Federal Court of Australia

Department of Employment and Workplace Relations v Howell, in the matter of Castel Electronics Pty Ltd [2024] FCA 566

ORDERS

THE COURT ORDERS THAT:

1.    Castel Electronics Pty Ltd (ACN 074 561 087) is removed as a party to the proceedings.

2.    The separate questions are answered as follows:

(a)    Was the benefit of the Federal Court orders [the Judgment] as defined in paragraph 9 of the Amended Statement of Claim a circulating asset as at 25 January 2018?

    Answer: Yes.

(b)    Was the sum of $1,750,000 recovered by the Defendants (as described in paragraph 16 of the Statement of Agreed Facts) a circulating asset?

    Answer: Yes.

(c)    Were the stock and inventory on hand (as described in paragraph 22(a) of the Amended Statement of Claim) circulating assets?

    Answer: Yes.

(d)    Were the Inventory Proceeds (as described in paragraph 14 of the Statement of Agreed Facts) circulating assets?

    Answer: Yes.

3.    The parties are to confer in order to provide an agreed form of any consequential orders, including costs, by 4pm on 7 June 2024.

4.    If the parties are unable to agree on a form of orders, they shall each provide their proposed orders by 4 pm on 7 June 2024 accompanied by any written submissions not exceeding three pages, and in that event, subject to any further order of the Court, any consequential orders will be determined on the papers.

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

REASONS FOR JUDGMENT

MCELWAINE J:

1    These reasons determine separate questions relating to payments made by the defendants, in their capacity as joint and several receivers and managers of Castel Electronics Pty Ltd, from the proceeds of sale of inventory and an amount received in settlement of an arbitration award, which the Commonwealth contends were circulating assets within the meaning of the Personal Property Securities Act 2009 (Cth) (PPSA). The kernel of the dispute is that the Commonwealth claims the amounts were paid by the defendants to a secured creditor in contravention of s 433 of the Corporations Act 2001 (Cth) because the amounts should have been paid in accordance with ss 556(1)(e) and 561 of the Corporations Act and s 31 of the Fair Entitlements Guarantee Act 2012. The primary amounts in issue are $239,282.42 the proceeds of the sale of inventory and $1,750,000 an amount received in satisfaction of a judgment, which was accepted to compromise the total amount due.

2    The necessary facts are set out in a Statement of Agreed Facts (SOAF) that I received in evidence pursuant to s 191 of the Evidence Act 1995 (Cth).

3    For the reasons that follow, I have determined that each question be answered as proposed by the Commonwealth.

The essential facts

4    Castel carried on business as a distributor of electrical goods, including air conditioning units. In December 2003, Castel entered into an agreement styled General Distributorship Agreement with a company based in China, TCL Air Conditioner (Zhongshan) Co Ltd. The Distributorship Agreement was varied in certain respects on 29 May 2007. A dispute arose between Castel and TCL which was referred to a commercial arbitration. A panel of arbitrators published an award on 23 December 2010 in favour of Castel in the amount of $3,369,351 on the claim and in the amount of $209,035 in favour of TCL on the counter claim, resulting in a net award in favour of Castel of $3,160,316 (Award). In a second award made on 27 January 2011, TCL was ordered to pay the costs of Castel in the amount of $732,500.

5    TCL failed to pay the amounts awarded to Castel. TCL applied in this Court to set aside the Award and Castel applied to enforce it. TCL failed and Castel succeeded for reasons published by Murphy J on 2 November 2012: Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214. His Honour, on 19 November 2012, ordered that judgment be entered in favour of Castel for the amounts awarded to it (including costs) plus interest, less the amount awarded to TCL (Judgment). The Judgment particularises the quantum awarded in favour of Castel by reference to three separate claims identified in the Award being $2,198,656 for the Other Equipment Manufacture Claim (OEM Claim), $745,522 for the faulty goods claim and $131,508 for the debt claim. I pause to explain what is meant by OEM. TCL manufactured its own brand of air conditioning unit to its specifications. It also manufactured air conditioning units for other suppliers to their specifications and to be marketed under their own brand names which in the Distributorship Agreement is referred to as the OEM products. The OEM claim was formulated as one for damages for breach of an exclusivity provision in the Distributorship Agreement, calculated by reference to lost profits. The parties’ reference this as the Enforcement Right, a nomenclature I adopt in these reasons.

6    Despite the decision of Murphy J, TCL maintained its refusal to pay the amounts awarded. Ultimately no amount was paid until January 2018 and then in an amount much less than the total sum due plus interest, the result of a compromise.

7    In October 2015, Castel entered into a security agreement with 1st Cash Pty Ltd and an agreement titled: Invoice Finance Deed. On or about 22 January 2018, 1st Cash served a demand for payment upon Castel in the amount of $1,335,969.18 owing pursuant to the Finance Deed. Castel did not pay the amount demanded and in consequence on 25 January 2018, the defendants were appointed as receivers and managers of the property, assets, and undertakings of Castel. As is usual, the defendants secured a deed of indemnity for their appointment from 1st Cash. However, the appointor denies the obligation to indemnify the defendants in respect of this claim. That is the subject of a cross-claim by the defendants, which need not be further mentioned in these reasons.

8    Between 25 January 2018 and 24 January 2019, the defendants received in total an amount of $239,282.42 from the sale of stock and inventory of Castel (Inventory Proceeds).

