Insolvent Corporate Trustees and the Amerind Appeal

7 March 2018

In a decision which was handed down last week, the Victorian Court of Appeal unanimously held that the statutory priority regime under the Corporations Act 2001 (Cth) (Act)applies to insolvent trustee companies (Commonwealth vByrnes and Hewitt [2018] VSCA 41) (Amerind). This decision is the latest, and most authoritative, contribution to a long line of cases which have considered the question of whether assets held on trust by an insolvent company are subject to the provisions of the Act or ordinary trust principles.

The assets of an insolvent trustee and conflicting authorities

A liquidator of an insolvent company has an obligation to get in all of the assets of the company and distribute them in accordance with the provisions of the Act, including the regime under sections 433, 556 and 560, which affords priority to certain types of creditors such as the petitioning creditor (if any) and employees of the company. However, one class of asset held by a company which has, for many years, been the subject of considerable uncertainty, are assets which are held on trust by the insolvent company.

A company which is the trustee of the trust has a right of indemnity, which may take the form of recoupment or reimbursement, out of the assets of the trust for all liabilities they incur in managing the trust. This right may take the form of a charge or lien over the assets of the trust. Given that a trust is, strictly speaking, not a separate legal entity, a creditor of a trust has no option but to sue the trustee, and in some circumstances is entitled to be subrogated to the trustee’s right of indemnity out of the trust assets.

A vexing question for liquidators has been whether property held by an insolvent company, in its capacity as trustee of a trust, can be defined as ‘property of the company’ for the purposes of section 433 of the Act. If trust assets cannot be characterised as ‘property of the company’, the priority regime under the Act does not apply and any assets held on trust must be distributed to creditors on a strictly pari passu basis.

For many years, the Victorian Courts followed the decision of Re Enhill Pty Ltd [1983] 1 VR 56, in which the Supreme Court of Victoria held that a trustee company’s right of indemnity was not a right held by the company in its capacity as trustee and could thus be characterised as ‘property of the company’. As such, the Court concluded that the priority regime applied to assets held by the insolvent trustee company on trust, as such assets were subject to the company’s right of indemnity.

However, in Re Independent Contractor Services (Aust) Pty Ltd (In Liq) (No 2) [2016] NSWSC 106, Brereton J in the Supreme Court of New South Wales Court refused to follow Re Enhill, and instead followed the later decision of Re Suco Gold (1983) 33 SASR 99, determining that the assets held by an insolvent company on trust must be distributed on a pari passu basis in accordance with ordinary trust principles and not in accordance with the provisions of the Act.

The Amerind decision

A brief summary of the facts in Amerind are as follows –

Amerind Pty Ltd carried on a business solely in its capacity as trustee of the Panel Veneer Processes Trading Trust (Trust).
It had secured facilities with Bendigo and Adelaide Bank (Bank).
All liabilities were all incurred by Amerind as trustee of the Trust.
Amerind owned no assets in its personal capacity.
On 11 March 2014, Amerind’s sole director appointed administrators.
The Bank then appointed receivers later that day.
The receivers continued to trade the business whilst there was sufficient stock with a view to selling the business as a going concern.
On 14 April 2014, the receivers stopped trading the business and realised the remaining stock.
On 13 August 2014, at the second meeting of creditors of Amerind, the creditors resolved to wind up the company.
The Commonwealth had advanced accrued wages and entitlements totalling some $3.8 million to Amerind’s former employees pursuant to the Fair Entitlements Guarantee Scheme (FEGS).
Following repayment to the Bank and to themselves for their remuneration, the receivers held a net surplus of $1,619,018 (Receivers’ Surplus).

At first instance, before Robson J (Re Amerind Pty Ltd (in liq) [2017] VSC 127), the Commonwealth asserted that the Receivers’ Surplus was ‘property of the company’ and should be applied in accordance with the regime under the Act, which afforded priority to employees of insolvent companies and, in turn, to the Commonwealth through FEGS.

One of Amerind’s creditors, Carter Holt Harvey, took an opposing view and asserted that the Commonwealth was not entitled to any priority as section 443 of the Act (as it affects the Receivers’ Surplus) did not apply.

Robson J, adopting Brereton J’s reasoning in Re Independent Contractor Services, agreed with Carter Holt Harvey’s position. The Commonwealth appealed to the Court of Appeal.

In a unanimous decision, the Court of Appeal (Ferguson CJ, Whelan, Kyrou, McLeish and Dodds-Streeton JJ) held, inter alia that

A corporate trustee’s right to be indemnified from the trust assets is ‘property of the company’ for the purposes of the Act;
As a result, the statutory priorities set out in sections 433, 556 and 560 of the Act will apply to any distributions of trust property by liquidators or receivers who have been appointed to corporate trustees; and
As a consequence, the Receivers’ Surplus should be paid back to the Commonwealth standing as a priority creditor in lieu of the employees of Amerind who had received payment for their accrued wages and entitlements under FEGS.

As such, the Court of Appeal in Amerind brought the law, at least in Victoria, back in line with Re Enhill.

Practitioners in this area are now waiting for a decision of the Full Federal Court in In the matter of KillarnieCivil & Concrete Contractors Pty Ltd (WAD 181/2016) which deals with a similar set of facts.

Whether this question is ultimately and conclusively resolved by High Court is anyone’s guess.

By Howard Chait, Partner, and Corey Byrne, Lawyer, Meerkin & Apel