Circulating or non-circulating, that is the question

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By Ariel Borland, Partner, Dean Brayley, Senior Associate and Amy Green, Lawyer

The judgment in RCR Tomlinson Ltd (Admins apptd) [2020] NSWSC 735 provides clarification regarding the classification of circulating and non-circulating assets for the purpose of section 561 of the Corporations Act 2001 (Cth) (Act). The decision provides useful guidance for insolvency practitioners classifying circulating and non-circulating assets.

The liquidators’ sought directions as to whether they were justified in classifying particular assets as circulating or non circulating, and, consequently, whether those assets would be available to employees in priority to secured creditors. Justice Black found that:

  1. whether an asset is circulating or non circulating (or is available for classification of this nature) is determined as at the appointment date; and
  2. a right to payment under a contract may be classified as an “account” and therefore a circulating asset, so long as the underlying obligation to pay is existing (or requires only the further action of the company to be existing), and the amount payable is identifiable as at the relevant date.


The RCR Tomlinson Group comprised of 41 related companies with a significant number of employees. Each company within the group was engaged in the provision of construction or like services. On 2 November 2018, administrators were appointed (Appointment Date), and on 1 May 2020, liquidators were appointed to RCR Tomlinson Ltd Pty Ltd (Company). The liquidators sought directions with respect to the following issues:

  1. at what point in time do you determine if an asset is circulating or non-circulating; and
  2. when will a right to payment under various contractual arrangements be considered a circulating asset

Justice Black’s Findings

Justice Black found that the analysis as to whether an asset is circulating or non-circulating must be undertaken at the “relevant date”, being the date on which the winding-up is taken to have begun under Part 5.6 of the Act. This is consistent with the approach adopted with respect to section 433 of the Act. The Court noted that to find differently 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 section 561 of the Act at a later date. 

With respect to the second issue, His Honour undertook a detailed analysis and applied this to different categories of assets (such as surplus proceeds from bonds and various permutations of work in progress). The assessment of particular assets in the liquidation was necessarily fact specific, but the key principles of His Honour’s decision can be summarised as follows:

  1. to be classified a circulating, the asset must first be able to be characterised as “personal property” for the purposes of the Personal Property Securities Act 2009 (Cth) (PPSA), and not be a “mere expectancy”. Here, the interest that the Company has in the proceeds of a bond deposited with a third party was “so contingent that it was “nothing but an expectancy”, as the bond was still in place at the Appointment Date, the third party was not bound to call on the bond, and there was no way to determine if it would in fact be called upon at any time in the future. Accordingly, the interest in the proceeds was not a contractual right and therefore did not have the nature of “personal property” at the Appointment Date.
  2. the Court considered if certain assets could be defined as an “account” (being a “monetary obligation” under section 10 of the PPSA), and thus a circulating asset for the purpose of section 340(5)(a) of the PPSA. Briefly put, Justice Black found [at 77 to 79]:
    1. the term “monetary obligation” must retain something of its character in general usage, and a potential claim 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;
    2. a monetary obligation is generally to be comprised of two elements:
      1. an existing requirement to pay; and
      2. an identifiable sum of money.

Accordingly, for a right to payment under a contract to constitute a “monetary obligation” (and thus be an “account”), the corresponding requirement to pay must be due and payable, or will become due and payable following the unilateral action/s of the holder (e.g. the holder of WIP raising an invoice for payment) and must be for a sum which is readily identifiable (e.g. WIP under a contract for service of a fixed amount).

In contrast, where goods or services under a contract are only partly performed at the Appointment Date and post-appointment goods or services are provided such as to trigger a progress payment for both pre and post appointment work which is then invoiced and paid, His Honour found that these funds were non-circulating. This was because as at the Appointment Date, there was only a mere possibility that a monetary obligation might arise if, and only if, the relevant works (goods or services) were completed. A corollary of this reasoning is that a progress payment due under a construction contract that became due prior to the appointment date would be a circulating asset.

Impact of this decision

The decision confirms that the date used for determining whether an asset is circulating or non-circulating is the “relevant date” (being the date on which the winding-up is taken to have begun under Part 5.6 of the Act), ensuring consistency between sections 561 and 433 of the Act.

The decision also provides helpful guidance in assessing what assets will be circulating and non-circulating for the purposes of section 340 of the PPSA. The case shows the importance of making a meaningful assessment of the position of partially completed contracts on appointment and giving careful consideration to what works are required to complete them and which creditors will be entitled to the proceeds of these rights.

  1. partially completed contracts;
  2. what works are required to complete them; and
  3. which creditors will be entitled to the proceeds of these efforts

If you require any assistance in characterising what is a circulating or non-circulating asset, please feel free to contact us to discuss.

For further information, please do not hesitate to contact us.

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