9    On or about November 2020, the defendants accepted an amount of $1,750,000 from TCL in satisfaction of the Enforcement Right (Settlement Sum).

10    The defendants paid away the Inventory Proceeds and the Settlement Sum for various purposes, including their remuneration and disbursements and to 1st Cash, without accounting to the Commonwealth for any amount claimed to be due to it.

11    Castel was made the subject of a winding up order on 23 July 2018. Shortly before the commencement of the hearing, it was deregistered. I made an order that, in consequence, it be removed as a party to the proceeding.

12    Between 22 and 28 September 2018, the Commonwealth made payments pursuant to the scheme established by the Fair Entitlements Act (FEG Scheme) totalling $631,169.42 comprising $53,039.91 for unpaid wages, $86,261.78 for annual leave, $7,710.80 for leave loading, $205,000.87 for long service leave, $135,502.36 for payment in lieu of notice and $143,653.70 for redundancy entitlements to former employees of Castel (FEG Advance). Despite lodging a proof of debt with the liquidator of Castel, the Commonwealth has not received any payment for the FEG Advance from the liquidator nor, for the purposes of this case, from the defendants in their former capacity as the receivers and managers of Castel.

13    By an originating process filed on 17 August 2022, the Commonwealth claims damages against the defendants for breach of s 433 of the Corporations Act. Section 433 operates to establish a priority regime where a receiver is appointed on behalf of the holders of a debenture secured by a circulating security interest, which for present purposes required the making of priority payments to the Commonwealth for the FEG Advance: Corporations Act ss 556(1)(e), (g), (h) and 561 and Fair Entitlements Act s 31.

The separate questions

14    Against this background, the parties formulated the following separate questions for determination and which I ordered be tried as such on 8 April 2024. The questions (with my interpolation) and my corresponding answers are:

(1)    Was the benefit of the Federal Court orders [the Judgment] a circulating asset as at 25 January 2018?

Answer: Yes.

(2)    Was the sum of $1,750,000 recovered by the defendants a circulating asset?

Answer: Yes.

(3)    Were the stock and inventory on hand circulating assets?

Answer: Yes.

(4)    Were the Inventory Proceeds circulating assets?

Answer: Yes.

15    I record that lawyers for the cross-respondents observed the hearing but did not seek to be heard.

The legislative schemes

16    The purpose of the Fair Entitlements Act, as stated in the objects at s 3, is to create a scheme to provide for the Commonwealth to pay advances on account of unpaid employment entitlements of former employees where the employer is insolvent, the end of the employment is connected with insolvency, the employees are not paid from any other source and to provide for the Commonwealth to recover advances through the winding up of the employer. Employment entitlements are defined as meaning annual leave, long service leave, redundancy pay, wages entitlements and payment in lieu of notice of entitlements. Part 5 is concerned with the recovery of advances paid by the Commonwealth. Section 31 is presently relevant and provides:

Recovery in other circumstances

(1)    When an advance is paid under section 28 for a person's employment by an employer , then, to the extent of the amount of the advance paid:

(a)    the employer's liability to the person is discharged; and

(b)    the rights the person had immediately before that discharge in relation to that liability in the winding up or bankruptcy of the employer become rights of the Commonwealth.

(2)    So far as the advance is for a particular employment entitlement, the Commonwealth has the same priority as the person had for that entitlement.

(3)    Subsections (1) and (2) do not apply to an amount of the advance that:

(a)    was paid to the liquidator or bankruptcy trustee of the employer; and

(b)    is, because of section 29 or 30 of this Act, taken for the purposes of section 560 of the Corporations Act 2001 or subsections 109(2) and (3) of the Bankruptcy Act 1966 to have been advanced.

17    There is no dispute that the Commonwealth has the priority conferred by s 31 for the FEG Advance.

18    The Corporations Act establishes the relevant priority in this case and s 433 applied upon the appointment of the defendants as the receivers and managers of Castel if their appointor held a circulating security interest. To the extent relevant, s 433 provides:

Property subject to circulating security interest--payment of certain debts to have priority

(2)    This section applies where:

(a)    a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by a circulating security interest, or possession is taken or control is assumed, by or on behalf of the holders of any debentures of a company or registered body, of any property comprised in or subject to a circulating security interest; and

(b)    at the date of the appointment or of the taking of possession or assumption of control (in this section called the relevant date ):

(i)    the company or registered body has not commenced to be wound up voluntarily; and

(ii)    the company or registered body has not been ordered to be wound up by the Court.

(3)    In the case of a company, the receiver or other person taking possession or assuming control of property of the company must pay, out of the property coming into his, her or its hands, the following debts or amounts in priority to any claim for principal or interest in respect of the debentures:

(a)    first, any amount that in a winding up is payable in priority to unsecured debts pursuant to section 562;

(b)    next, if an auditor of the company had applied to ASIC under subsection 329(6) for consent to his, her or its resignation as auditor and ASIC had refused that consent before the relevant date--the reasonable fees and expenses of the auditor incurred during the period beginning on the day of the refusal and ending on the relevant date;

(c)    subject to subsections (6) and (7), next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h) or section 560.

….

5.    The receiver or other person taking possession or assuming control of property must pay debts and amounts payable pursuant to paragraph (3)(c) or (4)(b) in the same order of priority as is prescribed by Division 6 of Part 5.6 in respect of those debts and amounts.

