In the last week, two cases have been handed down regarding funds held on trust in liquidations and liquidators’ fees.
Saker, in the matter of Great Southern Limited  FCA 771 (Great Southern) considered whether funds from floating charge assets held separately for satisfaction of priority employee entitlements were held on trust, and the impact on the liquidators’ fees and secured creditors’ recoveries in the absence of such a trust.
Re AAA Financial Intelligence Ltd (in liq) ACN 093 616 445 (in liq)  NSWSC 1004 (AAA Financial) addressed the entitlement of a liquidator to draw fees from funds which were held by the company on trust.
In summary, the Courts held that:
- A receiver or liquidator holding funds separate from other company assets, for the purpose of satisfying employee’s statutory priority entitlements, does not create a trust. (Great Southern)
- If liquidators receive funds from receivers for the purpose of the receivers complying with their obligation to pay priority employee entitlements from floating charge assets under section 561 of the Corporations Act 2001 (Cth) (CA), the liquidators should distribute those funds in accordance with the usual priorities in section 556. Importantly, this means the liquidators fees and costs will be paid ahead of employee entitlements from the floating property over which the receivers were appointed. (Great Southern)
- The proper time to determine whether there are sufficient assets of the company, for the purposes of paying employee entitlements under section 561 of the CA, is when there is sufficient information available to make the assessment. In this instance, the receivers paid the funds to the liquidators and retired in circumstances where it was unclear whether there were sufficient assets of the company for the payment of employee entitlements. The Court queried whether this meant the receivers had complied with section 561 of the CA, although it was clear in noting that it had only received the liquidators' side of the story. (Great Southern)
- Whether a liquidator can draw fees from trust funds depends on matters including whether the trustee company conducted operations other than as a trustee and the level to which the liquidator’s tasks relate to trust assets. Liquidators should continue to ensure that their fees are reasonable having regard to the tasks undertaken and proportionate to the assets available. (AAA Financial)
The practical lessons are that when keeping aside funds for the purpose of satisfying section 561 CA employee entitlements, practitioners should take into consideration the effect of higher priorities (such as fees and expenses of the liquidation) and remaining company assets. If such matters are not considered, a secured creditor may be required to disgorge funds received from floating charge (or circulating) assets to ensure compliance with section 561 of the CA.
Great Southern: whether funds are held on trust
Last week, the Federal Court handed down the most recent decision in the collapse of Great Southern Ltd (in liquidation) (GSL). In this case, the Federal Court (McKerracher J) considered an application by the liquidators of GSL for directions regarding funds received from the receivers purportedly on trust for payment to employees under section 561 of the CA.
- GSL and its subsidiaries promoted and conducted a number of agricultural managed investment schemes. GSL employed all of the personnel engaged in the activities of GSL and its subsidiaries.
- ANZ Fiduciary Services Pty Ltd (ANZFS) held fixed and floating charges as security trustee for the Club Banks.
- On 16 May 2009, voluntary administrators were appointed to GSL. The voluntary administrators were subsequently appointed as liquidators.
- On 18 May 2009, ANZFS appointed receivers and managers to GSL’s property charged under the fixed and floating charges. At this time, the Club Banks were owed approximately $380 million.
- Following the appointment of the liquidators, the affairs of GSL were ‘protracted and complex’. The receivers recovered all of the debt due to the Club Banks, including their own fees and costs.
- Orders were made on 23 February 2012 that ‘entitled’ the receivers to hold sufficient floating charge property on trust to pay the priority debts and amounts referred to in section 561 of the CA (previous orders).
- The previous orders were subject to the proviso that the receivers were only entitled to hold the floating charge property on trust in the event that they were unable to determine whether the property of GSL available for payment to creditors, other than secured creditors, would be insufficient to pay the priority debts.
- In accordance with the orders, the remaining floating charge property (FC Funds) was transferred by the receivers to the liquidators, and the receivers subsequently retired.
