111 NSWLR 446Resilient Investment Group Pty Ltd v Barnet and Hodgkinson[2023] NSWCA 118Court of AppealGleeson, White and Brereton JJA24November 2022, 30 May 2023
CORPORATIONS — Winding up — Priorities — Priorities in winding up — Refunds related to research and development expenditure — Circulating assets — Ordinary course of business — Corporations Act 2001 (Cth)
s 561 — Personal Property Securities Act
2009 (Cth)s 340.EMPLOYMENT AND INDUSTRIAL LAW — True identity of employer — Substance and totality of the relationship.
After the commencement of the winding up of a company, the liquidators received tax offset refunds relating to expenditure on research and development. The Commonwealth (which was subrogated by statute to the rights of company employees) and a secured creditor of the company made competing priority claims to the refunds. Under s 561 of the Corporations Act 2001 (Cth), the priority claim advanced by the Commonwealth depended on two key findings, first, that the refunds were “circulating assets” within the meaning of the Personal Property Securities Act 2009 (Cth) and, second, that the persons through whom the Commonwealth claimed and who were, as a matter of record, employed by a related company were employees of the company itself.
Section 340 of the Personal Property Securities Act described the circumstances in which “personal property” was a “circulating asset”, which included an “account” if certain conditions were satisfied. Section 10 defined “account” as a “monetary obligation” having certain characteristics, including that it “arises from” any of several events and activities, one being “providing services … in the ordinary course of a business of … providing services of that kind”.
The primary judge decided both issues favourably to the Commonwealth. The secured creditor sought leave to appeal. The leave application and the appeal were heard together.
Held (granting leave and allowing the appeal in part): (1) (Gleeson JA and Brereton JA, White JA not deciding) A taxpayer is not entitled to enforce payment of a tax offset refund against the Commonwealth (or the Commissioner of Taxation) at the end of the relevant year. The company did not have a chose in action against the Commonwealth or the Commissioner for the tax offset refunds. There was accordingly no “monetary obligation” of the kind relevant to the concepts of “account” and “circulating asset”. ([107], [123]; [201])
(2) As a matter of fact, the entitlement to the tax offset arose from incurring deductible expenses or being entitled to claim a deduction, not from providing services in the ordinary course of a business of providing services. ([141], [145]; [200]; [201])
(3) Because the related company had entered into employment contracts with relevant persons as agent of the company as an undisclosed principal, those persons were employees of the company. ([185]; [200]; [201])
(4) There is a distinction between cases concerned with ascertaining the character or characterisation of the parties’ relationship, such as whether an employee was engaged on a casual or permanent basis, or whether a worker was an employee or an independent contractor, and those directed to the determination of the identity of the “true employer”. When determining the identity of the employer, the court looks to the “substance and totality of the relationship”. ([162], [165]; [200]; [201])
This was an application for leave to appeal, heard together with the appeal, from a decision of the Supreme Court ([2022] NSWSC 340; [2022] NSWSC 579 (Black J)).
M Hodge KC and J Burnett, for the applicant.D Krochmalik, for the first, second and third respondents.MA Izzo SC and C Ernst, for the fourth respondent.Judgment reserved30 May 2023
GLEESON JA.
[1]
Summary of conclusions
[9]
Background
[11]
Grounds of appeal
[20]
The applicable statutory provisions
[22]
Corporations Act
[22]
PPSA
[27]
FIRST ISSUE: WHETHER THE R&D REFUNDS WERE CIRCULATING ASSETS OF SPITFIRE
[32]
“Circulating assets”: the primary judge’s reasons
[34]
Personal property
[34]
Account
[37]
Monetary obligation
[38]
Arise from providing services
[42]
Grounds 1 and 2: Whether the R&D Refunds were an “account” for the purposes of s 340(5)(a) so as to fall within “personal property” in s 340(1)(a)
[45]
Whether the R&D Refunds were a “monetary obligation” at the appointment date so as to fall within “personal property” in PPSA, s 340(1)(a)
[49]
Entitlement to tax offset for R&D expenditure
[50]
Liability to pay tax
[60]
The assessment process
[64]
Administration Act
[69]
Submissions
[74]
Resilient’s argument
[75]
The Commonwealth’s argument
[78]
Matters not in issue
[80]
Reasoning
[81]
Travis’ case
[91]
Shepherd v Hills
[100]
Other cases
[108]
Conclusion
[123]
Assuming the R&D Refunds were an account, did the account (ie monetary obligation) “arise from” providing services?
[125]
Reasoning
[127]
The services provided by Spitfire in the ordinary course of business
[133]
Other cases
[146]
Conclusion
[152]
SECOND ISSUE: THE EMPLOYER ISSUE
[153]
The identity of the employer: the primary judge’s reasons
[153]
The approach to the identity of the employer
[158]
No inconsistency and incoherence in the law
[166]
The totality of the relationship
[173]
THIRD ISSUE: COSTS
[186]
Costs on appeal
[189]
Conclusion and orders
[196]
GLEESON JA.1This application for leave to appeal concerns a priority dispute between a secured creditor and a subrogated employee creditor in respect of certain tax refunds received by the liquidators of Spitfire Corporation Ltd (in liq) (Spitfire) after the commencement of the winding up, which in the circumstances of this case, is taken to have commenced on 7 August 2020 (the appointment date).2The priority dispute arises in the context that the Corporations Act 2001 (Cth), s 561 provides, relevantly, that in the winding up of a company certain categories of debt due to employees specified in s 556, and any amount in respect of which priority is given by s 560 for advances to a company to make such payments to employees, should be preferred to the claims of a secured creditor in relation to a “circulating security interest”. The object of s 561 is to ensure that employees, whose work has contributed to the company’s assets, are not deferred to the rights of the holder of a circulating security interest over those assets: Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth of Australia(2019) 268 CLR 524; [2019] HCA 20 at [88]; In the matter of RCR Tomlinson Ltd (admins apptd)[2020] NSWSC 735 at [14] (Black J).3In the underlying proceedings the liquidators of Spitfire and a related company, Aspirio Pty Ltd (in liq) (Aspirio), applied for directions from the court as to the manner in which research and development tax incentive refunds for the 2019 and 2020 tax years (R&D Refunds) totalling some $2 million received by the liquidators should be distributed. Both the secured creditor, Resilient Investment Group Pty Ltd (Resilient), and the subrogated employee creditor, the Commonwealth of Australia (the Commonwealth), were given leave to be heard on that application without becoming a party pursuant to the Supreme Court (Corporations) Rules 1999 (NSW), r 2.13(1).4It was and is common ground that (1) if the R&D Refunds received by Spitfire post-liquidation were circulating assets of Spitfire at the appointment date, 7 August 2020, then those amounts are required to be applied by the liquidators to satisfy the employee entitlements of Spitfire’s employees under s 556(1) in priority to Resilient’s claim as secured creditor, and (2) if certain identified employees were employees of Spitfire at the appointment date, their employee entitlements under s 556(1) should be satisfied out of any “circulating asset” of Spitfire.5In his principal judgment, the primary judge (Black J) concluded that:
(1)
for the purposes of s 561 of the Corporations Act and s 340 of the Personal Property Securities Act 2009 (Cth) (PPSA), the R&D Refunds were circulating assets of Spitfire at the appointment date as the R&D Refunds were an “account” for the purpose of PPSA, s 340(5)(a) so as to fall within the first category of circulating asset referred to in PPSA, s 340(1)(a);
(2)
certain identified employees of the Spitfire group of companies were employees of Spitfire; and
(3)
the Commonwealth is entitled to the R&D Refunds as the subrogated employee creditor of Spitfire under s 560 of the Corporations Act, subject to any equitable lien of the liquidators in respect of their costs, expenses and remuneration in connection with the care, preservation, realisation and subsequent distribution of the R&D Refunds: In the matter of Spitfire Corporation Ltd (in liq) and Aspirio Pty Ltd (in liq)(2022) 160 ACSR 394; [2022] NSWSC 340 (J).