…

(9)    For the purposes of this section, the references in Division 6 of Part 5.6 to the relevant date are to be read as references to the date of the appointment of the receiver, or of possession being taken or control being assumed, as the case may be.

19    As is well understood, s 556 of the Corporations Act provides for priority payments in the winding up of a company which includes wages, superannuation contributions and superannuation guarantee charges payable by a company in respect of services rendered to the company by employees: (1)(e), all amounts due because of an industrial instrument to employees and in respect of leave of absence: (1)(g) and retrenchment payments: (1)(h). Section 561 is specifically concerned with the priority of employee claims over circulating security interests and provides:

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 company and may be made accordingly out of any property comprised in or subject to the circulating security interest.

20    A circulating security interest means a security interest if, relevantly, it is a PPSA security interest that has attached to a circulating asset within the meaning of the PPSA and the grantor has title to the asset: s 9.

21    The provision that is central to resolution of the separate questions is s 340 of the PPSA which provides:

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.

Exceptions

(2)    Despite paragraph (1)(a), personal property covered by subsection (5) is not a circulating asset if:

(a)    an effective registration with respect to the property, in relation to the grantor, discloses, in accordance with the regulations, that the secured party has control of the personal property; and

(b)    the secured party has control of the personal property.

Note:    For the meaning of control in this subsection, see section 341.

(3)    Despite subsection (1), personal property covered by subsection (5) is not a circulating asset if:

(a)    the personal property is goods; and

(b)    the security interest is perfected by possession.

(4)    For the purposes of paragraph (1)(b), personal property is not a circulating asset merely because the secured party has given express authority to transfer specific personal property, or a specific class of personal property, free of a security interest.

(4A)    Despite subsection (1), if a grantor grants a security interest provided for by a transfer of an account or chattel paper, the account or chattel paper is not a circulating asset in relation to 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.

Note: For the meaning of inventory in this subsection, see section 341.

22    Account is defined at s 10 of the PPSA as:

"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 the following:

(c)    an ADI account;

(d)    chattel paper;

(e)    an intermediated security;

(f)    an investment instrument;

(g)    a negotiable instrument.

Example: An account that is a credit card receivable is covered by paragraph (b).

23    There is no definition of monetary obligation.

24    The Commonwealth relies only on s 340(5).

Matters not in issue

25    Despite the pleadings and an initial version of the submissions, as the arguments developed Mr Galvin KC for the defendants accepted that the following matters are not in dispute:

(a)    The relevant date on which classification of property as a circulating asset or otherwise is to be made is the date of the defendant’s appointment, being 25 January 2018;

(b)    the obligation imposed by the Judgment was a monetary obligation within the meaning of s 10 of the PPSA;

(c)    The fact that the defendants accepted the Settlement Sum in satisfaction of the Judgment does not alter the analysis;

(d)    The issue for determination in relation to the first question is whether the obligation imposed by the Judgment arose from Castel providing services (granting rights is not relevant), in the ordinary course of a business of providing services of that kind within the meaning of both ss 10 and 340(5)(a) of the PPSA.

The first question

Submissions

26    For the Commonwealth, Ms Bell submits that the Enforcement Right was a circulating asset within the meaning of the PPSA in that it arose from providing services (acting as a distributor) in the ordinary course of the business of Castel of providing services of that kind within the meaning of s 340(5). Reliance is placed on the decision of the Court of Appeal in Resilient Investment Group Pty Ltd v Barnet and Hodgkinson as Liquidators of Spitfire Corp Ltd (in liq) [2023] NSWCA 118; (2023) 111 NSWLR 446, Gleeson JA (White and Brereton JJA agreeing), who at [127]- [131] expressed what is required by the requirement arise from at s 340:

Both PPSA, s 340(5)(a) and the definition of “an account” in PPSA, s 10 require a causal connection between the account (ie monetary obligation) and the “provision of services” in the requisite sense of “the ordinary course of a business of providing services of that kind”.

In the context of the causal connection required where a claim must “arise from” a matter, it has been said that it will satisfy such requirement if a claim originates in, springs from or has its foundation, in that matter: Quintano v BW Rose Pty Ltd [2008] NSWSC 793 at [7] (Brereton J); cf Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 84 (Bowen JA). Here, the matter from which the account must arise is services provided by Spitfire in the ordinary course of a business of providing services of that kind.

The phrase “ordinary course of business” has been considered in a variety of contexts: see the discussion in Burns v McFarlane [1940] HCA 25; (1940) 64 CLR 108 at 125, in relation to the “ordinary course of business” element of the defence to a claim for recovery of a preferential payment under the former s 95 of the Bankruptcy Act 1924 (Cth) (see now s 122(2) of the Bankruptcy Act). Rich, Dixon and McTiernan JJ noted at 125 that possibly the application of the expression in bankruptcy is not so wide as is in relation to floating charges; cf the discussion in relation to floating charges in Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 8 ACLR 422 at 428 (Mahoney JA), 431 (Priestley JA).

In Reynolds Bros, Priestley JA said at 431 that:

The course of the business will begin with the first transaction in an intended course of business ... and continue until the last transaction. Transactions will undoubtedly be in the ordinary course of business if, within its course, they are made for the purpose of carrying on the business or to achieve ends not disparate from those of the business activity (citations omitted).

