Supreme Court New South Wales Medium Neutral Citation: In the matter of Smouha Fabrics Pty Limited (in liquidation) [2012] NSWSC 1585 Hearing dates: 4 December 2012 Decision date: 18 December 2012 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Directions made entitling First Plaintiffs to distribute certain amounts to certain priority creditors of the Second and Third Plaintiffs. The First Plaintiffs' costs of the application be costs in the winding up of the Second and Third Plaintiffs. The directions made be stayed to 4pm on 30 January 2013. Catchwords: CORPORATIONS - Winding up - Corporations Act 2001 (Cth) ss 479(3) and 511 - Application for directions in relation to matters arising under winding up - Whether an appropriate case for the court to give directions. Legislation Cited: - Corporations Act 2001 (Cth) ss 9, 51C, 443B, 443D, 443E, 443F, 479(3), 511(1), 556(1), 556(1)(e), 556(1)(g)-(h), 560, 561, 561(1)(e), 561(1)(g), 561(1)(h) - Personal Property Securities (Corporations and Other Amendment) Act 2010 (Cth) Cases Cited: - Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd [2006] NSWSC 25; (2006) 224 ALR 490 - Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) [1978] HCA 45; (1978) 141 CLR 335 - B&B Budget Forklifts Pty Ltd v CBFC Ltd [2008] NSWSC 271; (2008) 216 FLR 294 - Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 - Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902; (2005) 145 FCR 220 - Deputy Commissioner for Corporate Affairs v Abbott (1980) CLC 40-667 - Jelin Pty Ltd v Johnson (1987) 5 ACLC 463 - Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27; (1999) 161 ALR 105 - Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 - Re MF Global Australia Ltd (in liq) [2012] NSWSC 994 - Re Spectrum Plus Ltd (in liq) [2005] 2 AC 680 - Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 194 Category: Principal judgment Parties: Bradley John Tonks and John Vouris (First Plaintiffs) Smouha Fabrics Pty Limited (in liquidation) (Second Plaintiff) White Stallion Pty Limited (in liquidation) (Third Plaintiff) Undercover Wear Australia Limited (Interested Party) Representation: Counsel: D. Sulan (Plaintiffs) A. Catford (Interested party - Undercover Wear Limited) Solicitors: O'Neill Partners (Plaintiffs) File Number(s): 12/288947 Judgment 1By Amended Originating Process filed on 18 October 2012, the First Plaintiffs, the liquidators ("Liquidators") of Smouha Fabrics Pty Limited ("Smouha") and White Stallion Pty Limited ("White Stallion") apply for directions under s 479(3) and s 511(1) of the Corporations Act 2001 (Cth). 2In particular, the Liquidators seek directions that they are entitled, under ss 560 and 561 of the Corporations Act, to distribute amounts received by the Liquidators from the former administrators of Smouha and White Stallion respectively on or about 28 July 2011 ("Smouha Funds" and "White Stallion Funds") to priority creditors, including the Department of Education and Workplace Relations under the General Employee Entitlements and Redundancy Scheme ("GEERS"), in priority to Velvet Ranch Pty Limited ("Velvet Ranch") or any other creditor or creditors of Smouha and White Stallion. Alternatively, they seek a direction as to such other manner in which the Smouha Funds and the White Stallion Funds should be distributed. 3The application is supported by affidavits of Mr John Vouris, one of the Liquidators of Smouha and White Stallion, dated 13 September 2012 and 4 October 2012. I have drawn on Mr Vouris' affidavits, and the helpful submissions of Mr Sulan, who appeared on the Plaintiffs' behalf, in outlining the relevant factual background below. Notice of the application has been given to interested parties, including four parties that had paid in advance for goods to be supplied by Smouha and/or White Stallion, the former administrators of Smouha and White Stallion, the Australian Taxation Office and GEERS. One of those parties, Undercover Wear Australia Pty Limited ("Undercover Wear") appeared on the application, represented by its Chief Financial Officer to whom I gave leave to appear on its behalf. Factual background 4Smouha was incorporated in 1964 and White Stallion in 2004. Smouha and White Stallion each operated fabrics importing and wholesaling businesses from the same premises at Waterloo, New South Wales. 5Smouha granted a charge in favour of St George Bank Limited ("St George") on 10 July 2001 and White Stallion granted a charge in relevantly the same terms in favour of St George on 29 September 2005. A notification of details of a charge given to the Australian Securities and Investments Commission noted that the charge was a fixed and floating charge, described the liability secured by the charge as "[a]ll money owing actually or contingently by the Chargor to the Chargee presently and (subject to the terms of charge) prospectively" and described the property charged as "[a]ll the Chargor's rights, property and undertaking of whatever kind and wherever situated, whether present or future". 