6On 12 May 2022, the primary judge gave directions and made orders under s 90‐15 of the Insolvency Practice Schedule (Corporations) being Sch 2 to the Corporations Act giving effect to his conclusions: In the matter of Spitfire Corporation Ltd (in liq) and Aspirio Pty Ltd (in liq)[2022] NSWSC 579:
“1. Pursuant to s 90‐15 of the Insolvency Practice (Corporations) Schedule (IPS), being Schedule 2 to the Corporations Act 2001 (Cth) (Act), the First Plaintiffs are justified in:
a. treating the amount received by the Second Plaintiff (Spitfire Corporation), by way of research and development tax incentive refunds in the total amount of $1,989,849.09 while Spitfire Corporation was in liquidation (R&D Refunds) as property subject to a circulating security interest for the purposes of s 561 of the Act; and
b. subject to any equitable lien of the First Plaintiffs, using the R&D Refunds to pay any debts or amounts falling within paragraphs (a) and (b) of s 561 of the Act in priority to any claim of Resilient Investment Group Pty Ltd.
2. Pursuant to s 90‐15 of the IPS, the First Plaintiffs are justified in treating:
a. Spitfire Corporation as the employer of all of the employees (within the meaning of sub-s 556(2) of the Act), with the exception of Laurence Milne (Employees), of the group of companies comprising Spitfire Corporation and the Third Plaintiff, Aspirio Pty Ltd (in liq) (Aspirio); and
b. the Employees as creditors of Spitfire Corporation and not of Aspirio.
3. Resilient Investment Group Pty Ltd pay the Plaintiffs’ additional costs of this proceeding, as agreed or assessed, beyond those which would have been incurred in an uncontested application for directions, and otherwise the Plaintiffs’ costs of this proceeding be costs in the liquidation of Spitfire Corporation.
…
5. There otherwise be no order as to costs of the application as between the Commonwealth of Australia and Resilient Investment Group Pty Ltd.
…”
7Resilient seeks leave to appeal to challenge those directions and the costs order in Order 3. Leave to appeal is required because as a non-party to the underlying proceedings, Resilient may only appeal with leave of the court: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 89 NSWLR 110; [2015] NSWCA 85 at [75]ff; Commonwealth of Australia v Construction, Forestry, Mining and Energy Union(2000) 98 FCR 31; [2000] FCA 453 at [18]; Letten v Templeton (2014) 102 ACSR 425; [2014] FCAFC 131 at [13]. In addition, leave is required because the orders of the primary judge were interlocutory: Supreme Court Act 1970 (NSW), s 101(2)(e); Re GB Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 680.8There should be a grant of leave to appeal as the issues raised are of general importance with respect to the proper construction of s 340 of the PPSA. In addition, the practical consequences of the giving of the directions justify the grant of leave, which was not opposed by the liquidators.
Summary of conclusions
9For the reasons given below, I have concluded that (1) the R&D Refunds were not circulating assets of Spitfire at the appointment date for the purpose of PPSA, s 340(1)(a) and (5)(a); (2) Resilient, as the secured creditor of Spitfire, is entitled to the R&D Refunds in priority to the Commonwealth’s claim under s 560, subject to any equitable lien of the liquidators in respect of their remuneration, costs and expenses; and (3) there was no error by his Honour in finding that Spitfire was the employer of the specified employees.10Accordingly, the appeal should be allowed on the circulating assets issue and otherwise should be dismissed. The directions given to the liquidators in Order 1 should be set aside and, in lieu, directions should be given consistent with the conclusion on the circulating assets issue. Given the different outcome on appeal, the costs discretion below must be re-exercised. The orders which I propose are addressed below.
Background
11It is necessary to say something first about the facts on which the application for directions was determined. The liquidators and the Commonwealth agreed a statement of facts which it is convenient to reproduce in full below. Although Resilient did not consent to the statement of facts as an agreed characterisation of the factual position, the primary judge found that those facts were established by the evidence of Ms Elizabeth Barnet, one of the liquidators, and not relevantly contradicted by the evidence of Mr Matthew Johnson, the former chief executive officer of Spitfire, which was adduced by Resilient on the application: at J[4]. There is no dispute by Resilient on appeal with respect to the statement of facts.12The statement of facts which his Honour recorded at J[4] is as follows:
“A. Background to the Spitfire Group
1 Spitfire Corporation …:
a was incorporated on 3 November 2014; and
b has been an unlisted public company since about 10 December 2015.
2 Spitfire Corporation has seven wholly owned subsidiaries as follows:
a Aspirio …;
b Spitfire Asset Management Pty Ltd (in liq);
c Spitfire Machines Pty Ltd (in liq);
d Spitfire Operations Pty Ltd (in liq);
e Spitfire Q Pty Ltd (in liq);
f Investar Research Pty Ltd (in liq); and
g Spitfire Money Pty Ltd (which is not in any form of external administration).
(together, ‘Spitfire Group’).
3 Spitfire Corporation was the sole shareholder of each of the other companies in the Spitfire Group.
4 The business of the Spitfire Group, prior to its external administration, was developing and acquiring wealth management and share analysis technology platforms, with the aim of building a global financial platform to simplify transacting in global financial markets for its users (‘Business’).
5 Spitfire Q and Investar were the only two companies that held any assets as part of the Business.
6 Each of the companies in the Spitfire Group entered into a Tax Sharing Agreement on 10 October 2016, which was said to be effective from 1 July 2015.
7 On 7 August 2020, the First Plaintiffs were appointed as joint and several administrators (‘Administrators’) of each of Spitfire Corporation, Spitfire Asset Management, Spitfire Machine and Spitfire Operations. On the same day, the First Plaintiffs were also appointed as liquidators of Aspirio.
8 On 4 November 2020, each of Spitfire Corporation, Spitfire Asset Management, Spitfire Machine and Spitfire Operations executed a deed of company arrangement (‘DOCA’).
9 On 19 February 2021, the creditors of each of Spitfire Corporation, Spitfire Asset Management, Spitfire Machines and Spitfire Operations resolved that the DOCA be terminated and, on that date, those companies were wound up. Thereafter, on 25 June 2021, Spitfire Q and Investar were also wound up by the Court on the application of Spitfire Corporation.
10 The First Plaintiffs are the Liquidators of each company in the Spitfire Group (other than Spitfire Money Pty Ltd, which is not in any form of external administration).
B. Secured Creditor — Resilient
11 On 29 April 2019, Spitfire Corporation and Resilient Investment Group Pty Ltd entered into:
a a convertible note trust deed (‘CNTD’), pursuant to which Resilient subscribed to convertible notes with an aggregate face value of $3,000,000; and
b a general security deed (‘GSD’), pursuant to which Spitfire Corporation granted a security interest over all its present and after-acquired property in favour of Resilient to secure Spitfire Corporation’s obligations under the CNTD.
12 Pursuant to the GSD:
a the security interest granted by Spitfire Corporation secured the due and punctual payment of the Secured Money (as defined) and the performance by Spitfire Corporation of its other obligations under each Finance Document (as defined) and convertible note;
b ‘Secured Money’ was defined as:
‘all money which Spitfire is or at any time may become actually or contingently liable to pay to or for Resilient’s account for any reason whatever under or in relation to a Finance Document, whether or not currently contemplated. It includes money by way of principal, interest, fees, costs, indemnity, guarantee, charges, duties or expenses, or payment of liquidated or unliquidated damages under or in relation to aFinance Document, or as a result of a breach of or default under or in relation to, a Finance Document …’; and
c Spitfire Corporation was entitled (subject to certain exceptions, which are not relevant) to dispose of any circulating asset in the ordinary course of its business.
13 On 2 May 2019 (and amended on 3 May 2019), Resilient registered a financing statement on the Personal Property Securities Register with registration number 201905020063480 with respect to Spitfire Corporation, describing the collateral as all present and after-acquired property.
14 As at 13 September 2021, the debt owed by Spitfire Corporation to Resilient was $1,088,873.23 and interest continues to accrue with respect to that debt under the CNTD.
C. R&D Refunds
15 As part of the Business, Spitfire Corporation engaged in 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.
16 Spitfire Corporation made research and development tax incentive applications (‘R&D Tax Incentive Applications’) and claimed research and development tax offsets (‘R&D Tax Claims’) with respect to each of the financial years ended 30 June 2015, 30 June 2016, 30 June 2017 and 30 June 2018.
