For some time liquidators have been without a great deal of guidance as to how to approach the sale of trust assets where a corporate trustee has entered into liquidation. Generally, when such an appointment occurs, the trust deed will provide for an automatic vacation of the trustee’s position. Clearly, where a company holds assets in its capacity as trustee, it has a right of indemnity against the trust in respect of any and all debts it properly incurs in that capacity. However, that does not of itself confer a power of sale on a liquidator of a corporate trustee who enters liquidation because at that point (in most cases), the corporate trustee is no longer the legal owner of the property. To get around this issue, for the most part, in practice, the industry has approached the realisation of such assets by, for example:

a) appointing (or having a secured creditor appoint) a receiver over the trust assets;

b) obtaining court orders for the sale of the trust assets by the liquidator facilitated by the liquidator’s broad powers under s 477 of the Corporations Act 2001 (Cth) (Corporations Act);

c) making facilitative amendments to the trust deed prior to the appointment of an external administrator; and

d) particularly in the case of trusts with insignificant assets, seeking the consent of trust beneficiaries for the sale to occur and essentially hoping that nobody will contest the issue.

Once trust assets are sold and remitted to the liquidator pursuant to his or her right of indemnity, naturally, the industry practice has been for the liquidator to treat those proceeds as property of the company and thus distributed according to the priority regime set out in ss 555, 556, 560 and 561 of the Corporations Act. Such practices were supported by, for instance, Re Enhill[1],  and have thus far been the accepted industry practice. However, a recent spate of decisions by various first-instance courts around Australia have thrown into serious doubt whether this is correct. That is, whether the priority regime set out in the Corporations Act applies at all to the proceeds of the sale of trust assets, or whether those proceeds are to be distributed to trust creditors pari passu (meaning, shared equally - without legislatively created priorities). The implications for this confusing state of affairs are obvious.  

It is expected that the above question will soon be authoritatively answered in proceedings known as Martin Bruce

Jones as in his capacity as the liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) ACN 085 230 486 v Matrix Partners Pty Ltd.[2] 

This article is co-authored by the Plaintiff’s solicitor, Lee Christensen, and the Defendant’s solicitor, Bonnie Scovell in those proceedings. The purpose of this article is to inform the insolvency and legal industries as to the existence of these proceedings and the likelihood of, hopefully, a resolution of these questions in the short-term.

How did this case come to be the vehicle for determination of these issues?

Essentially, right place-right time.

Killarnee Civil & Concrete Contractors Pty Ltd ACN 085 230 486 (In Liquidation) (Killarnee / the company) had a singularly untypical life as a mining contractor in Western Australia in that it came from humble beginnings to become a large and successful business, with huge profits, before burning with the sudden drop in iron ore prices and the end of the construction phase in the gas industry. Killarnee acted at all times as trustee of a discretionary trust (the Trust), and at no time conducted any business other than in its capacity as trustee. The terms of the Trust are what one might consider fairly ordinary. Importantly, it contained the usual term that upon the trustee (where a company) entering into liquidation - but not administration - it would cease to be trustee of the Trust.

The company went into administration and subsequently liquidation under the control of Ferrier Hodgson’s Martin Jones, Ben Johnson and Darren Weaver (the Liquidators). Under their stewardship, the assets of the company were liquidated and certain priority creditors were paid. There remained (and remains) a relatively significant sum of monies available for distribution to unsecured creditors. Matrix Partners Pty Ltd (an accountancy firm in Subiaco, Western Australia) (Matrix) is one such creditor.

Once the dust had settled on the realisation of the company’s assets and payment of some priority claims, a question arose as to whether in certain circumstances the secured creditor of the company could be subrogated (for a number of reasons) to various claims against Killarnee which enjoyed priority under s 561 of the Corporations Act. Prudently, the Liquidators decided to seek directions from the Federal Court of Australia as to:

a) the secured creditor’s position as to potential subrogation;  

b) seeking approval of the disposal of assets in the winding up; and 

c) whether a liquidator of a trustee company must, as suggested by the common practice, seek some facultative order of a court or the intervention of a receiver in order to realise trust assets.

