The Victorian Court of Appeal decides that the Corporations Act priority regime does apply to trading trusts.
The law is now clear. Or is it?
For the last two years and six days, insolvency practitioners and other stakeholders involved in the liquidation of trading trusts have been frustrated by what should be a very straightforward question.
If the company in liquidation carries on business through a trust structure, as many do, what is the order of priorities that the liquidator must apply when making distributions to creditors?
Since mastodons roamed the plains, liquidators have generally adopted the position that when winding up all companies, creditors are paid under the priority scheme imposed by section 556 of the Corporations Act 2001 (Cth) (Corporations Act) and its predecessors. It’s still the liquidation of a company and trust creditors are still creditors - so 556 must apply whether it is a trust or not. Priority creditors (who are generally employees of the company) get paid ahead of non-priority creditors. Why should a company who is the trustee of a trust be any different?
The laws of physics were inverted on 23 February 2016 when Brereton J of the New South Wales Court of Appeal handed down his revolutionary decision in Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2)  NSWSC 106. His Honour held that trading trusts were different. Very different. The liquidator must wind up their affairs under general principles of trust law, rather than corporations law. Claims of creditors are not governed by section 556, so the statutory priority regime does not apply. There are no priority creditors. There are just trust creditors who are paid under principles of trust law.
Fourteen months later, Robb J in the Victorian Supreme Court handed down his decision in Re Amerind Pty Ltd (in liq)(rec and man apt)  VSC 127. His Honour held that Brereton J was correct. Trusts are indeed a different species. Robb J held that:
- a corporate trustee’s right to be indemnified from trust assets is not “property” of that company for the purposes of the Corporations Act; and
- as such, section 556 does not apply to distributions made by liquidators to creditors of trustee companies. The general law of trusts must be applied. There are no priority creditors as recognised by section 556.
Yesterday, the Victorian Court of Appeal overturned Robb J’s decision. In a joint judgment delivered by the five judge bench who heard the appeal, the Court of Appeal held that:
- a corporate trustee’s right to indemnity is, in fact, the property of that company for the purposes of the Corporations Act; and
- as a result, the statutory priorities do apply to any distributions made by liquidators appointed to corporate trustees.
So we all emit a collective sigh of relief in knowing that this has this just been a two year blip. We can throw away those dusty textbooks on Trusts Law because we are now back to where we always thought we were on this fundamental question. A joint judgment of five judges in very clear terms must equal good law.
Or does it?
Sadly, it does not. Whilst yesterday’s decision is a decisive and important victory for priority creditors, the war will continue to play out for some time to come.
In particular, the following battles are yet to be fought:
- In August 2017, the Full Federal Court in Western Australia heard both sides of this vexed argument in Re Killarnie Civil and Concrete Contractors (being proceedings WAD181 of 2016). The Court is yet to hand down its decision. If it is consistent with the Victorian Court of Appeal in Amerind, we will have considerably greater certainty on the point. If it is not, the point will be more uncertain than ever!
- There is a good chance that the question will end up before the High Court within the coming year or so. Either Amerind or Killarnie is likely to be the subject of an application for special leave - perhaps both will. If so, it will give the High Court a chance to review its earlier decision in Re Octavo (1979) 144 CLR 360. In determining this question either way, much will turn on the view the High Court ultimately takes on that decision.
- It still remains open to the Commonwealth Parliament to change the law and make the matter certain - one way or another. This must be the best long term solution for all.
For the moment, insolvency practitioners would be best advised to proceed on the basis that the law of the land is that which the five judges of the Victorian Court of Appeal said it to be in the course of yesterday’s judgment. For now, the liquidation of a trustee company is no different to any other company and priority creditors get paid in priority.
For now, anyway… Let’s see what happens in Killarnie before we all get too comfortable…