17 Spitfire Corporation, under the control of the First Plaintiffs, received a total of $2,024,812.90 by way of tax refunds (‘R&D Refund’) following the lodgement of two R&D Tax Incentive Applications and R&D Tax Claims. The R&D Refund is comprised of the following amounts:
a $1,061,731.91 received by Spitfire Corporation in respect of the financial year ended 30 June 2019 (‘FY19 Refund’); and
b $963,080.99 received by Spitfire Corporation in respect of the financial year ended 30 June 2020 (‘FY20 Refund’).
18 The R&D Refund was not obtained because of or by reason of the external administration of Spitfire Corporation. Rather, the entitlement to the R&D Refund stemmed from the nature of the Business (and this entitlement was not otherwise impacted by the fact that Spitfire Corporation was insolvent and / or placed into external administration prior to the lodgment of the R&D Tax Incentive Applications and R&D Tax Claims).
FY19 Refund
19 On 5 August 2020, an income tax return for Spitfire Corporation for the financial year ended 30 June 2019 (including an R&D Tax Incentive Application) had been prepared and signed by [Mr Milne], the Chief Executive Officer and at that time a director of Spitfire Corporation. That return had not been lodged by 7 August 2020 (being the date on which the Administrators were appointed).
20 On 17 August 2020, the Administrators caused Spitfire Corporation to lodge its income tax return for the financial year ended 30 June 2019.
21 On 11 April 2021, Spitfire Corporation (while it was being wound up) received a refund from the ATO in the amount of $1,061,731.91, being the FY19 Return, which was paid into Spitfire Corporation’s liquidation bank account.
FY20 Refund
22 On 25 August 2021, the Liquidators caused Spitfire Corporation to lodge an income tax return for Spitfire Corporation for the financial year ended 30 June 2020 (including an R&D Tax Incentive Application).
23 On 31 August 2021, Spitfire Corporation (while it was being wound up) received a refund from the ATO in the amount of $963,080.99, being the FY20 Return, which was paid into Spitfire Corporation’s liquidation bank account.
D. Employees of the Spitfire Group
Formal arrangements
24 The Spitfire Group employed 42 employees at different times.
25 Other than Mr Milne (whose employment agreement was with Spitfire Asset Management) and each of [named employees] (whose employment agreements were with Spitfire Corporation), the employment agreements between the various employees of the Spitfire Group were with Aspirio.
26 The employment of each of [named employees] had been terminated prior to the Administrators’ appointment. However, each of those former employees have outstanding entitlements owed to them in their capacity as employees of the Spitfire Group.
27 Under each employment agreement between Aspirio and the various employees of the Spitfire Group, there were various references made to ‘the Group’, which was defined either as:
The Company [Aspirio] and its related Bodies Corporate, including, but not limited to Aspirio Pty Ltd; or
The Company [Aspirio] and its related Bodies Corporate, including, but not limited to its parent company, Spitfire Corporation Limited …
28 Aspirio (save for in the case of each of Mr Milne, [and named employees] (‘Excluded Employees’)):
a was the entity that was party to the contracts of employment which provided for the payment of pay wages, superannuation and other entitlements to employees of the Spitfire Group;
b lodged and paid workers’ compensation premiums for employees of the Spitfire Group;
c reported PAYG for employees in the Business Activity Statements lodged through the ATO portal;
d logged leave entitlements of the employees through its Xero online accounting software; and
e was identified as the payer on payslips issued to the employees.
Aspirio’s financial position and dealings with Spitfire Corporation
29 Aspirio maintained one bank account with the National Australia Bank, being account number [omitted] (‘Aspirio NAB Account’) and one bank account with Macquarie Bank, being account number [omitted] (‘Aspirio Macquarie Account’).
30 Aspirio also maintained Management Accounts for each financial year ended 30 June 2015, 30 June 2016, 30 June 2017, 30 June 2018 and 30 June 2019, namely, Profit and Loss Statements, Balance Sheets, and Cash Flow Statements.
31 As recorded by: the bank statements for the Aspirio NAB Account and the Aspirio Macquarie Accounts; and the Management Accounts, and otherwise more generally, Aspirio:
a did not conduct any business or undertake any business activities of its own, separate to the Business of the Spitfire Group;
b had no functions external to the Spitfire Group;
c did not have any of its own customers or clients;
d did not have any assets of realisable value;
e operated at a loss for each of the financial years ending 2015, 2016, 2017, 2018 and 2019;
f received cash injections from time to time from other companies in the Spitfire Group;
g did not generate any revenue (other than a small amount of interest from cash at bank and, later, revenue recorded as loan forgiveness with respect to a loan from Spitfire Corporation (which is dealt with below …)); and
h did not have the ability to generate any revenue and was unlikely to generate any revenue or profit in the future, as it had no customers or clients of its own.
32 The manner in which Aspirio satisfied the obligations it had to the employees of the Spitfire Group was as follows:
a Spitfire Corporation paid money out of its own bank account to (i) employees or their superannuation funds (with respect to wages and other entitlements); (ii) workers compensation insurers (with respect to workers compensation premiums); and (iii) the ATO (with respect to PAYG withholding tax); and
b amounts paid by Spitfire Corporation were added to the loan balance owing by Aspirio to Spitfire Corporation at any given time, by way of book entry.
33 The books and records of Spitfire Corporation and Aspirio do not disclose an instance where Spitfire Corporation actually transferred money into a bank account held in the name of Aspirio for Aspirio to use that money to pay wages and other entitlements to the employees of the Spitfire Group.
34 The Management Accounts do not contain any evidence of Aspirio charging Spitfire Corporation (or any of the other companies in the Spitfire Group) a management fee or any other amount in connection with being the ‘employer entity’ or providing employment related services to the employees of the Spitfire Group.
35 On 30 June 2019, all of the companies in the Spitfire Group, other than Spitfire Money, entered into a Deed of Forgiveness with respect to each intercompany loan transaction between the companies, with the effect that each intercompany loan was forgiven by the relevant creditor in the Spitfire Group. The forgiven loan balance was recorded as revenue in Aspirio’s books and records and had the effect of eliminating its liability to Spitfire Corporation.
E. Assets and Claims in the Liquidation of Spitfire Corporation and Aspirio
36 As at the date of filing this application, there was $1,451,463.54 available in the liquidation of Spitfire Corporation, comprised of the balance of the R&D Refund after deducting remuneration that has been approved (although further costs, expenses and remuneration of the Liquidators will reduce this amount somewhat further).
37 As at 19 October 2021, the estimated claims of creditors in the liquidation of Spitfire Corporation was at least $4,142,639.23. Of this amount:
a $1,088,873.23 represents the debt owed to Resilient;
b $2,218,617 represents trade creditors; and
c $835,149 represents related party creditors.
38 The amount of $4,142,639.23 referred to in the preceding paragraph does not include the priority employee creditors of the employees of the Spitfire Group (apart from the Excluded Employees), to the extent that they are found to be creditors of Spitfire Corporation, as opposed to Aspirio.
39 The claims of the employees of the Spitfire Group are currently as follows:
a $550,650.59 in the liquidation of Spitfire Corporation, of which: (i) $76,439.32 is claimed by the Commonwealth Attorney-General’s Department, which is subrogated to the rights of various employees; and (ii) $474,211.27 claimed by various employees, additional to the Department’s claim; and
b $1,960,586.54 in the liquidation of Aspirio, of which: (i) $1,038,641.67 claimed by the Department, which is subrogated to the rights of various employees; and (ii) $282,951.50 claimed by various employees, additional to the Department’s claim; (iii) $638,993.37 claimed by various employees for outstanding superannuation charge.
[These amounts are not agreed by the Commonwealth.]
