On 23 February 2016, Justice Brereton of the Supreme Court of New South Wales handed down a decision In the matter of Independent Contractor Services (Aust) Pty Limited ACN 119 186 971(in liquidation) (No 2) that may significantly impact the economics of winding up of corporate trustees and the return to priority creditors such as employees.

In summary, the Court held that:

  • A liquidator’s reasonable remuneration and expenses as they relate to realising and distributing trust assets is subject to the court’s discretionary approval (as opposed to approval by a committee of inspection or resolution of creditors). It is often preferable that remuneration be calculated by reference to a percentage of recoveries rather than hourly rates.
  • The statutory priorities provided by section 556 of the Corporations Act 2001 (Corporations Act) do not apply in respect of the distribution of trust assets held by an insolvent corporate trustee. Trust creditors will instead rank equally.
  • There is a difference between the definitions of ‘employee’ in section 556 of the Corporations Act and the definition in the Superannuation Guarantee (Administration) Act 1992 (SGA Act). The definition in the SGA Act is broader and includes subcontractors, whereas the Corporations Act definition is narrower.

What does this mean for practitioners?

  • Courts may take a strict approach when determining whether remuneration is ‘reasonable’. In contrast to the usual industry approach of billing on an hourly basis, the Court held that a 2% return on total realisations was appropriate in circumstances where a liquidator engaged in limited work, in addition to a 15% return on distributions (although this was regarded as an ‘unusually high rate’). Courts may also take an unfavourable view of liquidators billing their standard hourly rates.
  • It is unclear whether courts in other jurisdictions will follow the decision as it concerns remuneration. Justice Brereton extensively referred to his previous decisions on remuneration to support the conclusions in this case.
  • The decision is authority for the proposition that liquidators must distribute all assets held on trust by a corporate trustee equally among the trust’s creditors, rather than on the basis of the priorities in section 556 of the Corporations Act. This approach is at odds with industry practice and case authority in South Australia and Victoria.
  • Where statutory priorities apply to distributions and a superannuation guarantee charge debt is claimed, liquidators must consider whether the employees or subcontractors claiming that debt fit within the narrower definition of ’employee’ under section 556 of the Corporations Act, even if the persons are employees for the purposes of superannuation legislation.

Background

Independent Contractor Services (Aust) Pty Ltd (Company) was trustee of the Independent Contractor Services Trust (Trust), through which it operated a labour-hire business. On 8 November 2012, creditors resolved that the Company be wound up and appointed a liquidator who had previously acted as the Company’s voluntary administrator (Liquidator).

The Court had determined in a previous application for directions that the Company only held assets on behalf of the Trust.The Trust’s creditors included persons subcontracted through the business and the Australian Tax Office (ATO). The ATO was owed a superannuation guarantee charge debt in respect of those subcontractors that would ordinarily receive priority under sub-section 556(1)(e) over unsecured debts.

The Liquidator made realisations, in the course of which he retained solicitors, data-extraction specialists and a debt collection agency. He consequently sought directions from the Court regarding remuneration, reimbursement of expenses and proper distribution of the Trust’s assets.

Decision

Remuneration

The Court started from the general proposition that liquidators of a corporate trustee were ordinarily entitled to receive ‘reasonable’ remuneration and have their expenses paid out of trust assets. However, those were ultimately subject to court approval (exercising its inherent equitable jurisdiction) and liquidators bore the onus of justifying the particular amounts claimed. The usual procedure of approval by resolution of the creditors or a committee under the Corporations Act does not apply where trust assets are concerned.

In this case, the liquidator’s expenses were reasonably incurred and thus he was entitled to draw on the trustee’s indemnity. However, a more controversial conclusion was reached on what was ‘reasonable’ remuneration. The Court first observed that it had a ‘very wide discretion’ in fixing remuneration and is not bound to observe a liquidator’s standard hourly rates, particularly in smaller liquidations where ‘questions of proportionality, value and risk loom large’.

The Court ultimately settled on allowing the liquidator remuneration of approximately 14% ($30,000) of realisations, taking into account the following considerations:

  • Justice Brereton’s first inclination was to allow 2% ($4,236), reflecting the very limited work undertaken by the liquidator in respect of realisations as a result of ‘transferring’ much of the risk to his solicitors and the debt collection agency.
  • However, an allowance of 15% ($16,647) on distributions, although ‘unusually high’, would reflect the insolvency’s complicating factors evidenced by the liquidator having to seek court directions twice.
  • Further, an additional amount should be allowed to ensure the Court did not discourage liquidators from taking on small but difficult liquidations.

The Court also cited other cases where a 20% allowance was described as a ‘significantly higher percentage than seems to have been regarded as conventional’ and a 5% allowance would ‘require special circumstances’ to justify. There was no evidence before the Court regarding the costs of running an insolvency practice (such as staff and rent) and whether remuneration of $30,000 for the work undertaken is viable for the practice.

Distribution priority

Although the distribution of an insolvent company’s assets among creditors would ordinarily be governed by the statutory priorities under section 556, these had no application in circumstances where the Company only held assets in its capacity as trustee (ie held no assets for its own benefit).

Instead, the creditors ranked side by side and shared equally in the remaining assets. Justice Brereton reasoned as follows:

  • The trustee (previously the Company and now the liquidator) held a lien over all of the Trust’s assets through which it was indemnified against all liabilities incurred in its capacity as trustee (including liabilities to creditors). Courts have long recognised that Trust creditors are entitled to subrogate onto the trustee’s lien.
  • The trustee’s lien operates akin to a fixed and floating charge, as opposed to attaching to any particular asset or securing any particular liability.
  • The lien’s nature, alongside the fact that the amount it secured and parties whom shared in it would likely vary over time, supported the view that multiple creditors had an equal right to enforce the lien and therefore share in any assets it secured.

Superannuation guarantee charge

Even if the statutory priorities did apply, the Court ruled that the ATO’s superannuation guarantee charge claim did not receive any priority because the subcontractors were not ’employees’ for the purposes of section 556.

The charge was payable under the SGA Act, sub-section 12(3) of which deems an ’employee’ to include a person working under a contract that is wholly or principally for the labour of that person. However, that definition only applied ‘for the purposes of this Act’. Accordingly, while the subcontractors were employees for the purposes of the SGA Act, they fell outside the corresponding definition under sub-section 556(2) of the Corporations Act, that being a person who is an employee of a company, whether remunerated by salary, wages, commission or otherwise.

Since the term ’employee’ was used elsewhere in section 556 (for example, in relation to leave entitlements), it was inappropriate to apply the expanded definition of employee under the SGA Act to the Corporations Act.