Of course, care must be adopted in seeking to find an analogy with the phrase “ordinary course of business” in other contexts. Here, the words “arise from” do not require the account (ie monetary obligation) to arise in the ordinary course of business; it is the services provided by Spitfire which must be provided in the ordinary course of a business of providing services of that kind, and the account must arise from the provision of services answering that description.

27    Drawing on this analysis, and others including Hamersley Iron Pty Ltd v Forge Power Pty Ltd (in liq) (receivers and managers appointed) (2018) 130 ACSR 262; [2018] WASCA 163, Ms Bell submits that Castel was in the business of distributing electrical goods, it contracted with TCL pursuant to the Distributorship Agreement to provide distribution services to TCL for the sale of TCL and OEM air conditioning units within Australia and that the Enforcement Right arose directly from breach of the agreement by TCL. On that analysis, it is not necessary for the monetary obligation “itself to arise in the ordinary course of business”, rather that “the services must arise in the ordinary course of business, and the account must arise from the provision of those services.” Further, or alternatively, that upon analysis of each of the heads of damage found in favour of Castel pursuant to the Award, there is a clear and direct link to the ordinary course of business of Castel in that the loss of profit claim was calculated by reference to Castel’s claimed loss of sales.

28    In contrast, Mr Galvin for the defendants submits the claim falls at three hurdles: (1) Castel did not provide services to TCL; (2) even if it did, the Commonwealth has not established that the provision of services was in the ordinary course of Castel’s business of providing services of that kind; and (3) the Enforcement Right did not arise from the provision of those services. It is not sufficient, on those arguments, for the Commonwealth to contend that Castel acted as the distributor for air conditioning units manufactured by TCL. That proposition fails to identify precisely what services Castel provided to TCL under the Distributorship Agreement, how and in what way is it said that Castel was a distributor of electrical appliances and ignores the distinction between Castel as a distributor “in the sense that it purchased products from manufacturers which it then on-sold to its own customers in its own right (rather than as a distribution agent for manufacturers)”. The argument is not assisted by identifying the Distributorship Agreement and then to assert that Castel provided distribution services, as proceeding in that way fails to identify just what services were provided in the ordinary course of Castel’s business of providing services of that kind. The analysis interrogates, in detail, the provisions of the Distributorship Agreement to make good those arguments.

29    On the second proposition, the argument is taken somewhat further in that the submission is that the Commonwealth has failed to demonstrate by reference to the evidence how it is that the services said to be provided by Castel to TCL were provided in the ordinary course of providing services of that kind.

30    Mr Galvin agrees that the term arises from in s 340(5)(a) of the PPSA connotes a causal nexus. He submits however that the provision is to be construed by reference to the policy purpose of s 433 of the Corporations Act (and its predecessors) which is to “prefer the claims of unpaid employees over those of secured creditors where the labour of the employees has contributed to, or augmented, the assets of the company which have been used in the course of carrying on the company’s business”. If that is right, then the liability of TCL pursuant to the Judgment is “the result of breaches by TCL of obligations with respect to rights granted and services provided by TCL to Castel, not by Castel to TCL”. That submission is taken further: the Commonwealth has failed to establish that the liability arising from the services was generated or augmented by the endeavour of Castel’s employees. For those policy arguments, primary reliance is placed on Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20; (2019) 268 CLR 524 at [11]–[12] and Korda v Silkchime Pty Ltd (receivers and managers appointed) [2010] WASC 155; (2010) 78 ACSR 675 at [60].

31    In reply, Ms Bell notes that the defendants have resiled from the original version of their outline of written submissions, in which it was accepted that the services provided under the Distributorship Agreement “were services provided by Castel to TCL (in exchange for rights of exclusive distribution granted by TCL to Castel)”. In my view this question is not usefully resolved by reference to a withdrawn version of the defendant’s submissions: a submission does not have the same consequence as an admission in a pleading and is open to be withdrawn.

32    In any event, Ms Bell emphasises various clauses in the Distributorship Agreement as demonstrating that Castel was obliged to provide services to TCL, it is an agreed fact that Castel was a distributor of electrical goods, including air conditioning units, and the Commonwealth is not obliged to establish that every service provided and the Distributorship Agreement was in the course of the business of Castel: Reynold Bros (Motors) Pty Ltd v Esanda Ltd (1983) 8 ACLR 422 at 431, Priestley JA.

Decision

33    The answer to this question begins with construction of the Distributorship Agreement read with the agreed facts. The document is not an exemplar of clear drafting. I adopt the capitalisation of words and terms in it, and I refrain from grammatical correction. TCL is described as the Supplier, and Castel the Distributor. There are four introductory paragraphs. The first defines the Products as “shall expressly be confined to air conditioners sold by SUPPLIER with its registered trademark TCL or any other brands manufactured by it (commonly referred to as OEM products). The second states the Territory is confined to Australia. The third states the Period as an initial period commencing on the date of execution and terminating on 31 January 2005. There is provision for an extension for a period of 4 years, subject to compliance with Article 5. At the end of the fifth year if the quantity achieved is not less than 25,000 units in that year, the agreement may be further extended by another 5 years.

34    The fourth reads:

This Agreement is made and entered into by and between the SUPPLIER and the DISTRIBUTOR whereby SUPPLIER agrees to grant to DISTRIBUTOR the right to sell the PRODUCTS in the TERRITORY on the terms and conditions stipulated as follows.

