Home Insights Is a non-circulating security interest really non-circulating? Lessons from Re Amerind

Is a non-circulating security interest really non-circulating? Lessons from Re Amerind

In Australia, secured creditors only enjoy absolute statutory priority over employee and administrator costs over non-circulating secured property. 

The introduction of the Personal Properties Securities Act 2009 (Cth) (PPSA) brought significant changes to the regime for the classification of circulating and non-circulating assets, including the creation of a new set of rules in relation to the creation of non-circulating security interests over debtors and inventory.

Various attempts have been made to draft provisions which create non-circulating security interests over inventory and debtors relying on the provisions contained in the PPSA. If a non-circulating security interest is successfully created, then this has the potential to meaningfully change the outcome of an insolvency scenario for secured creditors.

The Victorian Court of Appeal’s decision in Commonwealth v Byrnes and Hewitt [2018] VSCA 41 (Re Amerind) has sparked much discussion since it was handed down earlier this month. While the bulk of the decision concerns the application of the priority regime in section 433 of the Corporations Act 2001 (Cth) (Corporations Act) to the assets of trading trusts, it has broader implications for financiers and advisors in understanding the approach that will be taken by the Courts to the characterisation of circulating and non-circulating assets.

The simple lesson is that, as at the date of appointment, a purportedly non-circulating security interest will only be non-circulating if the secured creditor has restricted the grantor’s ability to use assets in the ordinary course of their business and the formal requirements under the PPSA have been met. This has significant practical implications for secured creditors and insolvency practitioners who are called upon to adjudicate on claims.

The characterisation of circulating and non-circulating assets – some background 

Many financing transactions are priced based on assumptions as to the position of the key statutory priority creditors – employees and voluntary administrators for their fees and expenses in an enforcement scenario.

The statutory priority creditors enjoy priority to the claims of the secured creditor over circulating assets. The key circulating assets are inventory and accounts (debtors). Often, claims can exceed or substantially erode the value of debtors and inventory held by insolvent corporations. Accordingly, the characterisation of assets as circulating or non-circulating is often the subject of substantial controversy.

Prior to the PPSA, the prevailing view was that a non-circulating security interest would not be brought into existence over debtors or inventory without removing the debtor from physical control over the assets, mirroring the positon that existed in the United Kingdom and other common law jurisdictions.

What are the practical considerations for secured creditors?

Date of categorisation of security interest type

Re Amerind confirms that time for determination of whether an asset is circulating or non-circulating is the time that a receiver is appointed and not when the security interested is granted.


Even if the PPSA registrations disclose control over an account or inventory, there is a secondary requirement that the secured party retains actual control within the meaning of the PPSA.

Section 341 of the PPSA defines control in a number of ways, including that:

  • with respect to inventory, the secured party and the grantor have agreed that:
    • the grantor will appropriate specific inventory to the security interest;
    • the grantor will not remove the security interest without the consent of the secured party; and
    • the grantor’s ordinary practice is to comply with that agreement;
  • with respect to an account that arises from the disposal of property, the granting of rights or the provision of services (in the ordinary course of business), the secured party has both an effective registration and control. This covers many forms of receivables financing.

Control in relation to an account is extensively defined by section 341 of the PPSA, which provides that control will arise in relation to an account when:

  • there is an agreement between the secured party and the person who is owed the money to deposit amounts into a specified ADI bank account;
  • the usual practice is that amounts are deposited into that ADI bank account; and
  • the secured party has control (a second control test!) of the relevant ADI bank account within the meaning of section 341A.

In order to pass the second control test with respect to an ADI bank account, regard must be had to section 341A of the PPSA, which provides that control exists over an ADI Bank account when:

  • the secured party is the ADI controlling the bank account; or
  • the secured party is able to direct the disposition of funds from the account without further consent by the grantor; or
  • the secured party becomes the ADI’s customer.

However, with respect to control of the ADI bank account, a secured party can have control even if the grantor retains the right to direct the disposition of funds from the ADI bank account.

Actual control 

In addition to formal requirements (including importantly making a control registration), the Court of Appeal in Re Amerind found that under the PPSA:

  • inventory, accounts, ADI accounts, the proceeds of inventory, currency and negotiable instruments are always circulating unless they fall within the exceptions outlined above; but
  • in every case it is necessary that the secured party has not “given the grant express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantors’ business, free of any security interest” as at the date of the appointment.

Accordingly, there is now an increased element of focus on whether or not a grantor is allowed to transact with the personal property that will determine whether or not an asset is circulating.