40 The claims in the winding up of Aspirio … above are subject to the determination of the true employer of the employees of the Spitfire Group (other than the Excluded Employees) and the Department has reserved its right to increase its claim in the winding up of Spitfire Corporation (in lieu of its claim in the winding up of Aspirio).” (Emphasis added)
13The following additional background matters are relevant.14The companies within the Spitfire group conducted different and separate business activities with each subsidiary as a different “silo” or “business unit”. The business operations of each company in the Spitfire group were described by Mr Johnson in his affidavit as follows:
(1)
Spitfire was a revenue generating entity that marketed and distributed investment products that were developed by Spitfire Asset Management Pty Ltd, including model portfolios, and charged clients for those assets; and utilised proprietary Merlin software, which was a wealth management platform. Spitfire was the employer of six executives of the group, including Mr Johnson;
(2)
Aspirio was the employer of record of all other group employees;
(3)
Spitfire Asset Management Pty Ltd (in liq) was a revenue generating entity which developed managed account products for sale to clients; and utilised the Merlin software with access to various markets and the ability to place trades over a broad range of assets. Approximately six people worked within that business unit, which also developed financial products and conducted trades;
(4)
Spitfire Machines Pty Ltd (in liq) was involved in the development of asset management software, including the Merlin software. It had approximately 30 people working within that business unit, including software engineers and data scientists;
(5)
Spitfire Operations Pty Ltd (in liq) was not a revenue generating entity; it managed the day-to-day operations of the Spitfire group. It had approximately 18 people working within that business unit who performed roles such as legal and client services;
(6)
Spitfire Q Pty Ltd (in liq) owned all shares in Investar Research Pty Ltd (in liq) (Investar), which was acquired by Spitfire in March 2019. Investar was a market research analysis platform which researched stocks worldwide and issued reports on stock performance; and
(7)
Spitfire Money Pty Ltd (in liq) was created in anticipation of further growth of the Spitfire group.
15With respect to par 4 of the statement of facts, the Spitfire customers were primarily wealth management and financial planning companies, including those mentioned in par 30 of Ms Barnet’s affidavit.16Mr Johnson gave evidence that in terms of operations of the Spitfire group, having the majority of employees in Aspirio meant that there were greater administrative efficiencies in respect of matters such as human resources, payroll and payment of taxes. Mr Johnson explained that each business unit entity was responsible for managing the day-to-day operations of each entity, including giving directions to employees, and employees were required to follow directions from their managers.17With respect to par 6 of the statement of facts, the tax sharing agreement was permitted by s 703‐50 of the Income Tax Assessment Act 1997 (Cth)(ITAA 1997). As a consequence, the Spitfire group was a single entity for income tax purposes and the ITAA 1997 treats as consolidated the liabilities and losses of the separate companies: ITAA 1997, s 701‐1. The effect of the “single entity” rule in s 701‐1 is that Spitfire as the head company of the consolidated group is considered to have carried out on its own behalf the research and development activities carried out by or on behalf of its subsidiary members.18Spitfire lodged R&D Tax Incentive applications with the Department of Industry, Innovation and Science for the 2019 tax year, and the liquidators on behalf of Spitfire lodged a similar application for the 2020 tax year. Both applications described the R&D project as “[t]he design and development of an automated B2B2C asset and investment management platform for wealth manager, family office and institutions”.19With respect to par 35 of the statement of facts, recital A of the deed of forgiveness dated 30 June 2019 between Spitfire and Aspirio records as a rationale for that transaction:
“The parties often operate as a single entity for commercial purposes. As such, loan balances may exist between the parties from time to time as they each enter into commercial arrangements as stand-alone counterparties on behalf of the Parties.” (Emphasis added)
Grounds of appeal
20Resilient contends that the primary judge erred in:
(1)
finding that the R&D Refunds are “personal property” of Spitfire for the purpose of s 340(1) of the PPSA;
(2)
finding that the R&D Refunds are circulating assets pursuant to s 340(1)(a) of the PPSA;
(3)
finding that Spitfire was the true employer of the “named employees” for the purposes of Pt 5.6 Div 6 of the Corporations Act; and
(4)
ordering that Resilient pay the liquidators’ costs of the hearing before the primary judge.
21The active parties on appeal on the substantive issues were Resilient and the Commonwealth. The liquidators took a neutral role with respect to those issues and limited their submissions to seeking to uphold the costs order against Resilient.
The applicable statutory provisions
Corporations Act
22Section 561 of the Corporations Act relevantly provides:
“561
Priority of employees’ claims over circulating security interests
So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of:
(a)
any debt referred to in paragraph 556(1)(e), (g) or (h); and
(b)
any amount that pursuant to subsection 558(3) or (4) is a cost of the winding up, being an amount that, if it had been payable on or before the relevant date, would have been a debt referred to in paragraph 556(1)(e), (g) or (h); and
(c)
any amount in respect of which a right of priority is given by section 560;
payment of that debt or amount must be made in priority over the claims of a secured party in relation to a circulating security interest created by the companyand may be made accordingly out of any property comprised in or subject to the circulating security interest.”23The three categories of priority debts due to employees referred to in s 561(a) are:
•
the debts due to employees for wages, superannuation contributions and the superannuation guarantee charge (s 556(1)(e));
•
amounts in respect of leave of absence (s 556(1)(g)); and
•
amounts in respect of retrenchment payments (s 556(1)(h)).
24The Corporations Act, s 556(2) defines the word “employee”, in relation to a company, to mean a person (a) who has been or is an employee of the company, whether remunerated by salary, wages, commission or otherwise; and (b) whose employment by the company commenced before the relevant date, which in this case is the appointment date.25The amounts referred to in s 561(c) are advances of money by a person (whether before, on or after the relevant date) for the purpose of making the payment by a company on account of wages, superannuation contributions or in respect of leave of absence or termination of employment under an industrial agreement: s 560. It is not in dispute on appeal that the Commonwealth made such advances to Spitfire as recorded in par 39 of the statement of facts.26The expression “circulating security interest” is defined in the Corporations Act, s 51C as meaning a security interest that is a “PPSA security interest” if that security interest has attached to a “circulating asset” within the meaning of the PPSA and the grantor has title to the assets, or a floating charge. The term “PPSA security interest” is defined in the Corporations Act, s 51 as meaning a security interest within the meaning of the PPSA.
PPSA
27The expression “personal property” is broadly defined in PPSA, s 10 to include property other than (a) land; or (b) a statutory right that is declared by the relevant statute not to be property for the purposes of the PPSA. It is not suggested that either exclusion applied.28PPSA, s 340 defines a “circulating asset” as a security interest in personal property that falls within either of two groups of assets in s 340(1):
“340
Meaning of circulating asset
General definition
(1)
For the purposes of this Act, if a grantor grants a security interest in personal property to a secured party, the personal property is a circulating asset if:
(a)
the personal property is covered by subsection (5) (unless subsection (2) or (3) applies); or
(b)
in any other case — the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor’s business, free of the security interest.
…
Current assets
(5)
This subsection covers the following personal property:
(a)
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);
(b)
an account that is the proceeds of inventory;
(c)
an ADI account (other than a term deposit);
(d)
currency;
(e)
inventory;
(f)
a negotiable instrument.
Example: An example of an account mentioned in paragraph (a) is an account that is a credit card receivable.” (Emphasis added)
29The term “account” referred to in s 340(5) is in turn defined in PPSA, s 10:
“account means 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);
but does not include any of [specified matters].” (Emphasis added)30In RCR Tomlinson at [31], Black J observed that s 340 of the PPSA is directed to two groups of assets, being those specified in s 340(1)(a) and (b), and that the assets falling under s 340(1)(a) are the “current assets” listed in s 340(5), subject to the exclusions in s 340(2)–(3). Paragraph 340(5)(a) provides, as an instance of those current assets, an account that (i) arises from (ii) granting a right or providing services (iii) in the ordinary course of a business of granting rights or providing services of that kind.31Although raised below, it is not suggested on appeal that s 340(1)(b) has any application in this case. Nor do the exclusions in s 340(2)–(3) apply in this case, as the primary judge observed at J[38].
