Circulating assets, monetary obligations and the PPSA

 The decision of the New Zealand Court of Appeal in Strategic Finance Limited (In Receivership & In Liquidation) & Anor v David John Bridgman & Ors [2014] NZCA 357 (Strategic Finance) is, potentially, a significant decision for the interpretation of provisions of the Australian Personal Property Securities Act 2009 (Cth) (PPSA).

The decision in Strategic Finance considered the definition of “account receivable” and, as a result, the definition of “monetary obligation”. 

Both of these terms were considered in the context of whether, amongst other things, certain assets of an insolvent company were available for the payment of priority creditors under the preferential payment regime of the Companies Act 1993 (NZ) (NZ Companies Act). 


Strategic Finance Pty Ltd (Strategic) provided Takapuna Procurement Ltd (Takapuna), a property development company, with a loan facility of approximately NZ$11,000,000.  Strategic took a General Security Agreement (GSA) over all of Takapuna's "present and after-acquired personal property" and all of Takapuna's "present and future rights in relation to any personal property".  The GSA was properly registered on the New Zealand (NZ) Personal Property Securities Register. 

Takapuna was subsequently placed in to liquidation by order of the High Court of Auckland.  In the course of the liquidation, the liquidators collected funds totaling approximately NZ$782,108 (Fund). 

The Fund was acquired from four main sources including a NZ$3,000 engineering and construction bond (Bond) from North Shire City Council (NSCC).  The Bond was paid by Takapuna to the NSCC to secure Takapuna’s performance in respect of a development project for the NSCC (Project).  The Bond was subsequently refunded to Takapuna upon the NSCC being satisfied that the Project was completed satisfactorily. 


Strategic claimed it was entitled to the Fund pursuant to the terms of its GSA. 

The Commissioner of Inland Revenue (Commissioner) intervened and claimed that the Commissioner was entitled to the Fund pursuant to the preferential creditor's priority regime under the NZ Companies Act. 

Clause 2(2) of Schedule 7 of the NZ Companies Act provides the Commissioner with priority over the claim of a secured creditor insofar as there are insufficient assets to meet the claims of specified preferential creditors (of which the Commissioner is one).

Decision at first instance and Court of Appeal

The High Court at first instance found in favour of the Commissioner determining that the Commissioner was entitled to the entirety of the Fund.

On appeal to the New Zealand Court of Appeal, the Court found that only the Bond was payable to Strategic, the balance of the Fund was still payable to the Commissioner.  The reasoning for this was that the Bond was not a monetary obligation on the part of the NSCC within the definition of "accounts receivable".  Accordingly, the NSCC had no legal obligation to pay this sum of money until Takapuna had met its obligations under the relevant bonds and this did not occur until after the commencement of liquidation.  As a result, Strategic was entitled to these funds under its GSA.

The definition of "accounts receivable" in the NZ Companies Act specifically incorporates the NZ PPSA definition of "accounts receivable", the term had the meaning set out in section 16 of the NZ PPSA.

The Court of Appeal noted three features concerning section 16 of the NZ PPSA definition of “accounts receivable”:

(a) there must be a "monetary obligation";

(b) but not one "evidenced by chattel paper, an investment security, or by a negotiable instrument"; and

(c) the obligation need not have been earned by performance.

Accordingly, the Court held that:

[54]... we consider that “monetary obligation” in the context of the PPSA means an existing obligation imposed on, or assumed by, one party to pay a certain sum of money to the other party on a specific or ascertainable future date. An obligation of this nature will involve an existing liability on the part of the first party which is legally enforceable by the second party. Each of the essential elements of the term “monetary obligation” is supported by reference to relevant dictionary definitions and legal texts.

[55]… monetary obligations primarily exist where the debtor is bound to pay a fixed, certain, specific or liquidated sum of money.

[57]…when “monetary” and “obligation” are read together, it is also clear that the liability must be to pay an identifiable sum on an ascertainable date. This will include a claim of that nature based on debt statute or money had and received.  A possible liability to pay an unidentifiable sum at an unascertainable future date will not suffice.

Application in Australia

Section 340(5) of the PPSA defines the meaning of circulating asset.  That definition includes at section 340(5)(a) of the PPSA:

an account that arises from granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided).

Account is defined in the PPSA at section 10 to mean (amongst other things):

a monetary obligation (whether or not earned by performance, and, if payable in Australia, whether or not the person who owes the money is located in Australia) that arises from:

(a) disposing of property (whether by sale, transfer, assignment, lease, licence or in any other way); or

(b) granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided).

The inclusion of the term “monetary obligation” directly raises the issues considered by the New Zealand Court of Appeal in Strategic Finance

Lavan Legal comment

Whilst the decision in Strategic Finance is not binding, it is persuasive and helpful in determining whether some assets are circulating or non-circulating, which ultimately may affect payment of priority creditors under sections 433 or 561 of the Corporations Act 2001 (Cth). 

Accordingly, with performance bonds being prevalent in industries such as construction, secured creditors should take care when considering whether performance bonds are non-circulating assets or circulating assets, which may enliven the priority regime under the Corporations Act 2001 (Cth). 

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.