35    Article 1 provides for the appointment of Castel:

During the effective period of this AGREEMENT, supplier hereby grants to DISTRIBUTOR the exclusive right to sell PRODUCTS in TERRITORY and DISTRIBUTOR accepts and assumes such appointment for the sale and distribution of PRODUCTS in TERRITORY

36    Article 2 is titled privity and provides:

The relationship hereby established between SUPPLIER and DISTRIBUTOR, during the effective period of this AGREEMENT, shall be solely that of Seller and Buyer, and DISTRIBUTOR shall under no circumstance be considered to be the agent or legal representative of SUPPLIER for any purpose whatsoever and shall have no right or authority to create or assume any obligation or responsibility of any kind, expressed or implied, in the name of or on behalf of SUPPLIER

37    Article 3 is titled prohibition of competitive transaction and provides:

In consideration of the right hearin granted, SUPPLIER shall in no way directly or indirectly sell PRODUCTS to TERRITORY through any other channel than DISTRIBUTOR and DISTRIBUTOR shall in no way sell or promote the sale in TERRITORY, directly or indirectly, of any products which are of the same kind as, similar to or competitive with PRODUCTS and shall in no way make any purchase of such products without the prior written consent of SUPPLIER during the effective period of this AGREEMENT. Such prohibition shall not include air conditioning products of the kinds not manufactured by the supplier.

38    Article 4 imposes a prohibition upon the ability of Castel to re-export the products:

DISTRIBUTOR shall sell PRODUCTS only in TERRITORY and shall not, directly or indirectly, resell or re-export PRODUCTS to any place or country outside TERRITORY, nor shall resell PRODUCTS to any other person, firm or corporation in TERRITORY, whom DISTRIBUTOR, to the best of his knowledge and belief, knows and has reason to believe to have the intent to resell or re-export PTODUCTS to any place or country outside TERRITORY.

39    Castel was required to meet a minimum purchase requirement pursuant to Article 5, the effect of which was that it guaranteed to purchase not less than 15,000 units during each year of the agreement stipulated as 3200 in January, 1000 in May, 1800 in July, 3000 in September, 4000 in October and 2000 in December. Article 6 imposed information and reporting obligations upon Castel and TCL:

During the effective period of this AGREEMENT, both SUPPLIER and DISTRIBUTOR shall from time to time and/or on the request of either party furnish each other with information and market reports to promote the sale of PRODUCTS as much as possible. DISTRIBUTOR shall give SUPPLIER quarterly such reports as inventory, or on market conditions.

40    Article 7 is concerned with sales promotion:

DISTRIBUTOR shall exert his best efforts with diligence in advertising and promoting the sale of PRODUCTS throughout TERRITORY in an effective manner and SUPPLIER will provide PRODUCTS VI design to DISTRIBUTOR to unify SUPPLIER’s brand Vision Image, the total promotion fee should be no less than 1.5% of sales amount, DISTRIBUTOR should show according bill of documents to SUPPLIER to prove it.

41    Next follows two articles concerned with after sales service and guarantees. Article 8 provides:

DISTRIBUTOR shall try his best to be responsible for the installation and after sales service of PRODUCTS in TERRITORY.

42    Article 9 is titled Guarantee and provides:

SUPPLIER guarantee five year to the compressor and one year for the unit, SUPPLIER give DISTRIBUTOR 1% contract FOB value spare parts free of charge to cover any defect up to 2% by specific model, between 2% and 5% TCL and Castel will share the cost thereof while any product defect beyond 5%, TCL will be fully responsible.

43    Article 10 is concerned with the price policy whereby the wholesale and retail price of the products “shall be negotiated by SUPPLIER and DISTRIBUTOR in order to protect the market”. Article 11 is concerned with trademarks and provides:

DISTRIBUTOR may use the trademark of SUPPLIER during the effective period of this AGREEMENT only in connection with the sale of PRODUCTS… In case DISTRIBUTOR has found that SUPPLIER’s trade marks, patents, copyrights or other industrial property rights are infringed upon by any third party, DISTRIBUTOR shall promptly inform SUPPLIER of such infringement and assist SUPPLIER in taking necessary steps to protect his rights effectively.

44    Article 12 provides for cancellation or termination. Article 13 is concerned with confidentiality and Article 14 is an entire agreement clause as follows:

This AGREEMENT constitutes the entire and only agreement between the parties hereto and supersedes all previous negotiations and agreements relating to the sale of PRODUCTS, and shall not be modified or changed in any manner except by mutual consent in writing of a subsequent date signed by a duly authorized officer or representative of each of the parties hereto.

45    Article 16 is titled: other terms and conditions and provides:

I)    DISTRIBUTOR must submit quarterly purchase plan in advance so that SUPPLIER can arrange stable production and smooth delivery. However, the purchase plan can be adjusted within and extent of 25% from time to time when DISTRIBUTOR considers necessary according to market situation.

II)    DISTRIBUTOR should accomplish his quarterly purchase plans by at least 50%. Failing which for the first time, SUPPLIER will issue an alert notification to DISTRIBUTOR; if for the second subsequent time, SUPPLIER will be free to sell directly to third-party within TERRITORY, while notify DISTRIBUTOR in advance of each deal with such third party.

III)    Payment to SUPPLIER must be made either by Bank Tele-Transmission 30% before production and balance before shipment or by irrevocable Letter of Credit payable at sight covering 100% of each purchase value.

