FEDERAL COURT OF AUSTRALIA

Connelly v Commonwealth of Australia, in the matter of Australian Road Express Pty Ltd (Receivers and Managers Appointed) (in liq) [2018] FCA 1429

File number:

VID 366 of 2018

Judge:

MOSHINSKY J

Date of judgment:

17 September 2018

Catchwords:

PRACTICE AND PROCEDURE – strike out application – application to strike out statement of cross-claim alleging contravention of s 596AB of the Corporations Act 2001 (Cth) – application for strike out dismissed

Legislation:

Corporations Act 2001 (Cth), ss 9, 51C, 433, 560, 561, 596AB, 596AC, 1311

Evidence Act 1995 (Cth), s 140

Fair Entitlements Guarantee Act 2012 (Cth), s 29

Personal Property Securities Act 2009 (Cth), ss 79, 161, 340, 341, 341A

Federal Court Rules 2011, rr 16.21, 26.01

Cases cited:

Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1994) 217 ALR 226

Australian Securities and Investments Commission v Whitebox Trading Pty Ltd (2017) 251 FCR 448

Bell Group Ltd (In liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1

Cannane v Cannane Pty Ltd (In liq) (1998) 192 CLR 557

Fair Work Ombudsman v Eastern Colour Pty Ltd (2011) 209 IR 263; [2011] FCA 803

Polar Aviation Pty Ltd v Civil Aviation Safety Authority (2012) 203 FCR 325

Polar Aviation Pty Ltd v Civil Aviation Safety Authority (No 4) (2011) 203 FCR 293

National Mutual Property Services (Aust) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514

Sadie Ville Pty Ltd v Deloitte Touche Tohmatsu (A Firm) (2017) 123 ACSR 223; [2017] FCA 1202

Date of hearing:

14 September 2018

Registry:

Victoria

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Category:

Catchwords

Number of paragraphs:

74

Counsel for the First and Second Plaintiffs:

Ms EL Beechey

Solicitor for the First and Second Plaintiffs:

Corrs Chambers Westgarth

Counsel for the Defendant and Cross-Claimant:

Dr JP Moore QC with Mr SL Freire

Solicitor for the Defendant and Cross-Claimant:

McCullough Robertson

Counsel for the Cross-Respondent:

Mr SJ Maiden QC with Ms FJ Hudgson

Solicitor for the Cross-Respondent:

MinterEllison

ORDERS

VID 366 of 2018

IN THE MATTER OF AUSTRALIAN ROAD EXPRESS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 051 918 015) AND JOLLY’S TRANSPORT SERVICES PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 097 891 248)

BETWEEN:

ANTHONY NORMAN CONNELLY, ROBERT MICHAEL KIRMAN AND ROBERT BRUCE SMITH IN THEIR CAPACITY AS RECEIVERS AND MANAGERS OF AUSTRALIAN ROAD EXPRESS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 051 918 015)

First Plaintiff

ANTHONY NORMAN CONNELLY, ROBERT MICHAEL KIRMAN AND ROBERT BRUCE SMITH IN THEIR CAPACITY AS RECEIVERS AND MANAGERS OF JOLLY’S TRANSPORT SERVICES PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 097 891 248)

Second Plaintiff

AND:

COMMONWEALTH OF AUSTRALIA, DEPARTMENT OF JOBS AND SMALL BUSINESS

Defendant

AND BETWEEN:

COMMONWEALTH OF AUSTRALIA, DEPARTMENT OF JOBS AND SMALL BUSINESS

Cross-Claimant

AND:

ONE CORPORATE TRUST SERVICES LIMITED (ACN 163 307 800)

Cross-Respondent

JUDGE:

MOSHINSKY J

DATE OF ORDER:

17 SEPTEMBER 2018

THE COURT ORDERS THAT:

1.    The cross-respondent’s interlocutory application dated 27 July 2018 be dismissed.

2.    The cross-respondent pay the cross-claimant’s costs of the hearing on 14 September 2018.

3.    Otherwise, the costs of the interlocutory application be reserved.

4.    By 4.00 pm on 5 October 2018, the plaintiffs file points of claim.

5.    By 4.00 pm on 2 November 2018, the defendant file points of defence.

6.    By 4.00 pm on 2 November 2018, the cross-respondent file a defence to the statement of cross-claim.

7.    There be liberty to apply.

8.    The matter be listed for case management at 9.30 am on 16 November 2018.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MOSHINSKY J:

1    This is an interlocutory application brought by the cross-respondent, One Corporate Trust Services Limited (OCT) against the cross-claimant, the Commonwealth of Australia (the Commonwealth), seeking strike out of the Commonwealth’s statement of cross-claim.

2    I will first outline the principal proceeding, then outline the cross-claim, and then turn to the interlocutory application.

The principal proceeding

3    The principal proceeding is brought by Anthony Connelly, Robert Kirman and Robert Smith in their capacity as receivers and managers of two companies, Australian Road Express Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (ARX) and Jolly’s Transport Services Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (Jolly’s). I will refer to the plaintiffs as the “Receivers” and to ARX and Jolly’s as the “Receivership Companies”.

4    By their amended originating process, the Receivers seek two declarations:

(a)    A declaration that certain receivables (defined as the Receivables Assets) are non-circulating assets for the purposes of s 433 of the Corporations Act 2001 (Cth). If this is correct, it will mean that the assets will not be subject to the priority for employees’ claims provided for in s 561 of the Corporations Act.