FIRST ISSUE: WHETHER THE R&D REFUNDS WERE CIRCULATING ASSETS OF SPITFIRE
32Whether the claims of employee creditors of Spitfire have priority over Resilient’s claim as the secured creditor depends on whether Resilient’s security interest is a “circulating security interest”: Corporations Act, s 561. That depends on whether, at the appointment date, the R&D Refunds were a “circulating asset” of Spitfire for the purpose of PPSA, s 340.33Before the primary judge and again on appeal the parties approached this issue in two stages. First, as an anterior question of whether the right or claim to R&D Refunds is “personal property” for the purpose of PPSA, s 340. Second, whether the R&D Refunds are an “account” for the purpose of PPSA, s 340(5)(a) so as to fall within s 340(1)(a). The artificiality of addressing these questions separately is addressed below at [46]ff.
“Circulating assets”: the primary judge’s reasons
Personal property
34His Honour referred to Resilient’s contention that Spitfire’s claim to the R&D Refunds was at most a right to require the Commissioner to perform his duties under the tax legislation, enforceable by public law remedies, which does not create a debt or proprietary right in favour of Spitfire, referring to Health Insurance Commission v Peverill(1994) 179 CLR 226; [1994] HCA 8; Commissioner of Taxation of the Commonwealth of Australia v 4 Doonan Street Collinsville Pty Ltd (in liq)(2016) 332 ALR 349; [2016] NSWCA 69;and that Spitfire’s interest could be described as a “mere expectancy” only: Langdon, in the matter of Forge Group Ltd (recs and mgrs apptd) (in liq)(2017) 118 ACSR 434; [2017] FCA 170.35His Honour also referred to authorities dealing with other provisions of the tax legislation that required the Commissioner to make a refund where the taxpayer has paid a greater amount on account of tax than is required by the legislation: Federal Commissioner of Taxation v Official Receiver(1956) 95 CLR 300; [1956] HCA 24 (Travis’ case); Re Mondin; Ex parte Bradshaw (1985) 6 FCR 430; [1985] FCA 228; Re Evans; Ex parte Sweeney v Evans(1995) 61 FCR 556; [1995] FCA 1147; and the distinction between property, including a chose in action, and a mere expectancy: Norman v Federal Commissioner of Taxation(1963) 109 CLR 9; [1963] HCA 21.36At J[37], his Honour summarised his reasons for concluding that the R&D Refunds were “personal property” for the purposes of s 340(1) of the PPSA:
“[37] … In summary, Spitfire Corporation’s right to require those refunds arose under the applicable statutory regime; as Mr Izzo points out, Spitfire Corporation was obliged to bring the research and development offsets to account in calculating its assessable income, and did not have a free choice whether to claim or require the R&D Refunds to which it was entitled; that right was not subject to contingencies of the kind that I addressed in RCR Tomlinson, where the research and development was done prior to the Appointment Date; and the fact that the returns needed to be lodged to require the refunds in money did not deprive the right to them of the character of property; and it is not to the point that the right to the R&D Refunds was not enforceable against the Commissioner of Taxation personally, where it is analogous to the entitlements considered in Mondin and Evans, and (although this is not necessary to this conclusion) they would likely be enforceable against the Commonwealth as a debt owed by the Commonwealth. It is not necessary to address Mr Izzo’s further submission as to an analogy with the question when a liability to pay tax arises in order to reach that conclusion.”
Account
37His Honour rejected Resilient’s contentions on the “account” issue and concluded that the R&D Refunds were an “account” for the purpose of s 340(5)(a) of the PPSA and therefore, the R&D Refunds were a “circulating asset” for the purposes of s 340(1)(a) of the PPSA at the appointment date: at J[65].
Monetary obligation
38His Honour approached the question of whether the R&D Tax Refunds were a “monetary obligation” as being substantially similar to the question of whether the R&D Refunds were “property”. At J[47]–[48], his Honour referred without apparent disapproval to the statements made by the New Zealand Court of Appeal in Strategic Finance Ltd (in rec and in liq) v Bridgman [2013] 3 NZLR 650; [2013] NZCA 357, in relation to the term “monetary obligation” in the definition of “account receivable” in s 16 of the Personal Property Securities Act 1999 (NZ), including the summary (at Strategic at [83]) that a “monetary obligation” is:
“[83] … an existing legal obligation on another party to pay an identifiable monetary sum to the company on an ascertainable date. The obligation must be legally enforceable by the company [at the relevant date] on the basis that the other party has an existing liability to make the payment.”
39At J[49]–[50], his Honour distinguished Strategic and Langdon on the ground that in those cases the assets found not to be available for the benefit of priority creditors were characterised as effectively arising wholly from post‐liquidation (Strategic) or post‐receivership (Langdon) circumstances.40At J[51]–[56], his Honour referred to other cases involving post-insolvency receipts: Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd)(2017) 52 WAR 90; [2017] WASC 152 (Forge 1); Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (recs and mgrs apptd)(2018) 53 WAR 325; [2018] WASCA 163 (Forge 2); Re Amerind Pty Ltd; Commonwealth of Australia v Byrnes(2018) 54 VR 230; [2018] VSCA 41; and RCR Tomlinson at [77]–[78].41His Honour gave the following reasons at J[58] for rejecting Resilient’s characterisation of the R&D Refunds as not being a “monetary obligation” at the appointment date:
“[58] … I do not accept this submission, given the case law to which I have referred in paragraphs 47–56 above, where Spitfire Corporation’s claim against the Commonwealth for research and developments offsets arising prior to the Appointment Date was such a claim. Resilient also submits that any obligation on the part of the Commissioner of Taxation to make payment to Spitfire Corporation in respect of the R&D Refunds was dependent on the Commissioner of Taxation issuing the relevant assessment, and this had not occurred at the Appointment Date. I also do not accept that submission, given the statutory provisions to which Mr Izzo referred, and the fact that the obligation in respect of the R&D Refund is properly treated as enforceable against the Commonwealth although not the Commissioner of Taxation personally for the reasons I noted above. Mr Burnett also submits that the R&D Refunds are analogous to the ‘surplus proceeds’ identified in RCR Tomlinson above at [77], being an entitlement ‘which might or might not arise depending on the actions of a third party’ and ‘which had no element of obligation about it’. I do not accept that submission, where Spitfire Corporation had both a statutory entitlement to the R&D Refunds, enforceable against the Commonwealth as noted above, and an obligation to claim that entitlement in its returns.”
148The Commonwealth says that just as Forge had to provide bank guarantees in the course of doing construction work, so Spitfire had to pay tax (and was entitled to tax offset refunds) as a result of conducting business and earning income in the ordinary course. The suggested analogy is inapt.149There was a sufficient causal connection in Forge 2 between the account (the proceeds of the wrongful call on bank guarantees) and the provision of building services by Forge for reasons which included that the maintenance of the guarantees for recourse by Hamersley was an aspect of providing building services in the ordinary course of providing services of that kind (building services). By contrast, the R&D Refunds were not an aspect of providing the financial platform services in the ordinary course of providing services of that kind (financial platform services).150Amerind is also distinguishable. First, while the nature of the tax refunds is not disclosed in the reasons in Amerind, the Commonwealth did not suggest that it involved a tax offset for R&D expenditure. Second, insofar as the reasoning in Amerind at [415] described the tax refunds as arising from “providing services in the ordinary course of business”, it did not identify the relevant services nor address how the tax refunds were said to arise from the provision of services “in the ordinary course of … providing services of that [unidentified] kind”.151No assistance can be derived from Amerind for the present case. It says nothing of the causal connection between the tax refunds in that case and the provision of services in the ordinary course of providing services of that kind, which services are unidentified in the judgment.
Conclusion
152On the assumption that at the appointment date, the R&D Refunds were a “monetary obligation” for the purpose of the definition of “account” in PPSA, s 10 the primary judge erred in finding that the R&D Refunds answered the description of an account that arises from the provision of services “in the ordinary course of … providing services of that kind”.