46    The Distributorship Agreement was varied in a meeting on 29 May 2007 in the following relevant respects as found by the arbitration panel:

(1)    Castel agreed to notify TCL of “epidemic faulty products (defined as any products with failure in excess of 5% failure) as to whether to recall, stop further sale or whatever actions to take and TCL will within 14 days of such notification inform Castel of its decision as to the course it favours”.

(2)    TCL agreed to: “indemnify Castel for all costs in respect of any claim/penalty imposed by the Australian authorities for not complying with the Australian regulations regarding TCL products imported by Castel. Castel will liaise with TCL to minimise any such claim, compensation, or penalty is imposed by the relevant Australian authorities.”

47    The principles that govern the interpretation of the Distributorship Agreement are well understood and need not be examined at length: Mount Bruce Mining Pty Ltd v Wright Prospecting [2015] HCA 37; (2015) 256 CLR 104 at [46]–[52], French CJ, Nettle and Gordon JJ. The text is to be construed in context and through the lens of what a reasonable businessperson would have understood the terms to mean. This extends to consideration of the commercial purpose and the circumstances addressed by the contract.

48    I am satisfied that Castel provided services to TCL pursuant to the Distributorship Agreement. The obvious purpose and effect of the agreement was to facilitate and promote the sale of TCL products within Australia. Despite that it may have been open to TCL to directly establish a sales network in Australia, it chose to appoint Castel as the exclusive distributor of its products and Castel accepted and assumed that appointment: Article 1. In accepting that appointment, Castel provided the service of purchase, promotion and sale of TCL products in Australia. When the provisions of the Distributorship Agreement are considered as a whole and in context, it is clear that TCL sought to establish itself in the Australian market for two types of air conditioning units being those manufactured by it under its own brand and those manufactured by it for third parties to their specifications to be marketed as third party units (the OEM units). It appointed Castel as the exclusive Australian distributor for each type of product. Castel accepted the appointment, including provisions requiring it to purchase a minimum quantity of product and to use best endeavours to advertise and promote the TCL units to grow the market for the benefit of each party. The parties agreed to mutual exclusivity: TCL would not sell units into the Australian market other than through Castel and Castel would not promote or sell any products of the same kind, similar to or competitive with TCL products, save for units not manufactured by TCL. A consequence of this arrangement is that a customer would be required to place an order for a TCL brand unit or an OEM unit with Castel who would effect the supply from stock on hand or place an order with TCL.

49    Mr Galvin correctly emphasises that Castel was expressly not a manufacturer’s agent by Article 2. He further emphasises that Castel purchased product from TCL in its own right which it on-sold to its customers in Australia, did so exclusively for its benefit, had no obligation to account to TCL for any portion of the proceeds of sale, and received no commission or remuneration. That summary of some of the articles is correct but it does not follow that Castel did not provide services to TCL and which are readily identifiable on the face of the Distributorship Agreement.

50    In my view the exclusion of agency does not require the conclusion that Castel did not supply a distribution service to TCL. One needs to construe the arrangement as a whole and in context (which is my analysis above) and there are specific articles that cannot be reconciled with the pure vendor/purchaser conclusion that Mr Galvin urges. They begin with the limitation that TCL accepted, being the ability to directly or indirectly sell its products in Australia and correspondingly Castel agreed not to sell or promote, directly or indirectly, any products of the same kind or similar to the products of TCL: Article 3. Castel accepted the limitation that it would not directly or indirectly resell or re-export the products to any place outside of the Territory: Article 4. Castel guaranteed to TCL the purchase of an annual minimum quantity of product: Article 5.

51    There are more direct clauses that comprise the provision of services by Castel.

52    First, to provide information and market reports to TCL to promote the sale of the products and to provide a quarterly report as to inventory and market conditions: Article 6. Second, to use its best efforts with diligence in advertising and promotion of the sale of the products throughout Australia in an effective manner and in doing so to expend a promotion fee of not less than 1.5% of the sales amount: Article 7. Third, to use its best endeavours to be responsible for the installation and after sales service of products (Article 8) which is clearly related to the supplier guarantee at Article 9 pursuant to which TCL guaranteed for 5 years the compressors and for one year the unit, agreed to make certain payments to Castel for spare parts and defects up to 2% (whether that is a reference to the wholesale or retail price of the unit is unclear, but in any event matters not for present purposes) and thereafter Castel and TCL agreed to a cost sharing arrangement between 2% and 5%.

53    Fourth, by Article 11 Castel agreed to assist TCL in the enforcement and protection of its trademark rights.

54    Fifth, Article 16 in part required Castel to submit a quarterly purchase plan in advance so that TCL could “arrange stable production and smooth delivery”. Sixth, pursuant to the variation of the Distributorship Agreement, Castel accepted the obligation to liaise with TCL to minimise any claims or penalties that may be imposed by Australian authorities for non-compliance with Australian regulatory requirements.

55    In my view each is a service that Castel agreed to provide to TCL as integral to the overall service that it provided as the exclusive distributor. That Castel purchased the products in its own right and was not accountable to TCL for any portion of the proceeds of the sale, and expressly did not act as the agent of TCL, does not displace my overall conclusion. While there are aspects of the Distributorship Agreement that, adopting the characterisation of the defendants’ submissions, amount to no more than a vendor and purchaser arrangement, proceeding in that way overlooks the entirety of the clauses of the agreement and distracts attention from the services that Castel agreed to provide to TCL. The Distributorship Agreement was much more than one of sale and purchase of products made by a manufacturer and sold to an Australian distributor for resale in the Australian market.