(b)    A declaration that certain assets (defined as the WIP Assets) are circulating assets for the purposes of s 433. This declaration can be put to one side for present purposes.

5    The factual background to the Receivers’ claim for the first declaration is summarised in submissions filed by the Receivers on 8 June 2018 (the Receivers’ submissions). The following outline of the facts is based on [6] to [17] of those submissions.

6    The Receivership Companies’ primary business was providing haulage services. The Receivership Companies were formerly part of a group of companies known as the McAleese Group.

7    On 19 July 2016, a lender consortium acquired 100 per cent of the McAleese Group’s secured debt.

8    On 29 August 2016, the McAleese Group entered into voluntary administration and in December 2016 the McAleese Group was restructured via three interrelated Deeds of Company Arrangement (the DOCAs). Pursuant to the DOCAs, a number of companies that had up to that time formed part of the McAleese Group (including the Receivership Companies) subsequently became part of a new group called the Rivet Group.

9    On 21 December 2016, OCT registered on the Personal Property Securities Register (the PPSR) certain security interests that were to be granted by the Receivership Companies. (Pursuant to s 161 of the Personal Property Securities Act 2009 (Cth) (the PPSA), security interests may be registered before a security agreement is made covering the property.) The relevant security interests are recorded in the PPSR Registration Number Search Certificates set out in a table in [9] of the Receivers’ Submissions. Each of the security interests states “Yes” in the field “Subject to Control” (on the second page of each Search Certificate).

10    On 27 January 2017, ARX changed its name from W.A. Freightlines Pty Ltd to Australian Road Express Pty Ltd. The former name appears on the PPSR registrations and in some of the financing documents.

11    On 31 January 2017 and 1 February 2017, the Receivership Companies (along with other companies in the Rivet Group) entered into a series of agreements pursuant to which they acceded to certain facility and security agreements that had already been entered into by other Rivet Group companies on 21 December 2016 and granted the anticipated further securities that were the subject of the registrations referred to above. The relevant agreements were:

(a)    a Guarantor Accession Deed (Syndicated Loan Note Subscription Agreement (Rivet) Working Capital) with SC Lowy Financial (HK) Limited (SCLHK), pursuant to which the Receivership Companies became bound as guarantors under the Syndicated Loan Note Subscription Agreement (Rivet) – Working Capital dated 21 December 2016 with SCLHK as Facility Agent, OCT as Security Trustee and others (the Working Capital Facility Agreement);

(b)    an Accession Deed for New Obligors, pursuant to which the Receivership Companies became bound as obligors under the Security Trust Deed (Rivet Security Trust) dated 21 December 2016 with OCT as Security Trustee;

(c)    a Receivables Security Deed with OCT as Security Trustee (the Receivables Security Deed); and

(d)    a Receivables Account Deed with Australia and New Zealand Banking Group Ltd (ANZ) as the Account Bank and OCT as Security Trustee (the Receivables Account Deed).

12    By operation of cls 2 and 3 of the Receivables Account Deed, one Jolly’s bank account and two ARX bank accounts were listed as “Receivables Accounts” (defined in cl 18 as the bank accounts specified in Schedule 2) to which control provisions in the Working Capital Facility Agreement and the Receivables Security Deed would apply (the Receivables Accounts).

13    An event of default occurred on 31 March 2017 when the Receivership Companies (amongst others) failed to make an interest payment due under cl 4.1(c) of the Working Capital Facility Agreement (and another facility), as evidenced in the letter dated 16 March 2018 in which the Facility Agent (SCLHK) wrote to the Receivers confirming the default.

14    On 17 July 2017, SCLHK issued a notice of default in respect of the Working Capital Facility Agreement (and other facilities) to the Receivership Companies and others, accelerating the debt and terminating the facilities.

15    At 4:29 pm on 17 July 2017, pursuant to the Receivables Account Deed, OCT emailed a notice to ANZ in relation to the Receivables Accounts (the RAD Notice) which stated:

Pursuant to clause 3(a)(iii) of the [Receivables Account Deed], the Secured Party gives notice that with effect from the date of this letter, the Account Bank must deal with the following Receivables Accounts and any balance only in accordance with the Secured Party’s instructions without reference to, or further consent of, an Account Holder[.]

The RAD Notice then listed six bank accounts, including the three Receivables Accounts of ARX and Jolly’s respectively (being the first three on that list).

16    At 4:30 pm on 17 July 2017 (that is, one minute later), OCT appointed the Receivers to the Receivership Companies and others.

17    The relevant contractual and legislative provisions are set out in [20] to [39] of the Receivers’ Submissions. The relevant legislative provisions include the definition of “circulating security interest” in s 51C of the Corporations Act and ss 340, 341 and 341A of the PPSA.

18    The contentions of the Receivers in the principal proceeding can be summarised as follows.

19    First, as set out in [49]-[56] of the Receivers’ Submissions, the Receivers contend that the Receivables Assets are non-circulating assets for the purposes of s 433 of the Corporations Act because (among other things):

(a)    by reason of the operation of s 340(2) of the PPSA, the Receivables Assets were not a circulating asset on the basis that, among other things, the secured party (OCT) had “control” of the Receivables Assets; and

(b)    the secured party (OCT) had “control” of the relevant Receivables Accounts for the purposes of s 340(2) of the PPSA on the basis that, among other things, by reason of cl 7.9(f) of the Working Capital Facility Agreement, the secured party was able to satisfy the requirement in s 341A(1)(a)(ii) of the PPSA that the secured party be able to direct dispositions of the funds from the account without further consent by ARX or Jolly’s (as the case may be).