SECOND ISSUE: THE EMPLOYER ISSUE
The identity of the employer: the primary judge’s reasons
153His Honour determined the issue of the identity of the employer by reference to the “substance and the totality of the relationship” between the parties: at J[66]. His Honour considered himself bound by the decisions of this court in Pitcher v Langford (1991) 23 NSWLR 142 at 161 and Shaw v Bindaree Beef Pty Ltd[2007] NSWCA 125, where the “totality of the relationship” had been considered in determining the identity of the employer: at J[76], [78].154His Honour rejected Resilient’s contention that a narrower approach is required that does not permit inquiry beyond the written employment contract (other than in cases of sham or contractual variation), relying upon three recent High Court decisions: Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd(2022) 96 ALJR 89; [2022] HCA 1 at [40]–[48] (Kiefel CJ, Keane and Edelman JJ), [172]–[173] (Gordon J); ZG Operations Australia Pty Ltd v Jamsek(2022) 96 ALJR 144; [2022] HCA 2 at [8] (Kiefel CJ, Keane and Edelman JJ), [109] (Gordon and Steward JJ); and WorkPac Pty Ltd v Rossato(2021) 271 CLR 456; [2021] HCA 23 at [57] (Kiefel CJ, Keane, Gordon, Edelman, Steward and Gleeson JJ).155In distinguishing the High Court decisions, his Honour accepted Resilient’s submission that there is a real distinction between the three High Court decisions and the “true employer” cases: at J[74]. His Honour found that the three High Court decisions are concerned with ascertaining the “character” or “characterisation” of the parties’ relationship (Rossato at [62], [63]; Personnel Contracting at [59], [174]; ZG Operations at [8]) and dealt with whether an employee was engaged on a casual or permanent basis (Rossato), or whether a worker was an employee or an independent contractor (Personnel Contracting and ZG Operations); by contrast, the “true employer” cases are directed to ascertaining the identity of the party by whom a putative employee is engaged, referring to Gothard v Davey(2010) 80 ACSR 56; [2010] FCA 1163 at [52]; Bindaree Beef at [59]. His Honour concluded that the decisions in Pitcher v Langford and Bindaree Beef had not been expressly or impliedly overruled by the three High Court decisions: at J[76].156Turning to the facts, his Honour found that the terms of the employment contracts were consistent with the employees being retained for the benefit of the Spitfire group generally (of which Spitfire was the parent) rather than Aspirio alone, referring to the following obligations in Mr Markey’s employment contract (by way of example) at J[81]:
“[81] … the obligation to ‘use your best endeavours to promote the Group’s reputation’ (cl 5(b)(v), Ex KEB‐1, 373); the obligation to ‘refrain from acting in conflict with the Group’s interests’ (cl 5(b)(vi)); the obligation to ‘protect the Group’s Confidential Information and Intellectual Property’ (cl 5(b)(viii)), with ‘Confidential Information’ defined by reference to the information of the ‘Group’ in cl 1.1; the obligation to take all reasonable steps to ‘maintain the Group’s Property in good working order’ and ‘ensure the security of and protect the Group’s Property’ (cl 12(a)); and an entitlement to participate in the ‘Group’s Employee Share Option Plan’ (cl 9(a)).”
and concluded that, so far as Aspirio was the employer, it can fairly be characterised as, in substance, an agent for Spitfire as an undisclosed principal. His Honour also noted (at J[81]) that the proposition that Aspirio acted as agent for Spitfire or other companies within the group in entering employmentrelationships also finds some support in Recital A of the Deed of Forgiveness dated 30 June 2019, which is set out at [19] above.157His Honour then addressed the factors which supported the inference of agency (at J[82]–[89]), before concluding that Spitfire was the “true employer” of the identified employees at J[90]:
“[90] Given the findings that I have reached above, it seems to me that Spitfire Corporation rather than Aspirio was the true employer of the relevant employees, at least for the purposes of Pt 5.6 Div 6 of the Corporations Act. The three recent decisions of the High Court do not require a different result, and, unless I was bound by appellate authority to do so, I would not adopt an approach that would facilitate the defeat of the provisions protecting employee entitlements in Pt 5.6 Div 6 of the Corporations Act by treating employment contracts (including with assetless companies) as conclusive, unless they are varied or a sham in the strict sense, of the true employer for the purposes of those provisions.”
The approach to the identity of the employer
158Resilient says that the primary judge erred in considering the substance and totality of the relationship in determining who was the employer of certain-named employees. It is said that Pitcher v Langford and Bindaree Beef, the authorities on which his Honour relied, are inconsistent with or were overruled by the High Court’s decisions in Personnel Contracting, Rossato and ZG Operations.159In Personnel Contracting and ZG Operations it was held that where there is a written agreement, the legal rights and obligations established by the written agreement should be decisive of the character of the relationship. In Rossato it was said (at [57]) that “[a] court can determine the character of a legal relationship between the parties only by reference to the legal rights and obligations which constitute that relationship”.160The Commonwealth says that the suggested inconsistency with the three High Court cases is not relevant in this case because the identity of the employer can be (and was) determined by reference to principles of agency. As explained below, it should be concluded that there is no error in the finding of agency. That is a sufficient basis to dispose of the suggested inconsistency between his Honour’s reliance upon the “true employer” cases and the three High Court cases.161The Commonwealth also says that the so-called “true employer” cases deal with a different topic to that in the High Court cases, being the identity of the party by whom a putative employee is engaged. That should be accepted. The “true employer” cases are not limited to the statutory context of Pitcher v Langford and Bindaree Beef, but include contracts of employment more generally: see, for example, Golden Plains Fodder Australia Pty Ltd v Millard(2007) 99 SASR 461; [2007] SASC 391 at [33]; Sturesteps v McGrath[2010] NSWSC 169 at [14]–[19]; In the matter of DH International Pty Ltd (in liq)(2017) 121 ACSR 585; [2017] NSWSC 870 at [79]; Gothard at [52]–[64]; In the matter of Branded Media Holdings Pty Ltd (in liq)[2020] NSWSC 557 at [31].162If it was necessary to decide this question, I would agree that his Honour was correct in distinguishing the three High Court decisions (at J[74]) on the basis that there is a real distinction between the High Court decisions and the “true employer” cases. The former are concerned with ascertaining the “character” or “characterisation” of the parties’ relationship (Rossato at [62],[63]; Personnel Contracting at [59], [174]; ZG Operations at [8]) and dealt with whether an employee was engaged on a casual or permanent basis (Rossato), or whether a worker was an employee or an independent contractor (Personnel Contracting and ZG Operations). By contrast, the “true employer” cases are concerned with ascertaining the identity of the party by whom a putative employee is engaged: see, for example, Gothard v Davey at [52]; Bindaree Beef at [59].163Nor should it be accepted, as Resilient submits, that Pitcher v Langford and Bindaree Beef were expressly or impliedly overruled by the three High Court cases. Those cases were not considered by the three High Court cases. Insofar as Pitcher v Langford was cited in a footnote by Gageler and Gleeson JJ in Personnel Contracting at [135], fn 218, that does not assist Resilient’s argument. Read in context, the footnote does not cast doubt on Pitcher v Langford. Nor were Pitcher v Langford and Bindaree Beef impliedly overruled by the High Court cases. As indicated, the “true employer” cases concerning the identity of the employer were not in issue in Personnel Contracting, Rossato or ZG Operations.164It is not to the point, as Resilient submits, that because the judgments of Priestley JA (at 154–155) and Handley JA (at 160–161) in Pitcher v Langford referred to R v Foster; Ex parte Commonwealth Life (Amalgamated) Assurances Ltd(1952) 85 CLR 138 at 151 and 155; [1952] HCA 10, and the High Court said in Personnel Contracting that the relevant passages in Foster are concerned with variation of contract and do not support a court departing from the terms of the written contract in construing the relationship between the parties (at [49]–[52], [179]), this is to be taken as impliedly overruling the reasoning in Pitcher v Langford. The reasoning in Pitcher v Langford was not limited to the citation of passages from Foster alone. Priestley JA, in dissent, found at 154–155 that the conduct of the parties was not pursuant to their written agreement, “but upon the basis of the arrangements in force upon earlier shearings”, being a reference to the nature of the worker’s employment as a shearer. That analysis was consistent with an estoppel; it seems his Honour had in mind a conventional estoppel. Handley JA spoke at 160–162 of whether the parties had ignored or abandoned their written contract. Neither the principles of estoppel nor abandonment of contract were in issue in the three High Court cases.165The contention that his Honour erred in considering the “substance and totality of the relationship” when determining who was the employer of the relevant employees should be rejected.