56    More fundamentally when all the relevant provisions are considered together, the clear conclusion is that Castel acted as the exclusive distributor for TCL products within Australia and in doing so provided that service to TCL. It is true that it did not do so on terms that it was a mere distributor of product owned by the overseas manufacturer to the point of third-party sale and for which service it was entitled to receive a commission or some other form of remuneration, but it does not follow that these are necessary indicia of service provision. It all comes down to the terms on which the parties agreed to the appointment of Castel as the exclusive distributor of the TCL products.

57    Mr Galvin in oral submissions emphasised that s 340(5) of the PPSA requires Castel to be the service provider, not TCL. That is perfectly true, and I accept that TCL agreed to provide services to Castel pursuant to the Distributorship Agreement but that does not detract from the services that Castel provided. The statute does not require that services only be provided from A to B, and it is not disapplied if there is a mutual provision of services.

58    The next issue is whether Castel provided the identified services to TCL in the ordinary course of a business of providing services of that kind. The agreed fact is that Castel was a distributor of electrical goods, including air conditioning units. In that capacity, Castel accepted appointment as the exclusive distributor of TCL products within Australia. Thus, I am satisfied as to this element.

59    This leads to the next issue: whether the benefit of right to enforce the Judgment (the Enforcement Right) is a monetary obligation that arises from the provision of those services. I have set out the passage from the reasons of Gleeson JA in Spitfire to the effect that the causal words arises from do not require that the monetary obligation must arise from the ordinary course of the business of Castel. Rather, the monetary obligation must arise from the provision of the services by Castel to TCL.

60    The Enforcement Right is founded on the Award. Justice Murphy in concluding that he would make an order in favour of the enforcement application of Castel at [191] stated:

I will make an order in terms of the Award, and Castel may then enforce by the usual Court processes.

61    Accordingly, it is to the Award that one must turn in resolving this issue.

62    The arbitration panel comprised the highly distinguished lawyers Dr Gavan Griffith AO QC, the Honourable Alan Goldberg AO QC and Peter Riordan SC. Castel claimed that TCL breached the exclusivity provisions of the Distributorship Agreement in that it supplied OEM units to customers in Australia under a variety of tradenames and in doing so repudiated the Distributorship Agreement. TCL did not deny that conduct, but contended that upon a proper construction the OEM units were not the subject of an exclusive appointment of Castel. The arbitrators rejected this contention, found that TCL repudiated the agreement and which repudiation Castel accepted with the consequence that the agreement terminated on or about 8 June 2008.

63    For this claim, Castel contended that it suffered damage in the form of lost profits on sales of units that it would otherwise have made for the duration of the agreement and, assuming an extension, for the extended period. Castel calculated its lost profit claim in an amount exceeding $33 million by reference to three time periods: 1 January 2004 – 9 June 2008 (the period during which the agreement operated), 9 June 2008 – 31 December 2008 (a period of lost profits by reason of the ending of the Distributorship Agreement) and the period 2009 – 2012 (being the further 5-year extended period of the Distributorship Agreement that the parties contemplated). It divided its claim as between those periods: $10,330,000 for the first, $1,984,000 for the second and $21,162,000 for the third.

64    The arbitrators did not accept Castel’s evidence in support of those claims. Doing the best that they could on the evidence available, they proceeded by estimating that Castel suffered a loss of 22.5% of OEM sales in Australia, which they calculated between 2004 and 2008 at 11,708 units. Having derived that figure, the arbitrators accepted evidence as to the margin on each unit to derive a total lost profit claim within that period of $2,198,656.

65    Castel formulated two other claims. One, the rectification costs of faulty goods delivered by TCL. The arbitrators accepted Castel’s evidence as to the type and number of faults, together with the quantum claimed. The total amount awarded was $745,522. The final claim was for debt, being amounts that were required to be paid by TCL pursuant to the variation to the Distributorship Agreement. This claim was upheld in the amount of $131,508. To these sums, the arbitrators calculated and allowed interest in the amount of $293,665.

66    TCL formulated a counter-claim for failure by Castel to purchase the minimum quantity of units in 2007 and 2008, which claim was in part upheld to the extent of an award of $190,816 plus interest of $18,219.

67    In my view, the Enforcement Right arises from the provision of services by Castel pursuant to the Distributorship Agreement. To employ the language of Gleeson JA in Spitfire at [128], each component of the amounts awarded to Castel “originates in, springs from or has [their] foundation” in the distribution services provided by Castel to TCL pursuant to the Distributorship Agreement and in the ordinary course of the business of Castel of providing services of that kind. The basis for the award of lost profits, whilst triggered by the repudiation of the Distributorship Agreement by TCL, is ultimately to be found in the term whereby Castel accepted appointment as the exclusive distributor of TCL and OEM units and the provision of that service to TCL. Section 340(5) of the PPSA does not require a single cause analysis. By analogy with the common law, it is sufficient in my view if the supply of the services is a cause of the account (the monetary obligation).