20    Secondly, as set out in [57]-[60] of the Receivers’ Submissions, the Receivers contend that the Receivables Assets are non-circulating assets for the purposes of s 433 of the Corporations Act because:

(a)    the issuing by the secured party (OCT) of the RAD Notice to ANZ at 4.29 pm on 17 July 2017 constituted a step to enforce OCT’s security interests under the Receivables Security Deed;

(b)    by reason of the operation of cl 7.2 of the Receivables Security Deed, any authority of ARX or Jolly’s to deal with the Receivables Assets as secured assets ceased immediately upon the issuing of the RAD Notice;

(c)    at the time the Receivers took possession of the Receivables Assets (4.30 pm on 17 July 2017), the secured party (OCT) had not given ARX or Jolly’s express or implied authority for the transfer of the Receivables Assets to be made in the ordinary course of ARX’s and Jolly’s respective businesses free from any security interest; and

(d)    accordingly, the Receivables Assets were not circulating assets under s 340(1)(b) of the PPSA.

The cross-claim

21    On 28 June 2018, the Commonwealth of Australia was joined as a defendant to the proceeding. Subject to obtaining the consent of the liquidators of ARX and Jolly’s, the Commonwealth was given leave, should leave be necessary, to file a notice of cross-claim and a statement of cross-claim.

22    On 13 July 2018, having obtained that consent, the Commonwealth filed a notice of cross-claim and a statement of cross-claim.

23    The background to the cross-claim is that, between October 2017 and April 2018, the Commonwealth made advances under the Fair Entitlements Guarantee scheme established by the Fair Entitlements Guarantee Act 2012 (Cth) (the FEG Act). The statement of cross-claim states that the Commonwealth made advances totalling approximately $2.2 million to the liquidators of ARX in respect of the outstanding employee entitlements of former employees of ARX, and advances totalling approximately $700,000 to the liquidators of Jolly’s in respect of the outstanding employee entitlements of former employees of Jolly’s.

24    It is contended in the statement of cross-claim that: by reason of the operation of s 29 of the FEG Act and s 560 of the Corporations Act, the Commonwealth has the same rights under Ch 5 of the Corporations Act as a creditor of ARX or Jolly’s (as the case may be); and, in the winding up of ARX or Jolly’s (as the case may be), the Commonwealth has the same right of priority of payment in respect of the advances as the former employees who received the advances would have if the advances had not been made.

25    The statement of cross-claim, at [28], refers to the Receivers’ contention that the Receivables Assets are non-circulating assets for the purposes of s 433 of the Corporations Act. It is noted, in [29] of the statement of cross-claim, that if (which is denied) the Receivables Assets are non-circulating assets, the Receivers would not be obliged to pay to the Commonwealth the advances in priority to any claim by OCT in respect of its security interest in the Receivables Assets.

26    The statement of cross-claim then puts forward two key contentions. In each case, the Commonwealth contends that OCT contravened s 596AB of the Corporations Act, giving rise to a liability to pay compensation to the Commonwealth under s 596AC of the Corporations Act. Sections 596AB and 596AC provide as follows:

596AB Entering into agreements or transactions to avoid employee entitlements

(1)    A person must not enter into a relevant agreement or a transaction with the intention of, or with intentions that include the intention of:

(a)    preventing the recovery of the entitlements of employees of a company; or

(b)    significantly reducing the amount of the entitlements of employees of a company that can be recovered.

(2)    Subsection (1) applies even if:

(a)    the company is not a party to the agreement or transaction; or

(b)    the agreement or transaction is approved by a court.

(3)    A reference in this section to a relevant agreement or a transaction includes a reference to:

(a)    a relevant agreement and a transaction; and

(b)    a series or combination of:

(i)    relevant agreements or transactions; or

(ii)    relevant agreements; or

(iii)    transactions.

(4)    If a person contravenes this section by incurring a debt (within the meaning of section 588G), the incurring of the debt and the contravention are linked for the purposes of this Act.

596AC Person who contravenes section 596AB liable to compensate for loss

(1)    A person is liable to pay compensation under subsection (2) or (3) if:

(a)    the person contravenes section 596AB in relation to the entitlements of employees of a company; and

(b)    the company is being wound up; and

(c)    the employees suffer loss or damage because of:

(i)    the contravention; or

(ii)    action taken to give effect to an agreement or transaction involved in the contravention.

The person is liable whether or not the person has been convicted of an offence in relation to the contravention.

(2)    The company’s liquidator may recover from the person an amount equal to the loss or damage as a debt due to the company.

Note:    Because employee entitlements are priority payments under paragraphs 556(1)(e) to (h), employees have priority to any compensation recovered by the liquidator in proceedings brought under this section.

(3)    If an employee of the company has suffered loss or damage because of:

(a)    the contravention; or

(b)    action taken to give effect to an agreement or transaction involved in the contravention;

the employee may, as provided in section 596AF to 596AI (but not otherwise), recover from the person, as a debt due to the employee, an amount equal to the amount of the loss or damage. Any amount recovered by the employee under this subsection is to be taken into account in working out the amount for which the employee may prove in the liquidation of the company.

(4)    Proceedings under this section may only be begun within 6 years after the beginning of the winding up.

