In the recent decision of In the matter of Spitfire Corporation Limited (in liquidation) and Aspirio Pty Ltd (in liquidation)  NSWSC 340, the Supreme Court of New South Wales considered whether research and development tax incentive refunds (R&D Refunds) paid to Spitfire Corporation Limited (in liquidation) (Spitfire) while it was in external administration were circulating assets under the Personal Property Securities Act 2009 (Cth) (PPSA) and therefore available to pay priority employee claims.
While the statutory entitlements to the R&D Refunds arose prior to Spitfire being placed into external administration, the relevant tax returns were only lodged and the R&D Refunds were only received by the administrators and liquidators after Spitfire went into external administration. The secured creditor, Resilient Investment Group Pty Ltd (Resilient) argued that the R&D Refunds were not property of the company at the appointment date, were not personal property within the meaning of the PPSA, and were not circulating assets.
The liquidators of Spitfire (Liquidators) subsequently applied for directions under section 90-15 of the Insolvency Practice Schedule (IPS) to the Corporations Act 2001 (Cth) (Act) that they would be justified in (amongst other things) treating the R&D Refunds as circulating assets available to pay priority employee claims.
Spitfire was the parent company of the Spitfire Group, which carried on the business of developing and acquiring wealth management and share analysis technology platforms. As part of this business, Spitfire carried out research and development activities that qualified it to receive a research and development tax offset from the Commissioner of Taxation (ATO) at the end of each financial year.
In April 2019, Spitfire entered into a secured funding arrangement with Resilient pursuant to which Spitfire granted Resilient a security interest over all of its present and after acquired property.
On 7 August 2020 (the Appointment Date) Spitfire and a number of its subsidiaries were placed into administration. On 4 November 2020, these same companies executed a deed of company arrangement (DOCA). However, on 19 February 2021, the creditors of those companies resolved that the DOCA be terminated, and the companies subsequently went into liquidation.
In the course of the administration of Spitfire, on 17 August 2020, the Liquidators (in their capacity as administrators) caused Spitfire to lodge its income tax return for the financial year ended 30 June 2019. The refund for FY19 was received by the Liquidators on 11 April 2021. The Liquidators then caused Spitfire to lodge its income tax return for the financial year ended 30 June 2020 on 25 August 2021. The refund for FY 2020 was received by the Liquidators on 31 August 2021.
The refunds for FY19 and FY20, which together made up the R&D Refunds, came to approximately $2m and were the only available assets in the liquidation of Spitfire.
After the deduction of the Liquidators’ approved remuneration, the remaining balance of the R&D Refunds was approximately $1.45m, in circumstances where Spitfire had remaining secured debt of $1m owed to Resilient, potentially up to $2.5m in employee claims, and a further $3m in unsecured trade and related party creditors.
The primary issue for the Liquidators was whether the R&D Funds should be applied first to the priority employee claims.
The component legal issues for the Liquidators were as follows:
The Liquidators subsequently applied for directions under section 90-15 of the IPS that (amongst other things) they would be justified in treating the R&D Refunds as circulating assets under the PPSA and therefore available to pay the priority employee claims.
While Resilient did not formally oppose the application, it filed submissions arguing against the three points above.
It is convenient to consider the reasoning in relation to each of the key issues separately.
Were R&D Refunds personal property under the PPSA?
The Liquidators submitted that Spitfire’s right to receive the R&D Refunds was a chose in action in existence as at the Appointment Date, and that it is well established that a chose in action constitutes personal property for the purposes of the PPSA. The Liquidators argued that the contingencies of Spitfire having to lodge its tax returns and the ATO having to make an assessment did not alter the existence or the nature of the chose in action.
The ATO, which appeared as an interested party, agreed that Spitfire’s legal entitlement to the R&D Refunds arose at the end of each of the financial years in which Spitfire carried out the relevant research and development activities.
Resilient on the other hand argued that all Spitfire held as at the Appointment Date was a right to require the ATO to perform its duties under the tax legislation if and when Spitfire lodged a valid tax return, and that this was neither property in a general sense or personal property within the meaning of the PPSA and was only a ‘mere expectancy’.
Justice Black noted the following points arising out of the facts of the case and the relevant authorities:
Ultimately Justice Black was satisfied that the R&D Refunds were a form of property and not just a mere expectancy, and as a chose in action qualified as personal property for the purposes of the PPSA.
Were R&D Refunds circulating assets?
The parties all agreed that an asset is a circulating asset under the PPSA if:
As to the limb regarding authority to transfer free of the security interest:
As to the limb regarding whether the R&D Refunds fell within one of the categories set out in section 340(5) of the PPSA:
Given the above, Justice Black was satisfied that the R&D Refunds were circulating assets within the meaning of the PPSA, and that as a result they were available to be applied in payment of the outstanding priority employee claims.
Whilst this case is focused on an analysis of the specific R&D Refunds, it provides very useful guidance as to the approach that will be taken by the Court in assessing whether a contingent right as at an appointment date might constitute personal property and/or a circulating asset for the purposes of the PPSA.
This is particularly important for insolvency practitioners, secured creditors and statutory creditors.
If you have any questions regarding whether an asset might be a circulating asset for the purposes of the PPSA, the experienced Lavan team is here to help.