How should the liquidator of an insolvent trustee company ensure payment out of trust assets of the entirety of his or her remuneration and expenses?

According to the Federal Court[1], from the outset the liquidator should seek appointment as a receiver of the trust assets rather than rely upon pre-appointment amendments to the trust deed designed to keep the trustee in office after liquidation starts. The right of indemnity does not confer a self-help right upon an insolvent trustee to sell trust assets for the payment of creditors.

The facts

Mr Giovanni Carrello was the liquidator of Gembrook Investments Pty ltd (in liq). Gembrook was the trustee of the Bailey Family Trust. On the day prior to Mr Carrello’s appointment, a power of amendment in the terms of the trust was exercised to prevent the trustee of the trust being removed by the appointor if a liquidator was appointed to the trustee. The amendment also provided that all remuneration and expenses of the liquidation would be expenses properly incurred by the trustee in administration of the trust and payable from the trust fund.

Mr Carrello was also the liquidator of Caneland Holdings Pty Ltd (in liq). Caneland was the trustee of the Sutherland Family Trust. Six months into the liquidation, an amendment to the trust was made to permit the trustee to remain in office once a liquidator was appointed to the trustee until the affairs of Caneland were wound up by the liquidator.

Both entities only traded in their capacity as trustees and only had trust creditors. There were insufficient trust assets to pay trust creditors.

Mr Carrello sought orders authorising the distribution of the realised proceeds of the trust assets to priority creditors in accordance with the priority rules stated in section 556 of the Corporations Act 2001 (Cth) and to pay any balance to ordinary unsecured creditors. He also asked the Court to determine the quantum of his remuneration.

Limits to the power of amendment

In both decisions, the Court questioned whether the exercise of the power of amendment under the terms of the trust was contrary to the requirement that a power conferred on a trustee by a trust deed must not be exercised for a purpose or intention not justified by the trust deed.[2]

In Gembrook and Caneland, the Court noted that the amendment power appeared to have been exercised in the interests of creditors and the trustees rather than the beneficiaries of the trust. This was because the purpose of the amendment in each case was to enable the liquidator to continue to control each entity in order to sell the trust assets and then apply the proceeds by way of exoneration on the basis that the trustee had a right to be indemnified out of the assets of the trust to the extent of liabilities incurred by the trust.

Ultimately, the Court did not determine this issue, as there was no challenge to the validity of the amendments by any party (both applications being conducted ex parte after creditors and certain identified beneficiaries were notified).

The appropriate course - appointment of a receiver

The Court unequivocally stated in both decisions that the preferable approach for a liquidator appointed to an insolvent corporate trustee is to seek appointment as receiver of the trust assets in order to realise the trust assets and apply the proceeds in satisfaction of the trustee’s right of indemnity and exoneration. Except for resort to cash funds held by the trustee that can be used for exoneration of trust liabilities, the right of indemnity does not confer a self-help right upon an insolvent trustee to sell trust assets for the payment of creditors; an application for the appointment of a receiver to exercise the trustee’s lien and associated indemnity is the appropriate course.

If a liquidator observes this practice, the court can properly assess whether there are interests of beneficiaries that might need to be provided for, such as in cases where the power to resort to trust assets for exoneration of creditors has been compromised by trustee misconduct. Otherwise, the court is left in a problematic position of having to conduct an ex post facto analysis of whether particular actions were undertaken in the due administration of the trust in order to approve the liquidator’s remuneration and the manner of distribution of proceeds recovered by the sale of trust assets.

The Court ultimately authorised both the distribution and the remuneration and expenses of Mr Carrello under the Court’s power under section 90-15 of the Insolvency Practice Schedule (Corporations) 2016. However, in what should be taken as a lesson to all liquidators appointed to insolvent corporate trustees, the Court did not approve the payment of Mr Carrello’s remuneration and expenses relating to the court applications themselves. The Court stated that had a receiver been appointed, the applications and the complexities associated with them would have been unnecessary.