This week’s TGIF is the first of a two-part series considering Commonwealth v Byrnes [2018] VSCA 41, the Victorian Court of Appeal’s decision on appeal from last year’s Re Amerind decision about the insolvency of corporate trustees.

This first part looks closely at what the Court of Appeal did – and did not – decide in relation to how receivers and liquidators should deal with property recovered pursuant to an insolvent corporate trustee’s right of indemnity.

What happened?

Amerind Pty Ltd (the company) manufactured and distributed decorative and architectural finishes as the trustee of a trading trust. The company used trust money to pay trust creditors directly – it did not pay creditors out of its own funds and then seek reimbursement from the trust. The company also had no non-trust creditors.

Administrators were appointed after the company’s bank cancelled its facilities. The bank appointed receivers the same day, and later the company was voted into liquidation. In the course of the liquidation, the Commonwealth advanced nearly $4m for wages and entitlements to the company’s former employees.

The Central Issue

After they were appointed, the receivers traded on and generated surplus of around $1,600,000.

The receivers sought directions on the issue of whether, in distributing the receivership surplus, they were required to comply with the statutory priority regime applied by of s 433 of the Corporations Act 2001 (Cth). That provision requires that a receiver must pay out of property coming into their hands debts in accordance with the statutory priorities in s 556 of the Corporations Act.

As explored in a Corrs thinking piece from 2017 (Federal Government Loses Out On Corporate Collapse), if the statutory priorities regime did not apply, the company’s trust creditors would be paid before the Commonwealth, which would be left out of pocket for the amounts it had paid to former employees for wages and entitlements.

The central issue depended in turn on two questions:

  • Was the insolvent corporate trustee’s right of indemnity from trust assets “property of the company” for the purposes of s 433 of the Corporations Act?
  • Did the receivership surplus fall within the ambit of property which is secured by a “circulating security interest”?

This week’s TGIF deals with the first question, while next week’s instalment will address the second.

First instance decision

At first instance, the primary judge held that the priorities regime did not apply because the trustee’s right of indemnity did not form part of the trustee’s personal estate, and so was not “property of the company” for the purposes of s 433 of the Corporations Act.

The Court of Appeal overturned the primary judge’s decision, holding that:

  1. the corporate trustee’s right of indemnity by way of exoneration is property of the company within the meaning of s 433; and
  2. the statutory priority regime applies to the distribution of the proceeds of the right of indemnity.

What the Court of Appeal did decide

The Court of Appeal held that High Court authority[1] had established that the trustee’s right of indemnity was in the nature a proprietary right. Despite academic criticism of that authority, it was binding and must be followed.

The Court of Appeal held that once it was acknowledged that the right of indemnity was property of the insolvent corporate trustee, it had to follow that the right of indemnity was “property of the company” and that the statutory priorities regime applied.

Accordingly, subject to consideration of the second key issue in next week’s TGIF, the surplus held by the receivers had to be distributed according to the statutory priorities regime.

What the Court of Appeal did not decide

Because the company only ever had trust creditors, it was strictly unnecessary for the Court of Appeal to decide the further vexed question of whether the proceeds of the trustee’s indemnity should be:

  • distributed to satisfy the claims of trust creditors only; or
  • distributed to satisfy the claims of all creditors who had claims against the trustee, however they arose.

This question has also been the subject of conflicting authority. A key Victorian decision had held that the proceeds of the indemnity are available to all creditors[2]. Others found that the question depends on what kind of indemnity the trustee is exercising[3] – that is:

  • Where a trustee exercises a right of exoneration – where the trustee uses trust property to directly pay debts incurred in the course of the trust’s trading activities – proceeds can only be distributed to creditors of the trustee whose claims arose the trust’s trading activities;
  • Where a trustee exercise a right of recoupment – where the trustee reimburses themselves from trust property having paid debts of the trading trust out of its own money – proceeds can be distributed all creditors of the trustee, however those claims arose.

The Court of Appeal simply noted that there were “considerations which support” both views without venturing any conclusion on the issue.

Comment

The immediate consequence of the decision is that, where a receiver (or liquidator) holds funds by reason of exercising the trustee’s right of exoneration, those funds must be distributed according to the statutory priority regime set out in the Corporations Act.

This position applies at least in Victoria, as there is authority in New South Wales that indicates that the statutory priority regime does not apply in the same situation[4].

As the Court of Appeal stated in this decision, there are many “competing considerations at play, all of which are supported to some degree in the diverse relevant authorities”. The following table summarises the different positions taken at different times by different courts on these different issues:

Clearly this area of law is in a state of flux. Precise conclusions are difficult to draw and decisions relating to distribution of trust property will need to be the subject of careful advice.

The stage may be set for the High Court to consider these difficult questions soon, and provide the certainty, clarity and consistency this area of law needs.