27    The Commonwealth’s first contention, which is dealt with at [33]-[38] of the statement of cross-claim, relates to cl 7.9(f) of the Working Capital Facility Agreement. In summary, it is contended as follows:

(a)    OCT’s entry into the Working Capital Facility Agreement on terms that included cl 7.9(f) constituted a “relevant agreement or transaction” within the meaning of that expression as defined by s 596AB(3).

(b)    OCT entered into the Working Capital Facility Agreement on terms that included cl 7.9(f) with the intention of, or with intentions that included the intention of: preventing the recovery of the entitlements of employees of either or both of ARX and Jolly’s; or significantly reducing the amount of the entitlements of employees of either or both of ARX and Jolly’s that can be recovered. (Paragraph [34] of the statement of cross-claim.)

(c)    In the circumstances, OCT contravened s 596AB(1) in relation to the employees of either or both of ARX and Jolly’s.

(d)    The Commonwealth, subrogated to the rights of the former employees of ARX and Jolly’s by reason of the operation of s 560, has suffered loss or damage.

(e)    By reason of these matters and s 596AC, OCT is liable to pay compensation to the Commonwealth, and the Commonwealth is entitled to recover from OCT as a debt due to the Commonwealth, an amount equal to the loss or damage.

28    The Commonwealth’s second contention, which is dealt with at [39]-[44] of the statement of cross-claim, relates to the issuing of the RAD Notice one minute before the appointment of the Receivers. In summary, it is contended as follows:

(a)    OCT’s issuing of the RAD Notice to ANZ constituted a “relevant agreement or transaction” within the meaning of that expression as defined in s 596AB(3).

(b)    OCT issued the RAD Notice to ANZ with the intention of, or with intentions that included the intention of: preventing the recovery of the entitlements of employees of either or both of ARX and Jolly’s; or significantly reducing the amount of the entitlements of employees of either or both of ARX and Jolly’s that can be recovered. (Paragraph [40] of the statement of cross-claim.)

(c)    In the circumstances, OCT contravened s 596AB(1) in relation to the employees of either or both of ARX and Jolly’s.

(d)    The Commonwealth, subrogated to the rights of the former employees of ARX and Jolly’s by reason of the operation of s 560, has suffered loss and damage.

(e)    By reason of these matters and s 596AC, OCT is liable to pay compensation to the Commonwealth, and the Commonwealth is entitled to recover from OCT, as a debt due to it, an amount equal to the loss or damage.

29    Each of the allegations regarding OCT’s intention is supported by particulars.

30    Under [34] of the statement of cross-claim, the following particulars appear:

The intention of OCT is to be inferred from the facts that:

(a)    published finance industry guidance available to prospective lenders and their advisers provides a precedent for an account bank deed used to support security granted over an ADI account, and states in relation to that precedent that its purpose is to ensure that the secured party has “control” of the ADI account under s 341A of the PPSA, and that the absence of such a clause would “result in preferred creditors having priority over the claims of secured creditors in relation to those [circulating] assets in an insolvency”: Personal Properties Securities Law, “Account bank deed to support security granted over ADI account” precedent, LexisNexis, online, [382.390]. It may be inferred that OCT, and / or their advisers, were aware of such (or similar) guidance, on the basis that they were informed participants in the secured lending industry.

(b)    there was no other commercial justification for the inclusion of a clause in the Working Capital Facility Agreement whereby OCT could operate any of the Receivables Accounts concurrently with ARX or Jolly’s (as the case may be), without consent.

Further particulars may be provided following discovery and prior to trial.

31    Under [40] of the statement of cross-claim, the following particulars appear:

The intention of OCT is to be inferred from the circumstance that the step of issuing of the RAD Notice to ANZ took place one minute before the appointment of the Receivers, and could only have been taken with the sole (or at least an) intention to avoid the funds held in any of the Receivables Accounts and the receivables at the time of the appointment of the Receivers being treated as circulating assets for the purpose of s 433 of the Act, thereby affording priority to the priority creditor of ARX and Jolly’s ahead of the claims of the secured creditor.

Further particulars may be provided following discovery and prior to trial.

32    Following the service of OCT’s submissions in support of its strike out application (dated 27 July 2018), the Commonwealth provided further particulars by letter dated 9 August 2018 from the solicitors for the Commonwealth to the solicitors for OCT (the Further Particulars).

33    Paragraph 1 of the Further Particulars (which relates to [34] of the statement of cross-claim) alleges, in summary, that at the time of entry into the Working Capital Facility Agreement, OCT knew that:

(a)    the total claims of the debtor group’s secured creditors significantly exceeded the total value of the assets of the debtors and guarantors (including ARX and Jolly’s); and

(b)    if the cash, work-in-progress and debts of ARX and Jolly’s were treated as non-circulating assets for the purposes of s 433 of the Corporations Act, they would be wholly applied toward repayment of the secured debt, leaving a substantial shortfall to the secured creditors and no funds available to meet employee entitlements.

34    Paragraph 2 of the Further Particulars (which relates to [34] of the statement of cross-claim) provides further particulars of the allegation that OCT and/or its advisers were informed participants in the secured lending industry.

35    Paragraph 3 of the Further Particulars (which relates to [34] of the statement of cross-claim) provides further particulars of the allegation that OCT and/or its advisers were aware of the relevant guidance and/or similar guidance.