No inconsistency and incoherence in the law
166One further matter should be mentioned. It is said that the approach contended for by the Commonwealth leads to inconsistency and incoherence in the law. The spectre of incoherence is misplaced. There is no inconsistency between the application of orthodox contractual principles in determining the character of the parties’ relationship the subject of a written agreement and the application of the principles of agency to determine the parties to a contract.167The doctrine of undisclosed principal is well established. Brief reference to some basic principles is necessary.168In Keighley, Maxsted & Co v Durant [1901] AC 240 at 261, Lord Lindley said:
“The explanation of the doctrine that an undisclosed principal can sue and be sued on a contract made in the name of another person with his authority is, that the contract is in truth, although not in form, that of the undisclosed principal himself.”
169Lord Lloyd noted in Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 at 207 that the development of the law with respect to undisclosed principals may seem anomalous, since it ran counter to fundamental principles of privity of contract, nevertheless, it was justified on grounds of commercial convenience. See also Mooney v Williams (1905) 3 CLR 1 at 8 (Griffith CJ); [1905] HCA 34; Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545 at 552 (Lord Denning); and Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 at 150–151 (Hope JA).170No reliance is placed by Resilient on either of the exceptions to the doctrine of undisclosed principal. Those exceptions are that (a) the express or implied terms of a contract provide that the actual parties are the real and only principals, and (b) that the contract must not be of such a kind that the personality of the contracting parties is material; for example, a contract to paint a portrait: Winstonu Pty Ltd v Piston[2001] FCA 541 at [30] (Stone J; Beaumont ACJ and Gyles J agreeing). See also Siu Yin Kwan at 207; Hardinge v Schidor[2002] NSWCA 277 at [34] (Powell JA; Mason P agreeing); Filatona Trading Ltd v Navigator Equities Ltd [2020] EWCA Civ 109 at [44]–[46].171One limitation on the operation of the doctrine of undisclosed principal was stated by Hope JA in Maynegrain at 150:
“This position of the undisclosed principal arises only where the agent was in truth his agent at the time of the transaction; a person claiming as principal cannot purport to ratify as the act of his agent a transaction entered into without his authority by one who purports at the time to be a principal, and does not disclose that he is an agent: Keighley, Maxsted & Co v Durant [1901] AC 240.”
172To the extent that Resilient contends that Aspirio was not the agent of Spitfire at the time of entering into the relevant contracts of employment, this issue is next addressed below.
The totality of the relationship
173Resilient says that on a “multifactorial analysis”, the features of an employment relationship point predominantly to Aspirio being the relevant employer. It is said his Honour’s reasoning contained error because it took certain facts and then drew an inference which could not rationally be drawn.174Addressing the factors to which Resilient drew attention, the first three — that Aspirio was recorded as the employer on the employment contracts, issued payslips, and reported “pay as you go” withholding tax to the ATO — reflect the business model adopted by Spitfire of having Aspirio as the “employer of record”. Documents of this kind, whilst relevant, are not determinative of who is the employer.175The fourth factor — that Aspirio paid workers compensation insurance and was identified as the employer for the purposes of that insurance — takes it no further. Moreover, as the Commonwealth correctly submits, the only documentary evidence of such payments is of one occasion on which Aspirio paid an insurance premium in the amount of $1,377.15 on 23 March 2018 and themoneys which enabled it to make that payment were advanced to it by Spitfire on 24 January 2018 by way of intercompany transfer of $15,000.176The fifth factor — that the payment of the employee obligations by Spitfire was recorded on the intercompany loan balance owing from Aspirio to Spitfire — must be assessed in the broader context of the financial arrangements between Spitfire and Aspirio. As his Honour found at J[88], Spitfire and other group companies did not transfer funds to Aspirio to allow it to pay employees; Spitfire in fact paid those employees from its own funds, and then recorded that payment as giving rise to an intercompany liability owed to it by Aspirio which did not have the capacity to discharge it. Further, Spitfire had the necessary assets to pay, and did pay, employees throughout the relevant period. Aspirio did not, and that is a significant matter, notwithstanding that Spitfire received funding from other entities in the Group, which Aspirio did not.177The sixth factor — that Aspirio was the employer of staff who worked within the Spitfire group for an “intelligible business purpose”, in the form of greater administrative efficiencies — misses the point. As Buchanan J explained in Fair Work Ombudsman v Ramsey Food Processing Pty Ltd(2011) 198 FCR 174; [2011] FCA 1176 at [78], where it is not “possible to identify a rational explanation for the arrangement [which] explanation must be satisfactorily related to an intelligible business objective”:
“… doctrines of agency, at least, may operate to defeat a bare claim of independence and isolated liability, supported only by a bare reference to separate incorporation.”
178It was observed in both Ramsey Food Processing at [78] and Branded Media at [26] that there is unlikely to be an intelligible business objective where the separate employing company in a group is completely reliant on the company to which it supplies labour; does not charge for the labour which it supplies; and is at all times incapable of meeting its obligations to employees. In this case, his Honour found at J[85] that there was no “intelligible business objective” consistent with the “financial and administrative organisation of the business” in Aspirio being the employer of the relevant employees. No error has been demonstrated in this finding.
179Turning to the factors which the Commonwealth says provide a sound foundation for his Honour’s conclusion, it is not in dispute that the evidence included the following matters: (1) Aspirio did not carry out any business activities, other than as a formal employer of record. It did not have any external clients or customers; (2) Aspirio did not have substantial assets or a revenue stream sufficient to meet its liabilities to the employees, it incurred a loss for each of the relevant financial years and was incapable of meeting the employees’ entitlements at all relevant times; (3) Spitfire paid the employees directly, and although this was initially accounted for as an intercompany loan from Spitfire to Aspirio, the loan was forgiven by a deed of forgiveness. Aspirio did not ever repay the debt to Spitfire, and it would not have had the assets or the revenue to meet that liability were it ever called on to do so; (4) the employees undertook work for various companies in the Spitfire group, each of which conducted separate business activities; and (5) there was no evidence of a contractual arrangement between Aspirio and Spitfire, such as a management services agreement, that would allow Aspirio to receive payment for the services it undertook in making its employees available for the benefit of the Spitfire group.180Resilient responds that an inference of agency could not rationally be drawn from this evidence because his Honour failed to give primacy to the written contracts of employment. That ignored the fact that his Honour did consider the terms of the written contracts between Aspirio and the relevant employees, and there is no challenge to the finding that the contractual terms identified by way of example at [156] above (at J[81]) are consistent with the employees being retained for the benefit of the Spitfire group generally (of which Spitfire was the parent) rather than Aspirio alone: at J[81].181Resilient says that it does not follow from the contractual terms identified by his Honour that Aspirio was acting as agent for an undisclosed principal. But the reasons for the finding of agency did not stop there. His Honour also relied upon the evidence of Mr Johnson for Aspirio being named as employer, the recital in the deed of forgiveness, the financial arrangements between Spitfire and Aspirio, and the absence of an “intelligible business objective” consistent with the “financial and administrative organisation of the business” in Aspirio being the employer of the relevant employees.182It is said that none of these matters are an indicium of agency, they are just indicia of the way the Spitfire group was structured and there is no rational inference of agency. The difficulty with this submission is that Mr Johnson’s evidence of the business model, together with the evidence of the financial arrangements, supports rather than undermines his Honour’s finding of agency.183It is said that the fact that another company was funding Aspirio to pay the employees is insufficient to give rise to a reasonable inference of agency. But that misunderstands the significance of the evidence of the financial arrangements. As his Honour said at J[85], that there was no formal structure by which Aspirio was paid by any other company in the group for making its “employees” available was consistent with Aspirio acting merely as an agent for payment on behalf of Spitfire, and not as an independent employer.184It is said that there is no rational basis for drawing an inference of agency from the evidence of financial arrangements made after the employment contracts were entered. But the reasonable inference is that the financial arrangements were in place from the time Aspirio first nominally entered contracts of employment with employees within the Spitfire group. That inference is to be drawn from the fact that (a) Aspirio never had a business or assets or revenue from which to pay employees if it was ever called upon to pay them; (b) there was no labour hire arrangement between Aspirio and Spitfire; and (c) all employee payments were made directly by Spitfire itself. Further, to the extent that book entries recorded a parent loan to Aspirio, that such loan was ultimately forgiven in June 2019 is consistent with the mutual intention of Spitfire and Aspirio that Aspirio was the undisclosed agent of Spitfire.185There was no error in his Honour’s finding that in entering employment contracts with employees within the Spitfire group, Aspirio was acting as the agent for an undisclosed principal, Spitfire.
