Assets held by an insolvent corporate trustee in its capacity as trustee may not be "property of the company".

For more than 30 years, Victoria has stood apart from the rest of Australia in how it treats the assets of an insolvent corporate trustee. That may have changed, following the Supreme Court's decision in Re Amerind Pty Ltd (receivers and managers appointed) (in liq) [2017] VSC 127.

Insolvency practitioners should note that assets held by an insolvent corporate trustee in its capacity as trustee may not be "property of the company", and therefore will not be subject to the priority regimes in the Corporations Act 2001 (Cth). Rather, trust assets should be distributed on a pari passu basis.

Insolvency practitioners will be interested to note that the decision does not alter a trustee company's right of indemnity against (and lien over) trust assets, which forms the basis for their remuneration in winding up a corporate trustee.  However, the Court indicated it will give a separate judgment on this issue after receiving further submissions.

The case deals with a number of issues, including situations where receivers trade on a business and the way that retention of title clauses operate under the Personal Property Securities Act 2009 (Cth). We will consider these other parts of the decision in a later Insights article.

Amerind's background

Amerind's sole function was to act as trustee of a trading trust. It had no assets of its own and incurred liabilities only as a trustee.

In the background, the Commonwealth had paid accrued employee entitlements under the Fair Entitlement Guarantee Scheme, and sought to recover these payments as a priority creditor under section 433 of the Corporations Act. The Commonwealth and receivers uniformly submitted that the Commonwealth was entitled to the statutory priority. Carter Holt Harvey (CCH), a creditor of Amerind, opposed this submission.

Does the priority regime apply?

The issue was whether property held on trust by a corporate trustee is 'property of the company' for the purposes of the Corporations Act. If it is "property of the company", it may be subject to the priority regime in sections 433(3), 556 and 560 of the Corporations Act. This means that a priority creditor of the company may be able to recover trust assets ahead of non-priority creditors of the trust. If it is not "property of the company", the assets will be distributed according to usual trust principles.

Section 433 provides for the priority payment of certain creditors in a receivership. Where a receiver is appointed under a circulating security interest, the receiver must apply moneys in the priority required by section 433 to the extent that the assets in the receiver's hands or under his or their control have been secured by a circulating security interest. The section draws on the more detailed priority regime prescribed for liquidators by sections 556 and 560.

Justice Robson found that trust property was not "property of the company" and therefore was not subject to the priority regimes in the Corporations Act. He followed a single judge decision of the Supreme Court of NSW in Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] 305 FLR 222, rather than following the Full Court decision of the Supreme Court of Victoria in Re Enhill Pty Ltd [1983] 1 VR 56.

Conflicting cases

The Commonwealth and the receivers relied principally on Re Enhill. In that case, a company that traded solely as a trustee went into liquidation. The liquidator sought orders that he should apply trust assets in payment of his own costs in priority to other claims, in accordance with priority contained in section 292(1)(a) of the Victorian Companies Act (the state predecessor to section 556 of today's Commonwealth Corporations Act). The Court in that case held that the trustee's right of indemnity itself was property subject to the control of the liquidator, and was not a right held by the trustee in its capacity as trustee. The priority regime under section 292(2)(a) was accordingly applied to the distribution of assets.

CCH submitted that the Court should follow Re Independent over Re Enhill. In Re Independent, the NSW Supreme Court found that trust assets were not "property of the company". In reaching this decision, the Court had relied on the SA Supreme Court decision of Re Suco Gold (1983) 33 SASR 99.

Justice Robson noted that the Court in Re Suco Gold had declined to follow the decision in Re Enhill. In Re Suco Gold, Chief Justice King held that where a company acted as trustee of two insolvent unit trusts, that trustee has no legal right to use or apply trust property other than for the authorised purposes of the trust. Accordingly, the costs and expenses of the winding up could not be paid out of the trust moneys, unless they were costs incurred on behalf of the trust. Chief Justice King described Re Enhill as "in conflict with the fundamental principles of the law of trusts". Chief Justice King's judgment was cited with approval over Re Enhill in later non-Victorian cases, including Re Independent.

Outcome for Amerind

After 104 pages of careful reasoning, Justice Robson J concluded that distributions of trust property were not subject to the Corporations Act priority regimes. He accepted that the section 433 priority regime only applied to property of the company and that the trustee’s right of indemnity against trust assets is not itself property of the company. In reaching this view, Justice Robson found that:

  • Re Enhill did not assist in construing the Corporations Act, because it related to the old Victorian Companies Act. Neither Re Enhill nor Re Suco Gold were binding on the Court given they only considered the old regime.
  • The Court should follow Re Independent unless it was plainly wrong, as that decision considered the phrase "property of a company" as it was used in the Corporations Act. It was better for there to be consistency across Australia in how the Commonwealth Corporations Act is interpreted.