6Administrators were appointed to Smouha and White Stallion on 19 March 2009 and traded those entities until 29 May 2009. A report to creditors dated 24 April 2009 noted that the businesses continued "to trade on a very limited basis under the control of the Administrators in order to evaluate the alternatives available". In that period, the administrators received certain funds as pre-payments for goods. St George appointed receivers over the book debts of Smouha and White Stallion on 30 March 2009 and, from 29 May 2009, over all the assets and undertakings of Smouha and White Stallion. Smouha and White Stallion passed from administration into a deemed voluntary liquidation on 1 June 2009 and the Liquidators were appointed as joint and several liquidators of Smouha and White Stallion at a meeting of the company's creditors on that date. 7St George assigned its charges to Velvet Ranch on 13 August 2010 and the Liquidators accept both the validity of the charges and the validity of the assignments for the purposes of these proceedings. The former administrators transferred the Smouha Funds comprising amounts of approximately $18,136 and $95,295 and the White Stallion Funds comprising an amount of $39,176.46 to the Liquidators on 28 July 2011. 8It appears, from the Liquidators' Report to Creditors dated 27 February 2012, which was admitted without objection, that GEERS had paid $719,305.92 to employees of Smouha and GEERS has lodged a proof of debt in the liquidation of Smouha for at least that amount. GEERS has also lodged a proof of debt in the liquidation of White Stallion in the sum of $37,410.60. 9Velvet Ranch subsequently claimed an interest in the Smouha Funds and the White Stallion Funds under the charges. By letter dated 14 June 2012, the former administrators also claimed a statutory indemnity and lien under ss 443D and 443F of the Corporations Act in respect of the Smouha Funds and White Stallion Funds and confirmed that claim by a further letter dated 25 June 2012. 10Mr Vouris' evidence, in his affidavit dated 4 October 2012 is that, if the Court determines that the relevant funds are to be distributed to Velvet Ranch, there will be no balance payable to GEERS and, if the Court determines that the relevant funds are to be distributed to GEERS, there will be no balance payable to unsecured creditors in either Smouha or White Stallion. Legal principles 11Section 479(3) of the Corporations Act allows a liquidator to apply to the Court for directions in relation to a matter arising under a winding up. I summarised the relevant principles in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994 (at [7]) as follows: "Section 479(3) of the Corporations Act allows a liquidator to apply to the Court for directions in relation to a matter arising under a winding up. The function of a liquidator's application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117; (1986) 4 ACLC 114; Re Ansett Australia Ltd (admins apptd) and Korda [2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433 at [46]. The Court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision: Sanderson v Classic Car Insurances Pty Ltd [(1985) 10 ACLR 115 at 117; (1986) 4 ACLC 114]; Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 686-7; 5 ACSR 673; 9 ACLC 1291; Re Ansett Australia Ltd [[2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433] at [65]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83 at [32]. A direction can be made under 479(3) in a voluntary liquidation, by reason of ss 506(1)(b) and 511: Warne v GDK Financial Solutions Pty Ltd [2006] NSWSC 464; (2006) 57 ACSR 525 at [63]-[64], [82]." A liquidator is protected against a claim for breach of duty if he or she acts in accordance with a direction given by the court under s 479(3) and he or she made full disclosure to the Court in the relevant application. 12Section 511 of the Corporations Act in turn allows a liquidator in a voluntary winding up to apply to the Court to determine any question arising in that winding up and exercise any power that the Court could exercise if the company was being wound up by the Court, if it is "just and beneficial" to do so. In MF Global above (at [8]), I noted that: "The principles applicable to an application under that section were recently reviewed by Ward J in Re Purchas (as liquidator of Astarra Asset Management Pty Ltd (in liq)) [2011] NSWSC 91 and I gratefully adopt her Honour's summary of the relevant principles. Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a Court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be "just and beneficial" to give the relevant direction. The Court may give such a direction where it will be "of advantage in the liquidation": Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg (in his capacity as liquidator of S&D International Pty Ltd) v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 at [7]. The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty: S&D International at [7]." 13In my view, this is an appropriate case in which to give directions, since there are competing claims to the Smouha Funds and the White Stallion Funds, including claims by GEERS and Velvet Ranch, a further claim by Undercover Wear, and a claim to a statutory indemnity and lien to secure that indemnity by the former administrators. Legal issues are raised where the Liquidator will benefit from the court's directions and there do not appear to be substantive contested questions of fact raised by the application that would warrant commencement of proceedings seeking declaratory or other relief between the relevant parties. Undercover Wear's claim 14As I noted above, the Chief Financial Officer of Undercover Wear appeared for it, by leave. Undercover Wear has advised the Liquidators that it paid the sum of $28,787.91 to Smouha on 25 March 2009 for fabric that was not delivered, the funds were not refunded and the balance remains outstanding to Undercover Wear. An invoice issued by Smouha to Undercover Wear is dated 24 March 2009, after the date of the administrators' appointment, and