Summary

  1. In this article, we consider a number of recent authorities on whether an insolvent trustee company’s right of indemnity in trust assets is property of the company for the purposes of the Corporations Act 2001 (Cth), and the application of statutory priorities in the winding up of insolvent trading trusts. These authorities provide some clarification on the legal position for insolvency practitioners, but to ensure a consistent and coherent application of law, there needs to be definitive clarification from the High Court or the Parliament.
  2. Until the law is clarified, the prudent course for insolvency practitioners appointed to an insolvent trustee in NSW remains (as noted in http://www.mccabes.com.au/insolvent-trading-trusts-twilight-zone/) to apply to the relevant Court to be appointed as receiver of the assets of the trust, in order to be able to sell and otherwise deal with the assets of the trust (and to ensure that costs, expenses and remuneration incurred acting as receivers and managers can be paid from the assets of the trust).

Background

It is uncontroversial that a trustee has a right of indemnity from trust assets for liabilities incurred while acting as trustee. It is also uncontroversial that property held on trust by a trustee for beneficiaries is not available to creditors of the trustee in insolvency, except to the extent that the liabilities were incurred while acting as trustee, having the effect of subrogating the creditors to the trustee’s right of indemnity.

The controversy, however, arises in relation to the question of the priority to be provided to the creditors subrogated to the insolvent trustee’s right of indemnity. Are those unsecured creditors to be treated on an equal (pari passu) basis or are those creditors to be paid from the funds recovered pursuant to the right of indemnity in accordance with the priorities in section 556(1) of the Corporations Act 2001 (Cth) (the Act). For the insolvency provisions of the Act to apply, the insolvent trustee company’s right of indemnity from the assets of the trust for liabilities incurred while acting as trustee must be considered to be property of the company within the meaning of the Act.

Property of the Company

Until around 2016, the question of whether the trustee’s right of indemnity is property of the company for the purposes of the priorities in winding up was dealt with in the case of Re Suco Gold (1983) 7 ACLR 873, which provided that the proceeds of the trust should be distributed in accordance with the priorities provided for in the Corporations legislation (section 556 of the Corporations Act 2001 (Cth)).

However, in a series of cases handed down by Brereton J in the NSW Supreme Court, and cases in the Federal Court of Australia, this position was reversed:

  • In Stansfield DIY Wealth Pty Limited [2014] NSWSC 1484, Brereton J found that a trustee company’s equitable lien over trust assets does not give rise to a beneficial interest in the trust assets, such that the assets of the trust cannot be considered to be “property of the Company” for the purposes of section 477(2) which provides the power of sale.
  • In Re Independent Contractor Services [2016] NSWSC 106 (Re Independent Contractor), Brereton J held that since section 556 of the Corporations Act only applies to “property of the Company”, the liquidators of the corporate trustee should distribute any proceeds from the realisation of trust assets amongst creditors in accordance with trust principles, rather than the priorities in section 556(1) of the Act.
  • In Robert Kite and Mark Hutchins in their capacity as liquidators of Mooney’s Contractors Pty Ltd (in liq) & Anor v Lance Mooney & Anor [2017] FCA 653, Markovic J in the Federal Court of Australia followed the decision of Re Independent Contractor Services and held that the trustee company’s indemnity and lien were not property of the company and accordingly the statutory priorities did not apply.

Victorian Court of Appeal decision in Commonwealth v Byrnes (in their capacity as joint and several receivers and managers of Amerind Pty Ltd (recs and mgrs. apptd) (in liq)) [2018] VSCA 41

On 28 February 2018, the Victorian Court of Appeal held that an insolvent trustee company’s right of indemnity in trust assets is property of the insolvent company for the purposes of the Corporations Act 2001 (Cth), such that the priorities in section 556(1) of the Act apply to the creditors of the trust.

In determining the appeal, the Victorian Court of Appeal returned to the position in Re Suco Gold, having relied on a number of authorities, particularly the decision of the High Court in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 (Octavo). In Octavo, the High Court held that payments by a trustee to a trust creditor (exercising the right of indemnity) were recoverable by the liquidator of the trustee company as preference payments.

The Victorian Supreme Court held that “Octavo not only establishes that the right of exoneration is property which passes to the trustee in bankruptcy or the liquidator, but also that the respective statutory regimes must apply to the disposition of that property…” ([2018] VSCA 41, [100]). The Court noted that Octavo had been applied as authority for these propositions in subsequent cases including Re Enhill Pty Ltd [1983] 1 VR 561, and Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99.

After considering the authorities in detail, the Court held that the trustee’s right of indemnity is property of the company, and therefore, that the insolvency legislation must apply, stating that “the first and most compelling reason for this is that High Court authority appears to require it. The High Court applied the preference provisions in Octavo. If the payments made in that case had not come from assets otherwise subject to the statutory insolvency regime there could not have been any preferential effect. Instead, there was a preference as between Octavo and other creditors ‘entitled to a share in the money paid’ ([2018] VSCA 41, [277]).

Full Federal Court decision in Jones (liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40

On 21 March 2018, the Full Court of the Federal Court held that while it is “clear” that a corporate trustee’s right of indemnity is property of the company, the exercise of that proprietary right may require the leave of the court where it involves the sale of trust property. The Full Federal Court held that:

  1. The liquidator of the insolvent trust company (where that company had been removed as trustee on insolvency by operation of the relevant trust deed) did not have the power to sell trust assets pursuant to section 477 of the Corporations Act 2001 (Cth), on the basis that, while the liquidator has the power to deal with assets of the company based on the proprietary interest to secure the trustee’s right of exoneration, that power does not authorise the liquidator to exercise the lien and sell the underlying assets which had been held on trust for the beneficiaries ([2018] FCAFC 40, [89]-[91]);
  2. “On the clear authority of Octavo Investments, Buckle and Bruton, the proprietary interest of the trustee in the assets otherwise held on trust in support of the right of indemnity is property of the company. Its exercise may require the leave of the Court, involving the sale of trust property” ([2018] FCAFC 40, [95]). Therefore, the statutory order of priorities (including in section 556 of the Act) should apply to assets under the control of the liquidator of the trustee company.

We note that Siopsis J dissented in relation to the question of whether the proceeds of the trust assets should be applied in accordance with the regime in the Act, stating that “in my view, it does not follow from the fact that, in Octavo Investments Pty Limited v Knight (1979) 144 CLR 360 and other cases, an insolvent trustee company’s right of indemnity in support of its right of exoneration, has been held to be “the property” of the company which is a proprietary interest held beneficially, that the statutory priority regime in section 556 of the Corporations Act applies to the assets which the insolvent company holds in its capacity as trustee upon which the right of indemnity in respect of the right of exoneration operates” ([2018] FCAFC 40, [160]).

While the issues have been further progressed by these recent cases, the dissenting part of the judgment delivered by Siopsis J suggests that the key issues in this area are not entirely resolved.

Conclusion

While the decision of the Victorian Court of Appeal in Re Amerind is not binding in NSW, the decision represents the ongoing uncertainty for insolvency professionals and their advisors in relation to the winding up of insolvent trustee companies in state courts, noting that the precedents in NSW remain of the opposite view in relation to how those winding ups are to be conducted.

However, the decision of the Full Court of the Federal Court Australia, does provide some welcome certainty for practitioners in the Federal Court on these issues, although practitioners will still be required to approach the court for guidance on their appointments to insolvent trading trusts (or appointment as a receiver) where a power of sale is sought.

To ensure that a consistent and coherent approach is taken across all courts, there needs to be definitive clarification of this issue by the High Court or the Federal Parliament.