The Federal Court has recently handed down a decision that clarifies the power of receivers to administer trust property under a debenture. In Benton, in the matter of Mackay Rural Pty Ltd (Receivers and Managers Appointed)  FCA 1285, the Federal Court confirmed that section 420 of the Corporations Act 2001 (“the Act”) confers upon receivers a power to dispose of trust property, provided that this is necessary for the purpose for which they have been appointed.
In this case the defendants were directors of Mackay Rural Pty Ltd (“Mackay”). Mackay was the legal owner of a property held on trust for the Amourgis Unit Trust, which operated as a dairy farm in Tasmania (“the Property”). The National Australia Bank (“NAB”) held a registered mortgage over the Property and a registered debenture (“Debenture”) over all of the assets of Mackay.
Upon Mackay’s default NAB appointed receivers (“Receivers”) pursuant to the Debenture in August 2014, and later, pursuant to the Mortgage. The Receivers desired to sell the Property and brought an application for declaratory orders pursuant to section 418A(1) of the Corporations Act (Act) that the appointment of the Receivers under the Debenture was effective over all of the assets of Mackay, including the Property and/or any right of indemnity in favour of Mackay over the assets of the Amourgis Unit Trust (“Indemnity”).
Beach J considered a number of issues including whether the Receivers were entitled to possession of the Property and to conduct a sale of the Property. This led to the question of whether the Debenture extended to assets held on trust by Mackay, including the Property.
Whilst Beach J accepted that the appointment of Receivers under the Debenture did not apply to trust assets, he held that enforcement could proceed under Mackay’s equitable right of indemnity against trust assets as this was a personal right and asset of Mackay that was covered by the Debenture. This was even though the Property itself was not specifically charged under the Debenture. In any event, Beach J noted that the Property was picked up by the mortgage (even though the Property was held on trust).
Even if the Property was specifically secured by the Debenture, Mackay as trustee had a right of indemnity against the Property that was a personal asset subject to the Debenture. This right of indemnity entitled Mackay to apply trust assets to discharge or secure the liabilities of Mackay as trustee, including NAB’s debt on the condition that this was a trust liability.
The Receivers on behalf of Mackay, in exercising Mackay’s right of indemnity could proceed under the trust deed to enter into possession and sell the Property, rather than under the Debenture directly. Beach J further noted that a trustee who has a right of indemnity also has the benefit of an ancillary equitable lien over the trust assets as a means of securing or enforcing its right of indemnity.
Mackay clarifies the position of receivers who face a situation where property is held on trust and it is unclear whether the security under which the receivers are appointed extends to the trust property. So long as the trustee has a right of indemnity against the trust property, this right will apply either under the trust deed or under section 420 of the Act.