The current proceedings
The key questions in this application were:
- whether the liquidators were bound by an obligation to hold the FC funds remitted by the receivers on trust; and
- how the liquidators should deal with the FC funds if they were not bound to hold them on trust - including whether the liquidators would be acting properly and otherwise justified in treating those funds as amounts to be applied in meeting the unsecured debts of GSL and claims made against GSL in the order of priority established by section 556 of the CA.
The Court agreed with the liquidators’ submission that there was never a trust in respect of the FC funds.
However, the practical issue was that the receivers had kept aside enough funds for the employee’s entitlements and applied the remainder to the Banks’ debts and their fees and costs, however, no funds were kept aside for the liquidators’ fees. The liquidators’ fees and costs (approximately $1.9 million) exceeded the FC fund and any other assets of GSL that were presently available.
The amounts owed to the employees (totalling $1.2 million) rank behind the liquidators’ fees and costs (section 556 of the CA), such that there were insufficient funds to satisfy the employee entitlements in accordance with section 561.
While two former employees of GSL submitted that the reference to a trust in the previous orders was intended to protect their entitlements in priority to the liquidators’ fees, the liquidators argued that the order of priorities was properly dealt with by sections 556 and 561 of the CA, under which the costs and fees of liquidation were in priority to the employee’s entitlements.
The Court considered in detail the nature of a trust as against the liquidators’ statutory duties. Ultimately, the Court determined that the FC funds were held pursuant to statute, not as trustee under a trust. As such, the ordinary statutory priority regime applied.
The Court was unwilling to accept the alleged role of the liquidators as trustees. Rather, the Court determined that the liquidators had a statutory obligation that could not be meaningfully added to by the recognition of a trust obligation.
As there was no trust found, the liquidators were entitled to carry out their duties in the normal manner, including distributing GSL’s assets (and those of its subsidiaries) in accordance with the statutory regime in sections 556 and 561 of the CA. The liquidators’ fees therefore held priority such that the FC fund was insufficient to discharge the employee entitlements.
In this regard, the Court noted that while the payments out of the company assets made by the receivers may have been premature and should possibly have been postponed pending determination of the issues raised by s 561 CA, the judge emphasised that ‘it is by no means clear on the evidence before me with only one side of the story’1
Importantly, the judge held that the liquidators should as part of their duties examine this issue and take appropriate steps if there was potential non-compliance with section 561 of the CA. In doing so, the Court held that the onus reverted back to the liquidators to ensure that section of the 561 CA had been satisfied.
Re AAA Financial: Liquidator’s right to draw remuneration out of trust assets
There are a number of established principles relating to the right of a liquidator to be paid her or his costs and expenses out of trust assets. These depend on the role of the particular company in liquidation.
- Where the company is a trustee of a trading trust and has no other activities, liquidators are entitled to be paid their costs and expenses out of the trust assets for their work in administering the trust assets and for general liquidation work.2
- Where the company does not act solely as trustee, the costs and expenses for work done in relation to trust assets that may also have been done in relation to the winding up of the company, should be borne primarily out of the non-trust property of the company (to the extent those assets permit).3
- Liquidators are entitled to be indemnified out of the trust assets for their costs and expenses, but only to the extent that those expenses are referable to the trust assets.4
- Where liquidators do work which would entitle them to remuneration as both the liquidator of the company and recovery from the trust assets, there should be a contribution between the two funds. However, if there are no assets of the company available, the expenses may be payable solely from the trust assets.5
These principles provide a useful framework to determine whether or not a liquidator is entitled to recover their costs of liquidation from the trust.
AAA Financial concerned the practical application of these principles.
In this matter, the company acted both as trustee and in its own capacity. The liquidator was therefore entitled to be remunerated out of the trust assets for work that was referable to the trust assets of the company.
However, the Court did question the reasonableness of remuneration in the context of the work undertaken and the value of the assets (the amount of fees was only slightly less than the value of the trust assets).
This case provides a reminder that in assessing the reasonableness of fees, the courts will have regard to whether they are proportionate with the value of the trust assets.