(The last question was thrown in for good measure, since it’s seen as an issue of great irritancy and additional cost to most in the industry).

The proceedings seeking directions were duly filed in the West Australian Registry of the Federal Court in 2016, in anticipation of a not untypical procedure and debate with the Court on what seemed to be mundane (but interesting no less) topics. During the programming phase of the proceeding, shockwaves were sent through the industry when Brereton J of the Supreme Court of New South Wales handed down his decision in Re Independent Contractor,[3]  which held that in the winding up of a corporate trustee, the proceeds of trust assets cannot be distributed to trust creditors in accordance with the priority regime set out in the Corporations Act. This changed the landscape of the Killarnee proceeding (including for the secured creditor), necessitating a reformulation of the questions to be posed to the Court and to give all interested parties an opportunity to be heard on the question. As it turned out, nobody did seek to be heard, and so Lee Christensen submitted before Siopis J that, amongst other things, the decision in Re Independent Contractor was, with respect, incorrect. His Honour duly reserved his decision.

Shortly thereafter, Farrell J handed down his decision in Woodgate[4]  siding with Brereton J’s views in Re Independent Contractor, which necessitated additional written submissions. The Liquidators and the secured creditor settled back to see what Siopis J would make of all of this. Enter Robson J who handed down his decision in Re Amerind[5],  who also sided with Re Independent Contractors. The appeal in Amerind was heard on 19 July 2017.

Given the number of first instance decisions that are now at odds with each other, on 8 May 2017 the Killarnee proceeding was referred to the Full Court of the Federal Court to be heard at first instance pursuant to section 20(A) of the Federal Court of Australia Act 1976 (Cth), given the great importance of having quick and authoritative determination of the issues. The Commonwealth Department of Employment and the secured creditor of Killarnee have been granted leave to intervene in the proceeding and are in support of the Liquidators’ position. Matrix is a contradictor in the proceeding because it, together with other unsecured creditors, stands to receive a higher rate of recovery in a pari

passu distribution.

The Full Court will hear the arguments of the parties in Killarnee on 10 & 11 August 2017. It is hoped that a decision will be handed down relatively quickly. 

Put simply, what are the competing views?

On one side of the argument, the right of the corporate trustee to enforce its right of indemnity (and the supporting equitable lien) is “property of the company” within the meaning of that phrase and the meaning of ‘property’ in the relevant sections of the Corporations Act, which enliven the priority regime set out therein. Further, once such proceeds are paid to the company to satisfy the indemnity, those proceeds are also the “property of the company”. Therefore, either way, the proceeds of sale of trust assets are the property of the company and thus the priority regime under the Corporations Act applies.

On the other side of the argument, at equity trust creditors share the right to be subrogated to the trustee’s equitable lien to enforce the trustee’s indemnity on a pari passu basis. Assets held by a corporate trustee in that capacity are trust assets (that is, held beneficially for someone else), and the fact that a trustee may have a right of indemnity that is enforceable against such property does not change the essential character of the property as trust property. That is to say that the right of a trustee to enforce its lien and the proceeds of such enforcement does not convert trust property into the trustee’s property, which a liquidator is then entitled (or obliged) to distribute in accordance with the priority regime in the Corporations Act. It remains the beneficial property of the trust and ought to be distributed to trust creditors accordingly (that is, pari passu).

What are the implications of what might be the decision?

If the Liquidators’ central arguments are accepted by the Courts, the industry status quo will essentially prevail and liquidators ought be comfortable continuing to deal with the proceeds of trust property in accordance with the priority regime created by the Corporations Act. It remains to be seen what the Court will determine in respect of whether and what facultative steps a liquidator must take to effect sale of such assets, but that is really the secondary issue in the case since liquidators generally, in some fashion, already do so.

If Matrix’s arguments are accepted then there will be significant industry implications in particular for those creditors who enjoy priorities under the Corporations Act such as employees (including the Commonwealth Department of Employment’s right of subrogation in relation to same where it pays employee entitlements via FEG) and will expose employees who are presently employed by trading trusts. In this event, perhaps the legislature will intervene – perhaps even retrospectively.

 

This article was co-authored by Bonnie Scovell at Edwads Mac Scovell.