36    Paragraph 4 of the Further Particulars (which relates to [40] of the statement of cross-claim) alleges, in summary, that at the time that it issued the RAD Notice to ANZ, OCT knew that: there had not been any material turnaround in the financial position of the Rivet Group, including ARX and Jolly’s; the claims of the secured creditors of the Rivet group continued to significantly exceed the value of the assets of the group; the assets of ARX and Jolly’s continued to be insufficient to pay out the secured debt; and in the event of a receivership or insolvency administration, if the cash, work-in-progress and debts of ARX and Jolly’s were treated as non-circulating assets for the purposes of s 433, such assets would be wholly applied towards repayment of the secured debt, leaving a substantial shortfall to the secured creditors and no funds available to meet employee entitlements.

The interlocutory application

37    By interlocutory process filed on 27 July 2018, OCT applies for an order that the statement of cross-claim be struck out pursuant to r 16.21(1)(d) or (e) of the Federal Court Rules 2011. If the statement of cross-claim is struck out, OCT seeks a further order that the cross-claim be dismissed under r 26.01(1)(a).

38    Rule 16.21(1) relevantly provides that a party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading: “is likely to cause prejudice, embarrassment or delay in the proceeding” (para (d)); or “fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading” (para (e)).

39    There is no issue between the parties as to the applicable principles. The relevant principles regarding strike out on the basis of failure to disclose a reasonable cause of action were summarised by Kenny J in Polar Aviation Pty Ltd v Civil Aviation Safety Authority (No 4) (2011) 203 FCR 293 at [8]-[12], referring to (among other cases) National Mutual Property Services (Aust) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 at 529 and Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1994) 217 ALR 226. An appeal from Kenny J’s decision was dismissed: Polar Aviation Pty Ltd v Civil Aviation Safety Authority (2012) 203 FCR 325. In relation to r 16.21(1)(d), see Fair Work Ombudsman v Eastern Colour Pty Ltd (2011) 209 IR 263; [2011] FCA 803 at [40]-[43] per Collier J and the cases there cited. See also Sadie Ville Pty Ltd v Deloitte Touche Tohmatsu (A Firm) (2017) 123 ACSR 223; [2017] FCA 1202 at [15]-[21].

40    OCT relies on two principal contentions in support of its strike out application:

(a)    OCT contends that the Commonwealth cannot make out the necessary intent on its pleadings.

(b)    OCT contends that, even if the pleaded facts are adequate, those facts could not satisfy the statutory test.

41    I will consider each of these in turn.

OCT’s first contention: that the Commonwealth cannot make out the necessary intent on its pleadings.

42    OCT submits that for conduct to contravene s 596AB(1), the person must have an intent to prevent or significantly reduce the recovery of employee entitlements. OCT submits that, for the Commonwealth to prove that intent on its pleaded case, it would need to satisfy the Court of one or more of the allegations set out in the particulars under [34] and [40] of the statement of cross-claim.

43    OCT refers to the two paragraphs of particulars under [34] as the “improper precedent allegations” and the “uncommercial agreement allegations” respectively and the particulars under [40] as the “timing allegations”.

44    In relation to the improper precedent allegations, OCT submits that the Commonwealth would have to satisfy the Court of all of the following: OCT and/or its advisers were “informed participants in the secured lending industry”; as a result of that status, it must be inferred that OCT and/or its advisers were aware of “guidance” contained in a legal precedent published on an internet subscription service at the time of the agreement, which stated that without ‘control’ of an authorised deposit-taking institution account, “preferred creditors [would have] priority over the claims of secured creditors in relation to those [circulating] assets in an insolvency”, or of (unidentified) “similar guidance”; and as a result of that awareness, it must be inferred that by entering into the Working Capital Facility, which included a term allowing OCT to operate and withdraw money from the Receivables Accounts, OCT intended to prevent employees of ARX and Jolly’s from recovering their employee entitlements or reduce the amount of those entitlements that they could recover.

45    Further, in relation to the improper precedent allegations, OCT submits that the Commonwealth has not pleaded:

(a)    any allegation of fact from which the Court could conclude that OCT or its advisers were “informed participants in the secured lending industry”, sufficient to make out the first limb of the improper precedent allegations;

(b)    any allegation of fact from which the Court could conclude that there had been published at the time of execution of the Working Capital Facility Agreement any “similar guidance” of which OCT or its advisers might be inferred to have been aware;

(c)    any facts from which the knowledge of lawyers working for OCT might be attributed to OCT;

(d)    any allegation of fact from which the Court could conclude that “informed participants in the secured lending industry” were aware of the relevant ‘guidance’, sufficient to make out the second limb;

(e)    any facts that connect the LexisNexis precedent relied upon with the Working Capital Facility Agreement; or

(f)    any allegation of fact from which the Court could infer that an intention to prevent statutory priority creditors having access to secured assets in priority to secured lenders constituted an intention to prevent or reduce the recovery of employee entitlements.

46    It follows, OCT submits, that the improper precedent allegations, as pleaded, must fail.

47    In relation to the uncommercial agreement allegations, OCT submits that the Commonwealth would have to satisfy the Court of both of the following: there was no commercial justification for the inclusion of a clause allowing OCT to operate the Receivables Accounts other than to prevent or reduce the amount of employee entitlements which ARX and Jolly’s employees could recover; and from that it must be inferred that OCT intended to prevent employees of ARX and Jolly’s from recovering their employee entitlements or reduce the amount of those entitlements that they could recover.

48    Further, in relation to the uncommercial agreement allegations, OCT submits that there are three independent reasons why that pleading cannot stand.

