision of Strategic Finance Ltd (in liq) v Bridgman [2013] NZCA 357 (Strategic Finance) on the meaning of “monetary obligation”, which held for the purposes of the New Zealand PPSA that a monetary obligation required there to be an existing legal obligation (as at the Snapshot Date) on the contractual counterparty to pay an identifiable sum of money on an ascertainable date. The court noted that the Bond Refund Amounts did not have the characteristics of a legal obligation to pay money on ascertainable dates, and therefore was not a “monetary obligation” and in turn not an account for PPSA purposes².

Interestingly, the court in RCR Tomlinson was very reluctant to receive and consider overseas authority from jurisdictions such as the United States³ and Canada⁴, given the extreme difficulty for an Australian court to assess the cases cited within the wider body of law in that country (which an Australian court cannot easily assess)⁵ . The Court far preferred to receive and rely upon decisions from New Zealand, on the basis that its PPSA is a closer base for comparison to Australia, and New Zealand cases are much easier for an Australian court to assess within the wider body of New Zealand law.

In relation to the WIP Amounts, the various “work in progress” (WIP) held by the companies was at varying stages of completion.

For WIP that was completed before appointment of administrators, and all that remained was to issue an invoice to the customers for payment, the court in RCR Tomlinson held that a monetary obligation existed in the customers to pay the companies for the work, and therefore an account existed under the PPSA at the Snapshot Date⁶. These WIP Amounts were held to be circulating assets, there being no question that any secured party had taken control of any WIP Amounts. The court pointed to the definition of “account” in PPSA section 10 which states that account means “a monetary obligation (whether or not earned by performance)…”, and reasoned that where performance has been completed and all that remains is the issue of an invoice, the definition is satisfied.

For WIP that comprised the production of goods and/or services that had commenced before the appointment of administrators but was only completed after the appointment date (the Snapshot Date), and for which no right to payment arose under the relevant contracts until completion of the work/services, the court in RCR Tomlinson again pointed to the New Zealand decision of Strategic Finance, and focussed on the requirement there stated that no legal obligation for payment had yet arisen, indicating that there was no monetary obligation and so no account for PPSA purposes⁷. These WIP Amounts were held to be non-circulating assets as at the Snapshot Date, because they were not accounts for PPSA purposes.