Circulating Assets within the Corporations Act and the PPSA

Introduction

In a recent case, the New South Wales Court of Appeal (NSWCA) explored the circumstances in which research and development tax refunds can constitute circulating assets subject to employee priority under the Corporations Act 2001 (Cth) (Corporations Act).

 

Case Analysis: Resilient Investment Group Pty Ltd v Barnet and Hodgkinson as liquidators of Spitfire Corporation Limited (in liq) [2023] NSWCA 118.

Facts

This case involved priority dispute between a secured creditor – Resilient Investment Group Pty Ltd (Resilient) and the Commonwealth of Australia (Commonwealth) as a subrogated employee creditor regarding a tax refund received by Spitfire Corporation Limited (in liq) (Spitfire) after the commencement of its winding up.

The first decision (Resilient Investment Group Pty Ltd v Barnet and Hodgkinson as liquidators of Spitfire Corporation Limited (in liq) [2022] NSWSC 340) was held in favour of Commonwealth and was then appealed by Resilient.

Spitfire was a parent entity of Spitfire Group which inter alia engaged in various research and development (R&D) activities alongside its core business, entitling it to receive tax offset refunds for its R&D expenditure.

In August 2020, following their appointment to Spitfire and a related entity of Spitfire called Aspirio Pty Ltd (in liquidation) (Aspirio), the liquidators received R&D Refunds of approximately $2 million for the 19-20 income years.

As a result, the Commonwealth became a subrogated creditor after paying employee entitlements under the Fair Entitlements Guarantee scheme. Resilient and Commonwealth then claimed their priority over the R&D Refunds.

 

Legislation

This case involved the analysis of multiple pieces of legislation. These include:

• s 561 of the Corporations Act, which states that in a winding up, certain debts due to employees are preferred over the claims of a secured creditor in relation to a circulating security interest.
• S 51 of the Corporations Act which defines a circulating security interest as a Personal Property Securities Act 2009 (Cth) (PPSA) security that has attached to a circulating asset.
• s 340(1) of the PPSA which defines a circulating asset as a security interest in personal property that falls within either of two group assets, including (a) personal property covered by s 340(5).
• s 340(5) of the PPSA which sets out various classes of property, including (a) an “account [which] arises from granting rights, or providing services, in the ordinary course of a business of granting rights or providing services of that kind.”

 

Further Considerations

The NSW Court of Appeal was required to determine whether a tax refund can constitute a circulating asset within the context of the Corporations Act and the PPSA

To be considered a circulating asset, the R&D Refunds need to fall under s340(1)(a) and s340(5) of the PPSA, particular to:

• meet the definition of an account; and
• arise from providing services in the ordinary course of a business of … providing services of that kind.

According to s10 of the PPSA an account can only exist if there is a monetary obligation at the liquidators’ appointment date.

 

Decision

The Court determined that the obligation to pay a tax offset arises only once the Commissioner issues a relevant income tax assessment for a given income year – which hadn’t occurred at the time the liquidators were appointed.

At the time of the liquidators’ appointment, the R&D Refunds couldn’t be characterised as a monetary obligation, and accordingly were not circulating assets within the meaning of the PPSA and the Corporations Act.

The Court ultimately held that Resilient had priority to the R&D Refunds over the Commonwealth’s claim under s561 of the Corporations Act.

 

Conclusion

This case has a number of key takeaways:

1. A tax refund payable to a company in relation to its R&D activities can only be considered an account after the Commissioner of Taxation has issued an income tax assessment in a relevant income year.
2. If a company enters liquidation before the date of the assessment, R&D refunds are not circulating assets, which means that s561 of the Corporations Act will not apply to put the interests of priority creditors (or the Commonwealth on a subrogated basis) ahead of the entitlement of the secured creditor.
3. Even if a company enters liquidation after the date of assessment, if the company conducts R&D activities not as its core business, but rather to enable the provision of other primary services, the R&D refund owed to the company will not be considered to arise from providing services in the ordinary course of the company’s business within the meaning of the PPSA.

 

*This article was prepared with the assistance of Annabel Randall