is stamped "approved for payment" with a date of 25 March 2009 and was paid under cover of a remittance advice bearing the same date. 15Undercover Wear also advised the Liquidators that it paid White Stallion the sum of $11,137.51 on 31 March 2009 for fabric that was also not delivered, those funds were also not refunded and the balance remains outstanding to Undercover Wear. The monies paid to White Stallion appear to relate to payment of an invoice dated 1 April 2009, issued after the appointment of the administrators. Oddly, the tax invoice dated 1 April 2009 is stamped "approved for payment" dated 26 March 2009, prior to its issue date. A remittance advice dated 31 March 2009 in turn refers to payment of the invoice dated 1 April 2009 and is addressed to another entity, Hill Textiles. I will assume, without deciding, that Hill Textiles and White Stallion are associated in some way, since the tax invoice issued to Undercover Wear was under the letterhead "Hill Textiles White Stallion Pty Ltd". 16It is first necessary to determine whether Undercover Wear has established a proprietary claim to the Smouha Funds or the White Stallion Funds or a claim over those funds that is given priority in the winding up. Undercover Wear did not articulate any basis on which it would have such a claim, but Mr Sulan helpfully assisted the Court to identify the bases on which the claim might be put. 17The first such basis was that there was a resulting trust or Quistclose trust over the relevant payments, in that they were made on the basis that property in them would only pass to Smouha and White Stallion if the relevant goods were delivered, and those goods had not in fact been delivered. In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, a dividend was declared and the company sent a cheque to the appellant bank under the cover of a letter requesting, among other things, that it be banked into a new account and confirming that the sum would only be used to meet the dividend due on a specified date. The company went into liquidation and the bank wished to apply the fund by way of set off against other indebtedness of the company to it. In the House of Lords, Lord Wilberforce (Lord Reid, Lord Morris of Borth-y-Gest, Lord Guest and Lord Pearce agreeing) said (at 580) that the "mutual intention" of the company and the bank and "the essence of the bargain" between them was that the money advanced would not become part of the assets of the company but that it should have been applied exclusively to the payment of the dividend, disbursing the money to the particular class of creditors so entitled, namely the shareholders. 18His Lordship distinguished cases where payments were made on the unqualified basis that they should be included in a company's assets and observed (at 581-582) that: "... when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see Re Rogers [(1891) 8 Morr 243] where both Lindley and Kay LJJ explicitly recognised this): when the purpose has been carried out (ie, the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (ie, repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. [T]he intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it." In the result, the money was to be held on trust by the company as trustee for the shareholders as beneficiaries until such a time that the dividend was paid. It was impossible to pay the dividend when the company went into liquidation so the money was held on trust for the lender. 19In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) [1978] HCA 45; (1978) 141 CLR 335, Gibbs ACJ (Jacobs and Murphy JJ agreeing) held that a Quistclose trust would not arise where the intention of the parties was that "the money was to form part of the general assets of the appellant, to be used as it wished" (at 353). His Honour noted that the Quistclose decision (at 353): "... is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust." 20In Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27; (1999) 161 ALR 105 at [49]ff, O'Loughlin J noted that factual circumstances which were relevant to whether such a trust existed included whether the relationship between each client and the company was a routine commercial transaction epitomising the business that the company conducted (noting that the courts are reluctant to introduce trusts into such commercial transactions); the existence of discrete evidence pointing to the existence of a mutual intention of the parties to create a trust; evidence as to an agreement or directions or instructions having been given as to how and in what manner the monies were to be held or applied; other objective indicators, such as how the recipient and alleged trustee have dealt with the funds in question (for example, whether those funds are deposited in a general bank account, which would tend against the finding of a trust); and whether there exists any obligation (statutory or contractual) requiring the recipient separately to account for the paid monies. 21ln Twinsectra Ltd v Yardley [2002] UKHL12; [2002] 2 AC 164 at 185, Lord Millett also emphasised the importance of the parties' intention, determined by the terms of the arrangement and the circumstances of the case, in determining the existence or otherwise of the trust. His Lordship noted that, in effect, a trust does not arise if the relevant purpose is carried out and distinguished between, on the one hand, the failure of purpose of the trust and, on the other, the disappointment of the settlor's motivations in providing the monies which will not necessarily give rise to such a failure. 