(a)    It is a statement of circular reasoning: it does no more than assert by alternative wording the ultimate legal conclusion which the Commonwealth seeks to rely on it to prove, namely that the sole purpose of the inclusion of cl 7.9(f) in the Working Capital Facility Agreement was to prevent or significantly reduce the recovery of employee entitlements.Even if that were not so, the pleading does not assert facts from which the Court could infer the “justification” of the inclusion of the clause. The commercial justification or purpose of a particular provision in an agreement is no more than the views held by those within a corporation which sought and caused the inclusion of that provision in an agreement. To speak of the “commercial justification” of cl 7.9(f) of the Working Capital Facility Agreement is to speak in the abstract, without reference even to the purposes of OCT as security trustee under that agreement. What matters is the intent of OCT, and the intent of OCT can only be inferred from the conduct of individuals (if any) within the organisation who sought and caused cl 7.9(f) to be included in the Working Capital Facility Agreement. No such conduct has been pleaded or particularised.

(b)    The argument sought to be made is negatived by the existence of at least two legitimate commercial purposes that justified the inclusion of c7.9(f), both of which are demonstrable by reference to the PPSA:

(i)    Before the introduction of the PPSA, a creditor could take a fixed charge over book debts, but one of the things that had to be demonstrated in order to establish that the charge was fixed and not floating was control over the bank account into which proceeds of the book debts were paid. The concept of ‘control’ is retained for a similar purpose in the PPSA: under ss 340-341A, control is relevant in the determination of whether an asset is circulating or non-circulating (with similar effects to those that previously applied to fixed and floating charge assets, respectively). The Parliament intended to preserve the effect of the pre-existing case law in assisting the determination of what amounts to circulating and non-circulating security interests. The effect of cl 7.9(f) is to assist the chargee to assert control over bank accounts into which the proceeds of secured receivables are paid, for that purpose.

(ii)    Section 79 of the PPSA exposes the lender under a security agreement to a new risk: under that section, the collateral (in this case the receivables) may itself be separately assigned to a different lender or third party, by consent of the grantor and the transferee or by operation of law, regardless of any prohibition expressed in the security agreement. Provisions such as cl 7.9(f) enable a secured creditor to seek protection against such an eventuality by creating a mechanism by which the secured creditor can ‘physically’ control the disposition of the collateral in question (here, the contents of the Receivables Accounts). It is entirely legitimate for a secured creditor to insist on such a provision (indeed, it would arguably be negligent for it not to).

49    In relation to the timing allegations, OCT submits that the Commonwealth would have to satisfy the Court of both of the following: OCT’s act in issuing the RAD Notice to ANZ one minute before it appointed receivers to ARX and Jolly’s compels an inference that it did so with the intention of preventing certain assets being treated as circulating assets for the purpose of s 433 (which would have afforded priority to priority creditors ahead of OCT); and from that intention, it must be inferred that OCT intended to prevent employees of ARX and Jolly’s from recovering their employee entitlements or reduce the amount of those entitlements that they could recover.

50    Further, in relation to the timing allegations, OCT submits as follows:

(a)    The RAD Notice stated that it was issued pursuant to clause 3(a)(iii) of the 21 December 2016 and 1 February 2017 Receivables Account Deeds between ANZ and OCT and stated account holders. Clause 3(a)(iii) of the 1 February 2017 deed provided that ANZ could deal with the ARX and Jolly’s receivables accounts on the instructions of the relevant account holder or OCT until such time as OCT notified ANZ that the balance of the accounts could only be dealt with on the instructions of OCT without reference to the account holder.

(b)    OCT’s entry into the deed itself is not impugned by the Commonwealth, which relies only upon the timing of the exercise by OCT of its rights under cl 3(a)(iii).

(c)    Section 596AB(1) proscribes “relevant agreements or transactions”. A relevant agreement or transaction is defined in s 596AB(3) to be a relevant agreement and/or transaction or any combination of relevant agreements and/or transactions. “Relevant agreement” is defined in s 9 to mean an agreement, arrangement or understanding. It is therefore apt to capture bilateral or multi-party arrangements but not the unilateral exercise of a right under an agreement. “Transaction” is defined in s 9 for the purposes of Part 5.7B but not for the purposes of Part 5.8A, where s 596AB is located. The word must therefore mean something different to the s 9 definition and must be given its ordinary meaning, which connotes an event in which two or more parties participate. There is nothing in the legislative purpose of 596AB that suggests that transaction was designed to capture the unilateral exercise of a right by which one person (here OCT) merely notifies another (here ANZ) that the first person has exercised an election in relation to an asset owned by a third party (here ARX or Jolly’s).

(d)    Further, the agreement having been entered, and already providing for OCT to have control of the relevant account, the sole purpose of the RAD Notice was to exercise OCT’s rights as secured creditor and make absolute its entitlement to the secured assets. Whatever rights it had in respect of the priority creditors, it obtained those rights by entry into relevant agreements and not by the mere giving of the notice necessary to give effect to some part of those rights.

51    In OCT’s submissions dated 27 July 2018, it submitted that an overarching problem with all three sets of allegations made by the Commonwealth was the absence of any allegation that OCT was aware (or even suspected) at any relevant time that there might be any shortfall in the funds available to satisfy employee entitlements, even if it realised all of the secured assets ahead of the priority creditors. Following the service of these submissions, the Commonwealth provided the Further Particulars, which appear to be directed to addressing this criticism of the pleading.

