The recent decision of the Supreme Court of New South Wales in In the matter of RCR Tomlinson Ltd (administrators appointed) and Ors  NSWSC 735 (RCR Tomlinson) has clarified the characterisation of certain types of assets in a construction liquidation as circulating and non-circulating assets. This decision impacts the returns recoverable for employees and secured lenders owed to by the RCR Tomlinson Group.
The RCR Tomlinson Group (RCR Group) comprised of 41 companies and more than 3,800 employees. Each of the companies within the group operated construction-related businesses. Administrators were appointed on 2 November 2018 who then were appointed as liquidators on 1 May 2020.
The Commonwealth Government (Commonwealth) paid several millions of dollars of employee entitlements under the Fair Entitlements Guarantee scheme. The RCR Group also had secured debts owed to lenders including the Commonwealth Bank of Australia (Secured Lenders). There was a shortfall within the RCR Group to pay both the Commonwealth and Secured Lenders in full. In order to discern the returns owed to the Secured Lenders and the Commonwealth, it was necessary to identify the RCR Group’s assets as circulating or non-circulating.
1.1 Snapshot Date:
(a) The date the administrators are appointed is the relevant date for assessing whether property is a circulating or non-circulating asset (consistent with s 443 of the Corporations Act 2001 (Cth) and the approach taken in Re Amerind which governs the payment of priority employee claims by receivers).
1.2 Classification of a circulating asset:
(a) The classification of an asset as a circulating or non-circulating asset depends on whether the WIP permutation was an ‘account’ under s340(5) of the PPSA; and
(b) Whether a ‘monetary obligation’ under s 10 of the PPSA exists on the administrators’ appointment date.
(i) ‘Monetary obligation’ means an:
(A) existing legal obligation to pay
(B) an identifiable monetary sum
(C) at an ascertainable future date (Strategic Finance Ltd (in liq) v Bridgman  NZCA 357))
(c) The asset must be characterised as ‘property’ for the purposes of the Personal Property Securities Act 2009 (Cth) (PPSA). E.g. If it is a ‘mere expectancy’ there is no existing contractual right, thus will not constitute ‘property’.
1.3 WIP Permutations that classify circulating assets:
(a) WIP Permutation 1: Goods or services under a contract are completed pre-appointment date, but payment is subject to issuance of an invoice, which occurs post appointment as does payment of the invoice;
(i) Any dispute of amount to be invoiced is governed and determined by the contract.
(b) WIP Permutation 2: Goods or services under a contract are completed pre-appointment date, but payment is subject to certification or approval and issuance of an invoice, both of which occur post appointment as does payment of the invoice.
(i) Any dispute of certification and amount invoiced can be determined under the contract, thus constituting an account under s 10 and 340(5)(a) of the PPSA.
1.4 WIP Permutations that do not classify circulating assets:
(a) WIP Permutation 3: Goods or services under a contract are commenced before and are partly performed at the Appointment date but only completed after the Appointment Date, following which an invoice is issued and then paid;
(i) There is only mere a possibility that a monetary obligation might arise.
(ii) There was no contractual basis for apportionment of payment between pre and post appointment of goods and services, meaning no monetary obligation existed and no account.
(b) The following categories likely do not give rise to ‘monetary obligations’ hence are not circulating assets.
(i) WIP Permutation 4: A contract for goods or services is executed pre-appointment date, but the goods or services are all provided post appointment date, at which time an invoice is issued and paid;
(ii) WIP Permutation 5: An umbrella contract is in place pre-appointment date, but the order for the goods or services is only placed post appointment date, at which time the goods or services are provided and an invoice then issued and paid.