22In Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135, Campbell JA (Meagher and Barrett JJA agreeing) observed that (at [48]): "[I]t is now clear that in deciding whether there is an intention to create a trust, the court ascertains that intention by inference from the outward manifestations of intention: Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [53]-[59], [102]-[115]. Thus, the task of ascertaining whether there is an intention to create a trust and, if so, on what terms is a similar one to ascertaining the intention of parties to a contract for the purpose of deciding whether there is an intention to enter contractual relations and the terms of any contract that has been entered." 23In the present case, the evidence before me did not establish the necessary elements of such a trust. There is no evidence to support an inference that the payments made by Undercover Wear could only be applied by Smouha, White Stallion or the administrators for the specified purpose rather than becoming part of their general funds and the transaction was, on its face, an ordinary course purchase of goods, in which the purchaser would generally have a remedy in damages for any breach of the sellers' delivery obligations. 24The second basis identified by the Liquidators for such a potential claim was that the transaction might give rise to a debt incurred by the administrator in the administration, for which the administrator would be entitled to be indemnified under s 443B of the Corporations Act. I do not consider that the amounts claimed by Undercover Wear can properly be characterised as debts for which the administrator is liable, since the administrator did not incur a liability for an ascertained amount as distinct from a potential liability to pay unascertained damages: Deputy Commissioner for Corporate Affairs v Abbott (1980) CLC 40-667; Jelin Pty Ltd v Johnson (1987) 5 ACLC 463. 25Alternatively, the transaction might give rise to another liability incurred, or damage or loss sustained by the administrator, in good faith and without negligence, in the performance or exercise of any of his or her functions or powers as administrator as to which it was indemnified under s 443D of the Corporations Act. The amount of a claim made by Undercover Wear, for example on the basis of unjust enrichment arising from a total failure of consideration in this in respect of the failure to deliver the goods, could potentially amount to a liability incurred by the administrator during the administration. However, neither the administrator nor Undercover Wear has led evidence as to the circumstances in which the administrator incurred that liability or failed to deliver the relevant goods, so it has not been established that any such liability was incurred in good faith or without negligence of the administrator so as to give rise to a right of indemnity under s 443D of the Corporations Act. 26In these circumstances, I do not consider that Undercover Wear has established an entitlement to assert a proprietary claim against the assets of Smouha or White Stallion, or a claim as to which the administrator has a right of indemnity under s 443D of the Corporations Act. It is therefore not presently necessary to determine whether any right of indemnity available to the administrator under s 443D of the Corporations Act would rank in priority to any claim by GEERS or by Velvet Ranch by reason of the operation of s 443E of the Corporations Act. Priority as between GEERS and Velvet Ranch 27The Liquidators made comprehensive submissions in respect of the competition between the claims of GEERS and Velvet Ranch and I have drawn on those submissions for the analysis that follows. 28GEERS' claim to the Smouha Funds and the White Stallion Funds arises because it has made payments of employee entitlements as to which it has priority under s 556(1)(e) or (g)-(h) and s 560 of the Corporations Act. Section 556(1) of the Corporations Act relevantly provides that: "(1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: ... (e) subject to subsection (1A) - next, wages and superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date; (g) subject to subsection (1B) - next, all amounts due: (i) on or before the relevant date; and (ii) because of an industrial instrument; and (iii) to, or in respect of, employees of the company; and (iv) in respect of leave of absence; (h) subject to subsection (1C) - next, retrenchment payments payable to employees of the company." Section 560 of the Corporations Act in turn provides that: "Where a payment has been made by a company on account of wages or of superannuation contributions (within the meaning of section 556), or in respect of leave of absence, or termination of employment, under an industrial instrument, being a payment made out of money advanced by a person for the purpose of making the payment, the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid, but not exceeding the amount by which the sum in respect of which the person who received the payment would have been entitled to priority in the winding up has been diminished by reason of the payment, as the person who received the payment would have had if the payment had not been made." 29The nature of the payments made by GEERS are set out in its proofs of debt in respect of Smouha and White Stallion which are in evidence. The operation of GEERS and of these sections in their application to it was summarised in Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902; (2005) 145 FCR 220 at [3]-[5] as follows: "The Commonwealth has established the General Employee Entitlements and Redundancy Scheme, which is commonly referred to by the acronym GEERS. The scheme is not constituted by statute but by an act of the executive government alone. It is administered by the Department of Employment and Workplace Relations. Under the scheme money granted by Parliament is distributed to employees whose employment has been terminated because their employer is insolvent and has insufficient assets to pay their entitlements. The entitlements that are covered by the scheme are unpaid wages, unpaid annual leave, unpaid long service leave, unpaid pay in lieu of notice and up to eight weeks' redundancy pay. An important feature of the scheme is the underlying assumption that, where possible, advances made to employees will be recovered by the Commonwealth out of the realisation of the employer's assets or from other proceedings. It is necessary to explain how GEERS advances might be recovered when the employer is an insolvent company. If the company is wound up the general rule is that all debts must be paid proportionately: s 555. There are many important exceptions to this rule. Some debts are given priority over others. These are listed in s 556. They include (subject to a cap) wages and superannuation contributions payable to employees (s 556(1)(e)), amounts due to employees under an industrial agreement in respect of leave (s 556(1)(g)), and retrenchment entitlements (s 556(1)(h)). Under s 560, where the company in liquidation has paid such debts out of money advanced for that purpose by another person, that person is entitled to the same priority in respect of the payments as the employee would have had. Those claims are also given priority over the rights of a chargee who holds a floating charge over the company's assets: s 433. Payments under GEERS are made on the basis that in a liquidation the Commonwealth will obtain priority by virtue of s 560. In an administration followed by a deed of company arrangement, the Commonwealth expects that the deed will incorporate the priority given to employees by s 556 and give the Commonwealth the same priority it would have enjoyed under s 560 in a winding up. However, statute apart, the fact that payments are made on a particular basis does not, without more, create enforceable rights." That summary was in turn adopted by Barrett J in Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd [2006] NSWSC 25; (2006) 224 ALR 490 at [5]. 30Velvet Ranch's claim would rank in priority to GEERS' claim if it is properly characterised as a claim under a fixed charge. If it is not properly characterised as such a claim, and instead is a claim under a floating charge or circulating security interest (as defined in s 51C of the Corporations Act, following amendments made by the Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth), to include a floating charge), then it will be subject to s 561 of the Corporations Act. That section provides that, if the company's property available for payment of creditors other than secured creditors is insufficient to meet payment of any debt referred to in s 556(1)(e), (g) or (h) or any amount in respect of which a right of priority is given by s 560, then payment of that debt or amount must be made in priority over the claims of the secured party in relation to the floating charge or circulating security interest created by the company, as the case may be. 31Mr Sulan draws attention to the decision in B&B Budget Forklifts Pty Ltd v CBFC Ltd [2008] NSWSC 271; (2008) 216 FLR 294, where Barrett J noted that the task of deciding whether a charge was a fixed or floating charge involved, first, the construction of the document to determine, from the parties' language, their intentions regarding their respective rights and obligations and, second, the determination of the legal characterisation resulting from those rights and obligations. The distinction between a fixed and floating charge was in turn summarised by Lord Walker in Re Spectrum Plus Ltd (in liq) [2005] 2 AC 680 at [138]-[139], in a passage quoted by Barrett J in B&B Budget Forklifts (at [34]), as follows: "... Under a fixed charge the assets charged as security are permanently appropriated to the payment of the sum charged, in such a way as to give the chargee a proprietary interest in the assets. So long as the charge remains unredeemed, the assets can be released from the charge only with the active concurrence of the chargee. The chargee may have good commercial reasons for agreeing to a partial release. If for instance a bank has a fixed charge over a large area of land which is being developed in phases as a housing estate (another example of a fixed charge on what might be regarded as trading stock) it might be short-sighted of the bank not to agree to take only a fraction of the proceeds of sale of houses in the first phase, so enabling the remainder of the development to be funded. But under a fixed charge that will be a matter for the chargee to decide for itself. Under a floating charge, by contrast, the chargee does not have the same power to control the security for its own benefit. The chargee has a proprietary interest, but its interest is in a fund of circulating capital, and unless and until the chargee intervenes (on crystallisation of the charge) it is for the trader, and not the bank, to decide how to run its business." 