52    OCT addresses the Further Particulars in its reply submissions. OCT submits that the Further Particulars do not remedy the fundamental inadequacies identified by OCT. OCT submits that, at best, the new particulars assert that OCT knew at the time of each impugned act that if ARX’s and Jolly’s receivables were treated as non-circulating assets in a receivership or liquidation, there would be no funds available to meet the unpaid entitlements of those companies’ employees. But, OCT submits, the essence of s 596AB is an intention to cause a subtraction from the assets out of which the relevant creditors might be paid: see analogously Cannane v Cannane Pty Ltd (In liq) (1998) 192 CLR 557 at [12]-[13] and Bell Group Ltd (In liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1 at [9146]. It follows, OCT submits, that in order to properly plead the knowledge necessary to infer mens rea under s 596AB, it is necessary to plead the defendant’s knowledge of both the status quo and the likely effect of the impugned transaction. That is, at the time of each of the impugned transactions:

(a)    there were unpaid priority creditor entitlements;

(b)    but for the transaction, the debtor would have had assets that would have been applied to satisfy those entitlements if a receiver or liquidator were appointed;

(c)    the transaction would have reduced the value of the assets that would have been applied in satisfaction of those entitlements by a receiver or liquidator; and

(d)    the defendant knew of (a), (b) and (c).

53    OCT submits that the Commonwealth’s claim, even as supplemented by the Further Particulars, remains defective in three crucial respects:

(a)    it does not identify the existence or quantum of any unpaid priority creditor entitlements in ARX or Jolly’s at the time of the impugned transactions;

(b)    it does not identify what if any assets of ARX and Jolly’s would have been available to satisfy those entitlements but for the impugned transactions; and

(c)    it does not plead that OCT knew of the matters set out at (a) and (b) above.

54    It follows, OCT submits, that on the case as pleaded, the Court could not infer that OCT intended to prevent or significantly reduce the recovery of entitlements, because the Court could not conclude that OCT knew at the time of either of the impugned transactions that there was any prospect of such recoveries to begin with.

55    In my view, at least at this stage of the proceeding, the Commonwealth has provided sufficient particulars in support of the allegations in [34] and [40] of the statement of cross-claim, such that OCT has not shown that the Commonwealth cannot make out the necessary intent on its pleadings. In circumstances where the allegations in [34] and [40] in terms plead the intention required for a contravention of s 596AB, the focus of consideration for present purposes is on whether the particulars that have been provided by the Commonwealth are sufficient to support the intention alleged in [34] and [40].

56    Starting with [40] of the statement of cross-claim, the fact that OCT issued the RAD Notice one minute before it appointed the Receivers to ARX and Jolly’s, together with the statutory scheme (of both the Corporations Act and the PPSA) and the particulars of knowledge included in the Further Particulars, are sufficient to support the allegation in [40], namely that OCT issued the RAD Notice with the intention of (or with intentions that included): preventing the recovery of the entitlements of employees of either or both of ARX and Jolly’s; or significantly reducing the amount of the entitlements of employees of either or both of ARX and Jolly’s that can be recovered. It is necessary to have regard to the relevant statutory provisions and the contentions that could be made in relation to those provisions based on the issue of the RAD Notice. The issuing of the RAD Notice enabled a contention to be made to the effect that the issuing of the RAD Notice by OCT to ANZ at 4.29 pm on 17 July 2017 constituted a step to enforce OCT’s security interests under the Receivables Security Deed and, accordingly, any authority of the Receivership Companies to deal with the Receivables Assets as secured assets ceased immediately at that time pursuant to cl 7.2 of the Receivables Security Deed. (Such a contention is made by the Receivers in the principal proceeding.) Given the timing of the issue of the RAD Notice relative to the appointment of the Receivers, and the absence of any other apparent purpose for issuing the notice, it may be inferred that OCT issued the RAD Notice in order to enable such a contention to be made.

57    The allegation in [40] of the statement of cross-claim concerns the intention and knowledge of the cross-respondent (OCT) and discovery has not yet taken place. In these circumstances, it is understandable that the cross-claimant (the Commonwealth) may not be able to provide as detailed particulars as may be expected after discovery has taken place (but the pleading as it stands must still be sufficient). If, following discovery, OCT considers that further particulars of intention and knowledge are required, it would be open to OCT to raise this matter.

58    In oral submissions, senior counsel for OCT submitted that the pleading was defective because it did not plead knowledge of a reduction in entitlements, that is, that the issuing of the RAD Notice would result in a reduction in the priority entitlements of employees. However, the Commonwealth does plead, in [40], that OCT had the requisite intention, and the particulars contained in the Further Particulars include that OCT knew that, in the event of a receivership or insolvency administration, if the cash, work-in-progress and debtors of ARX and Jolly’s were treated as non-circulating assets, such assets would be “wholly applied towards repayment of the secured debt, leaving a substantial shortfall to the secured creditors and no funds available to meet employee entitlements”. I consider this to be sufficient, at least for present purposes, to support the alleged intention.

59    I note that OCT contends that the issue of the RAD Notice was a unilateral rather than a bilateral step, and that it cannot therefore qualify as a “transaction” for the purposes of the relevant provisions. This is a contention that is more appropriately dealt with at trial. I do not consider the Commonwealth’s position in this respect to be unarguable.

60    I note that OCT submits that it obtained control of the relevant accounts upon entry into the relevant agreements; in simple terms, it is contended that the RAD Notice was unnecessary to achieve control. However, it is sufficient to support the Commonwealth’s allegation, as a matter of pleading, that there was the potential to contend (if necessary) that the issue of the RAD Notice gave OCT control of the relevant accounts. As has been noted, one of the arguments of the Receivers in the principal proceeding relies on the issue of the RAD Notice.

