A recent decision of the Queensland Supreme Court definitively confirmed that when a receiver purchases inventory in a trade-on of a business, and subsequently makes a profit on the sale of that inventory, the profit is available to a secured creditor who has a floating charge (known since the introduction of the PPSA as a circulating security interest) over the inventory (CMI Industrial Pty Ltd (Receivers and Managers Appointed) (In Liquidation) [2015] QSC 96).
The other possible contender for a receiver’s trading profits is priority creditors (such as employees).
With regard to property that is the subject of a circulating security interest, Sections 433 and 561 of the Corporations Act 2001 (Cth) require a receiver to pay certain amounts to priority creditors from that property that comes into their hands, in priority to any claims by secured creditors. Inventory is usually subject to a secured creditor’s circulating security interest.
However, this recent case confirmed that such priority creditors are entitled to be paid only from property that is the subject of a circulating security interest that was available as at the date of the receiver’s appointment.
The decision is of assistance to receivers who are often confronted with claims by priority employees from assets ‘coming into their hands’.
The decision is very favourable for secured lenders with a floating charge or circulating security interest who may reap the benefits of a receiver’s profitable trading activities. Secured creditors can take comfort that cash advances they make to enable a receiver to purchase inventory to facilitate a receiver’s trade-on of the business will not be eroded by the claims of priority creditors.
October 2015