THIRD ISSUE: COSTS
186Given the different outcome on appeal, ground 4 does not arise since the costs discretion below must be re-exercised.187It is common ground between the liquidators and Resilient that if Resilient succeeds on appeal, as it has, then the costs order against Resilient should beset aside, and the appropriate order is that there be no order as to costs below as between Resilient and the liquidators.188Otherwise, Order 3 of 12 May 2022 relating to the plaintiffs’ costs below should remain undisturbed.
Costs on appeal
189Although the draft notice of appeal sought an order that the liquidators pay Resilient’s costs of the appeal, this was an error. In oral argument, Resilient confirmed that it sought a costs order against the Commonwealth.190In opposing any costs order against it, the Commonwealth submitted that the appeal should be seen as a continuum of the liquidators’ application for directions, and that its role on the appeal, like that of Resilient, was that of the proper contradictor in respect of the money held by the liquidators. It is said that it is inappropriate to order costs against the unsuccessful contradictor on appeal.191The force of this submission is greatly diminished by the fact that having been joined as a respondent in this court, the Commonwealth took an active role in opposing the appeal and sought to advance its own interests in relation to the subject matter of the appeal.192Alternatively, the Commonwealth says that if Resilient has success on some grounds but not others there should be some apportionment of costs. The essential question is whether, given the mixed outcome on the appeal, some other order should be made than the default position that costs follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1. The relevant principles are summarised in Bostik Australia Pty Ltd v Liddiard (No 2)[2009] NSWCA 304 at [38] (Beazley, Ipp and Basten JJA).193It is appropriate to apportion costs as between the different issues since the circulating assets issue and the employer issue involved separable and discrete issues. As a matter of impression, it can be expected that Resilient would have incurred more costs on the circulating assets issue which was of greater legal complexity than the employer issue and assumed the major significance on the appeal in terms of its treatment in the parties’ submissions and focus of oral address. Adopting the broadbrush approach that is appropriate in a case like this, in my view, the Commonwealth should pay 70 per cent of Resilient’s costs in this court.194The liquidators sought an order that their costs be paid out of the fund. Such an order is appropriate: Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 4)(2008) 169 FCR 497; [2008] FCA 858 at [8]–[10] (Finkelstein J).195The liquidators also sought an order that whichever of Resilient or the Commonwealth was unsuccessful on the appeal should pay the liquidators’ costs of the appeal. Given that the liquidators’ appearance on the appeal was necessary to seek to uphold the costs order obtained against Resilient, and the liquidators otherwise took a neutral role on the substantive issues, it is appropriate that the liquidators’ costs should be paid by the Commonwealth as the losing party in what was essentially adversarial litigation between creditors claiming priority to a fund held by the liquidators.
Conclusion and orders
196The appeal in relation to the circulating assets issue has succeeded, and otherwise failed on the employer issue. Resilient is entitled to the R&DRefunds received by Spitfire, subject to any equitable lien of the liquidators. The directions to the liquidators in Order 1 made on 12 May 2022 should be set aside and, in lieu, directions should be given to the liquidators in accordance with the conclusion on the circulating assets issue.197I propose the following orders:
(1)
Grant leave to appeal.
(2)
Direct the appellant to file a notice of appeal in the form contained in the White Book within 7 days.
(3)
Appeal allowed on grounds 1 and 2 and otherwise is dismissed.
(4)
Set aside order 1 and order 3 made on 12 May 2022, and in lieu, give directions to the first plaintiffs as liquidators of the second and third plaintiffs in accordance with (5) below and make the costs order in accordance with (6) below.
(5)
Pursuant to s 90‐15 of the Insolvency Practice Schedule (Corporations) (IPS), being Sch 2 to the Corporations Act 2001 (Cth) (Act), the first plaintiffs as liquidators of the second plaintiff, Spitfire Corporation Limited (in liq) (Spitfire), are justified in:
(a)
treating the amount received by Spitfire by way of research and development tax incentive refunds in the total amount of $1,989,849.09 while Spitfire was in liquidation (R&D Refunds) as not subject to a circulating security interest for the purposes of s 561 of the Act; and
(b)
subject to any equitable lien of the first respondents, paying the R&D Refunds to the Resilient Investment Group Pty Ltd (Resilient).
(6)
There be no order as to costs as between Resilient and the plaintiffs in the proceedings below, and otherwise the plaintiffs’ costs of the proceeding be costs in the liquidation of the second plaintiff.
(7)
The fourth respondent to pay 70 per cent of the appellant’s costs in this Court.
(8)
The first respondents’ costs in this Court be paid out of the fund, being the proceeds of the R&D Refunds received by the first respondents.
(9)
The fourth respondent to pay the first, second and third respondents’ costs in this Court.
WHITE JA.198I have had the advantage of reading in draft the reasons for judgment of Gleeson JA.199I incline to the view that prior to the date of its administration Spitfire had a contingent asset which should be characterised as property, and the Commonwealth was under a monetary obligation, albeit a contingent obligation, to pay a tax refund; the contingency being that Spitfire lodge its tax returns claiming the tax refunds. It is unnecessary to express a concluded view on that question. Even if that be so, for the reasons Gleeson JA has given, that monetary obligation did not arise from Spitfire’s providing services in the ordinary course of a business of providing services of that kind within the meaning of s 340(5) of the Personal Property Securities Act 2009 (Cth).200I also agree with the reasons of Gleeson JA on the remaining issues in the appeal and with the orders his Honour proposes.BRERETON JA.201I have had the considerable benefit of reading in draft the judgment to be delivered by Gleeson JA. I agree with the orders his Honour proposes, for the reasons his Honour gives.
Appeal allowed in part
Solicitors for the applicant: Marque Lawyers.Solicitors for the first, second and third respondents: Mills Oakley.Solicitors for the fourth respondent: Clayton Utz.CP O’NEILLBARRISTER
Details
AGLC
Resilient Investment Group Pty Ltd v Barnet and Hodgkinson as liquidators of Spitfire Corporation Limited (in liq) [2023] NSWCA 118
Case
[2023] NSWCA 118
Decision Date
CaseChat Overview and Summary
The appeal concerned a dispute between Resilient Investment Group Pty Ltd and the liquidators of Spitfire Corporation Limited (in liq), Barnet and Hodgkinson. The primary issue revolved around the liquidators' claim for recovery of moneys paid by Spitfire to Resilient, which the liquidators alleged constituted unfair preferences under section 588FA of the Corporations Act 2001 (Cth). The case was heard in the Court of Appeal of New South Wales.
The central legal questions before the Court of Appeal were whether the payments made by Spitfire to Resilient were unfair preferences, and if so, whether Resilient had a defence under section 588FG of the Corporations Act. Specifically, the court had to determine if Spitfire was insolvent at the time of the payments, if the payments were made within the relevant time periods, and if Resilient received more than it would have if Spitfire had been wound up at the time of the payments. The court also considered whether Resilient had acted in good faith and given valuable consideration in return for the payments, and whether it would be inequitable to require repayment.
The Court of Appeal found that the primary judge had erred in their assessment of Spitfire's insolvency at the time of the payments. The court applied the principles of insolvency as defined in the Corporations Act, considering both the cash-flow test and the balance-sheet test. It was held that the liquidators had not discharged their onus of proving insolvency on the balance-sheet test, and that the evidence did not conclusively establish insolvency on the cash-flow test. Consequently, the payments could not be characterised as unfair preferences. The court also considered the defence under section 588FG, noting that even if the payments were preferences, Resilient had provided valuable consideration and acted in good faith, making it inequitable to order repayment.
The appeal was allowed, and the orders of the primary judge were set aside. The liquidators' claim for recovery of the moneys paid by Spitfire to Resilient was dismissed.