Forge Group Ltd Case Study

The recent decision of Langdon, in the matter of Forge Group Limited (R&M App)(In Liq) [2017] FCA 170 provided an opportunity for the Court to provide guidance on a number of areas including, of particular interest to financiers, when is the relevant date of assessment for fixing assets the subject of section 433 of the Corporations Act2001 (Cth) (Act).

Application for directions

In this case the receivers of Forge Group Limited (Forge) exercised their right to bring an application for directions under section 424 of the Act against the following backdrop:

  • following the receivers’ and separate voluntary administrators’ appointment, a number of long term contracts of the Forge group of companies (which included but was not limited to Forge) were terminated;
  • the Forge group of companies was an income tax consolidated group for Income Tax Assessment Act 1997 (Cth) purposes;
  • tax had been pre-paid by the Forge group in respect of projected profits;
  • the receivers applied to the Australian Taxation Office (ATO) for an amended tax assessment;
  • following their application, the receivers were given a refund of more than $53 million from the ATO (Refund);
  • the secured creditor was owed an amount in excess of $171 million by the Forge group;
  • there were significant outstanding employee entitlements; and
  • the receivers were unsure whether the Refund was property which captured by section 433 and was payable to satisfy employee entitlements in presence to the secured creditor.

The Court was required to consider two principal matters:

  • what is the date for fixing assets the subject of section 433 of the Act; and
  • whether the Refund was a “circulating asset”.

Date for fixing assets

Section 433 provides that where the appointment of a receiver occurs before the winding up of the company commences, section 433 continues to apply post liquidation, such that the receiver must pay priority employees out of property comprised in or subject to a “circulating security interest”, in preference to their appointor.

The Court held that the date for fixing assets, the subject of section 433 is the date of the receivers’ appointment. The Court commented that:

Neither the chose in action nor the Refund existed at the time of any floating charge or when there were circulating assets. They were not property in the hands of the Receivers upon their appointment and are not caught by s 433.

It found that the Refund was the product of the receivers’ application which occurred only by reason of Forge no longer carrying on business and the termination of the subject contracts.

Circulating assets

For completeness, the Court also considered the second question even though this was not necessary given the property had been held not to be in existence at the time of the receivers’ appointment.

The Act provides that a circulating security interest is a security interest over a circulating asset. Section 340 of the Personal Property Securities Act 2009 (Cth) (PPSA) deals with circulating assets and lists a number of categories of the same including inventory, currency, accounts, and negotiable instruments (as summarised by the Court):

In order for the Refund to be a circulating asset and available to employees in priority to the secured creditor, it must fall within one of two characterisations (as summarised by the Court at [54]):

  • property that comes within s340(5) of the PPSA;1 or
  • property which the secured party gave Forge express or implied authority to transfer in the ordinary course of its business, free of the security interest. 

The Court held that the Refund was not a circulating asset for reasons including:

  • the Refund was only applied for by the receivers because the ordinary course of Forge’s business had ceased, contracts were terminated, and less tax was therefore payable than anticipated.2In other words, the Refund did not, and would not, come into existence in the ordinary course of Forge’s business;

“…it is no answer to point to tax refunds which could arise in the ordinary course of business. The Refund was not of that kind”;3

  • the GSA expressly prohibits any dealings by the company with assets following the appointment of receivers. “The terms of the GSA cannot be ignored. The PPSA, in s 18(1), provides that the GSA will take effect ‘according to its terms’”;

“…a sale or other disposal of a chose in action is not in the ordinary course of Forge’s business;4

  • The Refund did not fit into any of the categories set out in section 340(5) of the PPSA; and

“…the Refund was not the product of an overpayment of tax, simpliciter, but was the product of an amended assessment in the particular circumstances of this case…”.5

While the Court did not directly consider the issue, it seems that even if the Refund had come into the receivers’ hands at the time of the appointment, in these circumstances the payment would not have been considered a circulating asset in any event (as it was not obtained in the ordinary course of business including by reference to the secured creditor's security documents).

Lavan comment

This case is useful insofar as it clarifies for financiers and receivers that the time for assessing whether or not property is a circulating asset for the purposes of section 433 of the Act is at the time of the receivers’ appointment.

Amounts that came into existence and into the receivers hands after their appointment likely would not have constituted a circulating asset and would therefore have been monies payable to their appointor.

While on these facts the relevant assets were not held to be circulating assets subject to the operation of section 433, each case requires its own careful analysis.

Maloney, Suzanne (2015) Forge Group Ltd case study (A): the revealing nature of numbers. IMA Educational Case Journal, 8 (1).

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Forge Group Ltd, an engineering and construction company in Australia, was a healthy company that acquired two major construction contracts in 2012 through the purchase of another company. The case presents details of a corporate collapse that occurred at the beginning of 2014. Twelve months prior to the Forge Group Ltd (FGL) collapsing, the company was viewed very favorably by the market and reached a peak share price. The financial statements illustrate the danger of acquisitions, risk, and debt, as well as the need for good internal reporting.

The value to students and educators is in illustrating the importance of good fundamental financial basics. The case can be taught at the basic level by having students read, extract, and comment on financial statement information. Or it could be widened at the intermediate level by asking students to combine information from all financial statements to appraise working capital requirements. For advanced-level courses, students would conduct financial statement analysis using common techniques and make judgments. This case also can be teamed with its sister case B to explore more advanced topics, including corporate governance, management ownership, compensation, risk, and ethics.

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