32The terms of the relevant charge provided: "2.1 For the purpose of securing to us payment of the amount owing, you charge the charged property to us. 3.1 The charge is fixed over all present and future: ... (e) book debts; and (h) interests in personal property that are not required by you for disposal by you in the ordinary course of business; and (i) any other property if clause 3.3 says the charge is fixed over the property. 3.2 The charge is floating over all other charged property (including the proceeds of any book debts). 3.3 Where this charge is floating (whether under the terms of this charge or at law) it immediately and automatically becomes fixed: (a) over all the charged property if you or a debtor/guarantor are or become insolvent or steps are taken to make you or the debtor/guarantor insolvent; and (b) over any charged property over which this charge is floating that you deal with except in your ordinary course of business ..." The term "charged property" is in turn defined as "all your rights property and undertaking of whatever kind and wherever situated whether present or future" and the term "insolvent" is defined to include an entity being in administration. 33The Liquidators point out that, prior to Smouha's and White Stallion's entry into administration, the Smouha Funds and the White Stallion Funds, as pre-payments for goods apparently made in the ordinary course of the companies conducting business, would be subject to the floating charge under clause 3.2 of the charges. The Liquidators acknowledge that the charges crystallised under clause 3.3 upon the administration of Smouha and White Stallion, but contend that that fact does not change the characterisation of the charge as being a floating charge or a circulating security interest for the purposes of s 561 of the Corporations Act. As Mr Sulan points out, that result follows from the definition of "floating charge" in s 9 of the Corporations Act as including a charge that conferred a floating charge at the time of its creation but subsequently became a fixed or specific charge. 34Mr Sulan points out that Velvet Ranch could have contended (although it did not, since it did not appear in the application) that the Smouha Funds and the White Stallion Funds were subject to a fixed charge by operation of clause 3.3 of the charges since the relevant payments were made after Smouha and White Stallion went into administration. However, s 561 of the Corporations Act, read together with the definition of "floating charge" in s 9, draws attention to the nature of the charge at the time of its creation rather than at the time the relevant payments were made. As Mr Sulan points out, the contrary view would otherwise have the result that s 561 of the Corporations Act would not apply where, after an administrator was appointed, assets which were previously subject to a floating charge became subject to a fixed charge on crystallisation of the charge, and that result would be inconsistent with the apparent purpose of that section. Administrators' claim to a lien 35As I noted above, the former administrators claimed, but have not appeared to seek to establish, a right of indemnity and a lien to secure that indemnity under ss 443D and 443F of the Corporations Act in respect of the Smouha Funds and the White Stallion Funds. I do not consider that distribution of the Smouha Funds and the White Stallion Funds should be deferred indefinitely by reason of a claim to indemnity or for a lien referable to claims of parties that purchased goods from Smouha and White Stallion while the administrators were trading those companies, where those claims have not yet been made. However, I propose to stay the directions that I will make below to the end of January 2013 to allow those parties to bring proceedings to establish such claims and/or the administrators to bring proceedings to establish a right to the asserted indemnity or lien. That stay may be extended if such proceedings are brought and expeditiously pursued, but otherwise the funds may be distributed in accordance with the orders that I make below. Other matters and orders 36The Plaintiffs also seek orders that their costs of the application be costs in the winding up of Smouha and White Stallion and I will make that order. The Plaintiffs initially sought an order or direction that the Liquidators may pay and/or recoup their remuneration and expenses incurred in connection with preserving and administering the Smouha Funds and the White Stallion Funds from those funds respectively. That application was not addressed in the course of the hearing before me and I make no order in that regard. 37Accordingly, I make the following orders: 1 Direct that the First Plaintiffs are entitled to distribute the Smouha Funds to Priority Creditors including the Department of Education and Workplace relations under the GEERS Scheme in priority to Velvet Ranch Pty Ltd or any other creditor or creditors of the Second Plaintiff. 2 Direct that the First Plaintiffs are entitled to distribute the White Stallion Funds to Priority Creditors including the Department of Education and Workplace relations under the GEERS Scheme in priority to Velvet Ranch Pty Ltd or any other creditor or creditors of the Third Plaintiff. 3 The Plaintiffs' costs of this application be costs in the winding up of the Second and Third Plaintiffs. 4 Stay orders 1 and 2 to 4pm on 30 January 2013. ********** Amendments 31 January 2013 - Added Judge's name Amended paragraphs: Coversheet DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 31 January 2013