What to do 

Assuming that the underlying security agreements contain terms that either on default or ordinarily restrict the grantor’s right to transfer personal property in the ordinary course of the business, then these provisions need to be enforced if assets are to be characterised as non-circulating. If this includes taking control over accounts, or requiring the debtor to take certain steps, then those steps should be taken if practical.

For example, if steps need to be taken to permit the secured creditor (through the issuance of a notice or similar) to be able to direct disposition of funds from a debtor’s ADI account, this will ensure the funds in the account are characterised as non-circulating provided that the formal requirements have been met. These steps need to be taken in advance of the commencement of external administration in order to be effective.

While the decision in Re Amerind does not cover the field in relation to circulating and non-circulating security interests, it points in the direction that the Court will not be eager to find non-circulating security interests where the grantor in fact retains day to day control of the assets as at the date of appointment.

Where it is commercially feasible, consideration may be given to other methods of achieving priority over circulating assets, such as via the creation of account transfer or chattel paper purchase arrangements.

Some issues remain unresolved, like the operation of automatic chattel paper or account transfer arrangements that purport to operate prior to default. Under s. 340(4A) of the PPSA, these arrangements prima facie create a non-circulating security interest notwithstanding the operation of the balance of the provisions. Whether these provisions are upheld seems likely to be a future ground of contest. Any attempt to rely on an automatic chattel paper transfer purchase arrangement (such as the standard clause in the WALRUS Group GSA) will require careful consideration in the face of better alternatives.

Other considerations 

Proceeds will be traced in the ordinary way

Following their appointment, the receivers of Amerind caused the company to enter into a new debtor finance facility to expedite the realisation of the company’s stock on hand (WIP). At the time of appointment, the WIP was characterised as a circulating asset. The Court held that regardless of post-appointment arrangement for financing and securing the WIP, the monies received from these activities retained their characterisation from the time of the appointment.

This restates the importance of secured creditors having appropriate arrangements for control of circulating assets in place well before an appointment, and ideally on settlement of a facility. Asset characterisation cannot be re-organised post-appointment via a re-financing transaction.

Ability for non-trust creditors to access trust assets

Re Amerind considers extensively, but does not ultimately decide, the vexed question: can trust assets be used to meet the claims of non-trust creditors?

In order to reach its primary opinion on the applicability of section 433, the Court confirmed that the liquidator’s right of indemnity from a trustee does indeed amount to the property of the company. But the Court did not decide whether the property could only be applied to meet the claims of trust creditors, leaving open duelling authorities from the Victorian Court of Appeal (Re Enhill) and the Full Court of the Supreme Court of South Australia (Re Suco Gold). 

The question ultimately turns to whether section 555 of the Corporations Act requires all debts and claims to rank equally and be paid proportionally unless otherwise provided by the Act. The answer derived from trust law principles in Re Suco Gold is that the language of section 555 is insufficient to overturn the great weight of precedent as to the nature of trust law. On the other hand, the approach in Re Enhill may achieve greater consistency with the apparent legislative intention of section 555.

Prior to Re Amerind, Re Enhill has been widely criticised, particularly in commentary on trust law. Jacob’s Law of Trusts in Australia states the decision is “plainly wrong”, and that the transfer of trust property to a liquidator does cause it to cease to be trust property. But Re Amerind defends Re Enhill, noting that it is “more internally consistent than some academic criticism may suggest” (at [264]). While not deciding the issue, Re Amerind provides a possible foundation to mount an argument that trust assets are indeed available for the benefit of creditors in general.

As it is increasingly common under finance and other agreements for various moneys to be held on trust, it is only a matter of time before the Courts will have to confront this clash between the common law of trusts and the Corporations Act. In the meantime, insolvency practitioners should consider seeking judicial directions if they are faced with competing claims of trust and non-trust creditors over trust assets.

For secured creditors and financiers, the solution remains to always ensure that the borrower is liable in their own right and in their capacity as trustee of any relevant trust.

Some final thoughts 

With the increasing proliferation of non-bank and alternative financiers, increased flexibility in terms and conditions and large amounts of cash chasing a limited pool of available deals, there is a potential for significant miscalculations in relation to the characterisation of assets as circulating or non-circulating.

Where a lender is relying on receivables, inventory or the proceeds of accounts to cover their position, they need to take care at every stage of the transaction to be conscious of where they sit in relation to circulating versus non-circulating assets.


Tom Schinckel

Senior Associate


Restructuring and Insolvency

This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.