61    In light of the above, I consider that the particulars provided by the Commonwealth are sufficient to support the allegation in [40] of the statement of cross-claim.

62    Turning to [34] of the statement of cross-claim, which concerns entry into the Working Capital Facility Agreement on terms that included cl 7.9(f), in my view the particulars provided by the Commonwealth under that paragraph together with the Further Particulars are sufficient to support the allegation that OCT entered into the agreement with that term with the intention of (or with intentions that included): preventing the recovery of the entitlements of employees of either or both of ARX and Jolly’s; or significantly reducing the amount of the entitlements of employees of either or both of ARX and Jolly’s that can be recovered. Many of the submissions advanced on behalf of OCT (both in writing and orally) go to the merits of the allegation (and thus are matters for trial) rather than to whether the allegation is sustainable as a matter of pleading.

63    As noted above, it is relevant to have regard to the fact that the allegation concerns the intention and knowledge of the cross-respondent and discovery has not yet taken place. In these circumstances, it is understandable that the cross-claimant may not be able to provide as detailed particulars as may be expected after discovery has taken place. Again, if following discovery OCT considers that further particulars are required, it would be open to OCT to raise the matter.

64    In oral submissions, it was submitted by senior counsel for OCT that cl 7.9(f) was in fact based on an earlier agreement rather than a standard precedent. This submission goes to the merit of the Commonwealth’s claim rather than the sufficiency or otherwise of the pleading. This type of factual contention is better dealt with at trial rather than on a strike out application. It may be that, following discovery, the Commonwealth will need to amend this aspect of its particulars.

65    I note OCT’s submission that paragraph (b) of the particulars under [34] of the statement of cross-claim is circular. I am not satisfied, at least at this stage, that this is the case. The absence of any other commercial justification for the inclusion of cl 7.9(f) may be probative of the alleged intention.

66    As set out above, OCT submits that there were two legitimate commercial purposes that justified the inclusion of cl 7.9(f). These are matters of fact to be dealt with at trial. They do not provide a proper basis to strike out the pleading.

67    In light of the above, I consider that the particulars provided by the Commonwealth are sufficient to support the allegation in [34] of the statement of cross-claim.

68    I note for completeness that, in its oral and written submissions, OCT submitted that s 596AB is a criminal offence provision. It is true that a contravention of s 596AB may constitute an offence under s 1311 of the Corporations Act. However, in order to succeed in its claim it is sufficient for the Commonwealth to establish a contravention of the provision on the civil standard of proof (in respect of which s 140 of the Evidence Act 1995 (Cth) may be relevant). See also Australian Securities and Investments Commission v Whitebox Trading Pty Ltd (2017) 251 FCR 448. I have taken into account the nature of the provision in my consideration of the sufficiency of the pleading.

OCT’s second contention: even if the pleaded facts are adequate, those facts could not satisfy the statutory test

69    OCT submits that, in determining whether the Commonwealth’s pleading can sustain proof of a contravention of s 596AB, the Court must determine what the section means when it speaks of an “intention of … preventing [or significantly reducing] the recovery of entitlements…”. OCT’s submissions, in essence, are as follows:

(a)    The dictionary definition of “prevent is “stop, hinder, avoid” (Shorter Oxford English Dictionary (5th ed, Oxford University Press, 2002)).

(b)    An arms-length creditor who: obtains a security agreement to better secure repayment of advances legitimately made (or to be made) to the chargor in the ordinary course of business; or having obtained such an agreement, takes any steps necessary to give that agreement effect, does not intend to stop, hinder or avoid the recovery of all or part of the entitlements of the chargor’s employees, but only to ensure that the creditor’s debt is paid ahead of all other creditors. What becomes of the employee entitlements is of no moment to the secured creditor, so long as that creditor is paid.

(c)    An intention of that type is an entirely legitimate one, which the Parliament never intended to impugn. An examination of the section in its context demonstrates that to be so.

70    OCT makes submissions concerning the legislative history of Pt 5.8A of the Corporations Act. It is not necessary to set out these submissions for present purposes.

71    In my view, it is preferable for the question of statutory interpretation raised by OCT to be determined at trial rather than on a strike out application. At trial, there will be a fuller factual foundation for the determination of the question of statutory construction (compared with determining the question merely on the basis of the facts alleged). This offers significant advantages, particularly in circumstances where there does not appear to have been any previous judicial consideration of 596AB.

72    Further, it is not clear to me that OCT’s submissions raise a question of statutory interpretation that can conveniently be dealt with on a strike out application. The propositions upon which OCT relies (as set out above) make assumptions regarding OCT’s intention that are not the subject of pleaded allegations or concessions. Also, in determining any question of statutory construction at this stage, it would be necessary to assume the correctness of the pleaded allegations, including the intention alleged in [34] and [40] of the cross-claim. Those allegations reflect the terms of s 596AB, making it difficult to see how the Commonwealth’s claim could be held to be unarguable.

73    For these reasons, OCT’s second contention does not provide a basis to strike out the statement of cross-claim.

Conclusion

74    It follows that OCT’s application to strike out the statement of cross-claim is to be dismissed. I will hear from the parties on costs. [Further discussion then took place in relation to costs and case management.]

I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky.

Associate:

Dated:    24 September 2018