The Victorian Court of Appeal and a Full Court of the Federal Court have each recently held that the statutory priority regime applies to the winding up of companies that act as trustees of trading trusts, confirming that employee claims and a liquidator’s remuneration and costs are priority debts. Special leave to appeal the Court of Appeal’s decision has been sought.

A common enough business structure is for a business to be carried on by a company on trust. In the course of running the business, the company acquires assets and incurs liabilities in furtherance of the trust. Inevitably, some of these businesses fail, and the assets are insufficient to meet creditors’ claims. This is nothing new. It is therefore surprising that we are still grappling with how the proceeds of the assets held on trust should be distributed amongst the company’s creditors. Does the priority regime in the Corporations Act 2001 (Cth) apply? Three approaches have emerged:

  1. Yes, and the trust assets may be divided amongst trust and non-trust creditors alike: Re Enhill Pty Ltd [1983] 1 VR 561 (Full Court);
  2. Yes, but the trust assets are only available to meet liabilities incurred in furtherance of the trust: In re Suco Gold Pty Ltd (In Liq) (1983) 33 SASR 99 (Full Court);
  3. No, the corporate trustee’s equitable rights relating to the trust assets are property held on trust outside the operation of the Act and should be divided pari passu among the trust creditors: Re Byrne Australia Pty Ltd and the Companies Act [1981] 1 NSWLR 394 (single judge, Needham J); Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106 (single judge, Brereton J).

Numerous recent decisions of single judges,[1] including in Victoria,[2] had adopted the third approach. Were they right to do so against the weight of authority of two intermediate appellate courts? The proper approach is important, not in the least because the third approach denies the statutory priority afforded to employee claims and a liquidator’s remuneration and expenses.[3]

In decisions that are sure to be welcomed by liquidators, unions and the Commonwealth, two Full Courts have held that the third approach is wrong. However, they have differed slightly as to which of the first two approaches is right.

First, the Court of Appeal of Victoria, in a unanimous decision of five judges, has held that sections 433, 555 and 556 apply to the disposition of property constituted by a corporate trustee’s right of indemnity against trust assets: Commonwealth v Byrnes & Hewitt [2018] VSCA 41 (Amerind), [275]-[276], [281] (Ferguson CJ, Whelan, Kyrou, McLeish and Dodds-Streeton JJA). The Court identified the difference between In re Suco Gold and Re Enhill, and, tantalisingly, some matters that would have to be addressed in determining which of the two decisions is correct, but did not find it necessary to resolve the question. Instead, the Court simply left Victorian trial judges with a direction to continue to follow Re Enhill: [286].

Shortly after, a Full Court of the Federal Court has held by majority that In re Suco Gold represents the correct approach, and assets held by the company on trust should be used to pay trust liabilities (and only trust liabilities) in accordance with the statutory priority regime: Jones (Liquidator) v Matrix Partners Pty Ltd; in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 (Killarnee), [4], [30], [76], [78]-[79], [101]-[102] (Allsop CJ), [196]-[197], [200] (Farrell J[4]). Liquidators will be relieved to know that their expenses and remuneration are ‘trust liabilities’ in this context: [105]-[107] (Allsop CJ), [201], [222] (Farrell J).

Killarnee also provides a reminder to liquidators to be conscious of potential limitations in their power to dispose of trust assets. In Killarnee, the effect of the trust deed was that, upon creditors resolving that the company be wound up, the company ceased to hold office as trustee of the trust. Such provisions in trust deeds are common. The Court unanimously held that, in those circumstances, the liquidators did not have the power to dispose of the trust assets as they had. In order to sell the property, the liquidators had to seek an order permitting them to do so: [91] (Allsop CJ), [139] (Siopis J), [198] (Farrell J).

Implications

The decisions have important implications for liquidators. One only has to consider the common enough scenario involving a company that carries on businesses on different trusts, or a company that also carries on business on its own account. Neither Amerind nor Killarnee involved such a situation. However, the consequences of the approaches can readily be seen.

  1. If directions are sought in the Supreme Court of Victoria, the Re Enhill approach applies. The Re Enhill approach would permit the liquidator to realise assets held by the company, whether on separate trusts or on its own account, to create a single fund from which all claims are paid in accordance with the statutory priority regime. Because there is no need to distinguish between the debts, the liquidator need not go to the trouble of attempting to attribute costs and remuneration to one or other of the trusts or funds;
  2. If directions are sought in the Federal Court, the In re Suco Gold approach applies. The approach taken in In re Suco Gold/Killarnee dictates that separate funds should be administered for the benefit of the separate creditors ([103] (Allsop CJ)) in accordance with the statutory priority regime. As to liquidators’ costs and remuneration, Allsop CJ approved the approach taken in In re Suco Gold, for the liquidator to make an estimate of the work and expense involved in the liquidation insofar as it relates to each trust, and if no apportionment is possible, to divide the expenses equally: [105]-[106]; and
  3. As to other courts, if it is held that the Re Byrne approach applies (which seems unlikely in the face of Amerind and Killarnee), that approach also dictates that separate funds should be administered for the benefit of the separate creditors, but denies the statutory priority afforded to, amongst other claims, a liquidator’s costs and remuneration and employee claims (and ‘subrogated’ Commonwealth Fair Entitlements Guarantee Scheme payment claims). However, the court might follow the approach preferred by Farrell J in Killarnee (see footnote 4) and give directions having the effect of conferring priority on those claims.

Special leave to appeal to the High Court has been sought in Amerind. In the meantime, perhaps the different outcomes depending on where on William Street directions are sought and obtained will lead to forum shopping in Victoria. Who knows. For now, the one thing that we can be sure of is that liquidators, unions and the Commonwealth will welcome the decisions in Killarnee and Amerind. It will be interesting to see whether other courts (and in particular, the Supreme Court of New South Wales) follow suit, and what ultimately comes of Amerind in the High Court.