68    Whilst it is true, as Mr Galvin submits, that the liability of TCL was the result of its repudiation of the exclusivity clause in the Distributorship Agreement, it does not follow that one ignores the obligations and rights of the parties pursuant to it and upon which the repudiation conclusion rests. The fact of the matter is that TCL, in breach of the Distributorship Agreement, sold and delivered OEM products into Australia. In doing so, it stepped outside of the contractual provision of the services that it engaged Castel to provide as the distributor of its products. There is a causal relationship between the contracted services, breach by TCL and the award of lost profits calculated by reference to the number of units and the margins thereon that Castel would likely have been able to sell but for breach of the Distributorship Agreement by TCL. Put another way, the ultimate springboard for the award of damages under this head is the provision of the distribution service by Castel.

69    The analysis does not differ for the faulty goods and debt claims. There is a direct relationship between the amount awarded for the faulty goods claim and the obligations of Castel to be responsible for installation and after sales service (Article 8) and the cost sharing arrangement for the guarantee (Article 9). Each is plainly the provision of a service to or for the benefit of TCL. The debt claim arises from the variation agreement pursuant to which TCL agreed to “promptly pay Castel” for all sums then outstanding pursuant to the Distributorship Agreement. TCL breached that obligation which, once again, is ultimately founded upon the services that Castel agreed to provide to TCL.

70    In reaching these conclusions, I record that I am unable to accept other arguments pressed by Mr Galvin. He submits that s 340(5) of the PPSA must be construed harmoniously with the purpose of s 433 of the Corporations Act, that a secured creditor is not permitted to “scoop the pool” in priority to unpaid employees who, by their efforts, have augmented the assets charged. That purpose is clear, but the conclusion urged, that s 340(5) is to be narrowly construed in that way, is unwarranted and contrary to the clear textual and contextual meaning of the provision. Section 340(5) is concerned with an account that arises from the provision of services in the ordinary course of a business and there is no basis for construing its operation narrowly governed by the purpose of s 433 of the Corporations Act. In contrast, the prioritisation of the debts of a company by reference to, as the third priority, employee entitlements of the kinds specified at ss 556(1) (e), (g) or (h) and 560 turns on the existence of employee entitlements, not the provision of services by the employer in the ordinary course of the employer’s business.

71    The submissions also do not engage with the definition of account at s 10 of the PPSA whereby the monetary obligation may arise “whether or not the account debtor is the person to whom the right is granted, or the services provided”. This definition evinces a clear intent that s 340(5) is to apply broadly, rather than narrowly which is the consequence of adopting the a priori purpose assumption of the defendants.

72    Various submissions were formulated by Mr Galvin to the effect that there are difficulties in the reasoning of Gleeson JA in Spitfire in that the Court was referred to insurance cases which have dealt with the words arises from in different contexts and which indicate there is a broad range of meanings but did not expressly advert to the approach taken in those cases when construing s 340(5) of the PPSA. As such the submission is that I should distinguish the reasoning. I do not consider it necessary to interrogate those cases in any detail, as I have reached the clear conclusion that there is the required factual causal nexus in this case. Nor do I consider it necessary to examine other cases that were referred to in submissions, by the Commonwealth and by the defendants, which in my view turn on their own facts.

73    For these reasons the answer to this question is: Yes.

The second question

74    It follows from my reasoning and conclusion as to the first question (and the agreed position that the fact that the defendants received the Settlement Sum in satisfaction of the Enforcement Right does not alter the analysis) that the answer to this question is also: Yes.

The third and fourth questions

75    These may be dealt with together. Inventory is deemed a circulating asset by s 340(5)(e) of the PPSA. Inventory has its ordinary meaning for the purpose of s 340 and the s 10 definition does not apply: s 341(1B). An agreed fact is that the defendants, between 25 January 2018 and 24 January 2019, received $239,282.42 as the Inventory Proceeds from the sale of stock and inventory on hand. If the physical assets were circulating assets, then the proceeds received from the sale is also a circulating asset by operation of s 340(5)(b) of the PPSA.

76    On the face of it therefore, the inventory was, and the Inventory Proceeds are, circulating assets, and the Commonwealth has made good the contentions it relies on.

77    In their written case, the defendants formulated various arguments that this conclusion does not follow, based on a factual contention that they traded and sold the inventory, received the proceeds and those amounts were then paid to 1st Cash as required pursuant to a trade finance facility under the Finance Deed. The net effect of that submission was that Castel assigned unconditionally and absolutely its debts to 1st Cash which had the effect of giving to it a security interest in each assigned debt. The end point of the submission is that the Inventory Proceeds “were the subject of a security interest provided for by a transfer of an account within the meaning of s 340(4A)” of the PPSA and therefore not circulating assets.

78    The submission next rested on the apparent distinction between inventory acquired after the date of appointment of a receiver and manager and inventory derived from the efforts of the receiver and manager in continuing to trade a business, which distinction Mullins J drew and categorised as “the receivers inventory trading profit” in Re CMI Industrial Pty Ltd (in liq) [2015] QSC 96 at [4].

79    In oral submissions, Mr Galvin advised that these arguments are no longer pressed, although the defendants reserve their rights “in relation to salvage costs associated with the preservation and protection of the inventory”: Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171.

80    For these reasons the answer to questions three and four is: Yes.

Conclusion

81    I answer the separate questions accordingly and I will hear the parties as to any consequential orders, including costs.

Associate:

Dated:    28 May 2024

SCHEDULE OF PARTIES