For insolvency practitioners who need clarity on how receivers and/or liquidators should pay, out of trust assets, priority employee claims arising from trust liabilities, the High Court's decision in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia & Ors [2019] HCA 20 (Amerind) is a welcome result.
Despite the greater clarity about when the statutory priority regime in sections 433, 556 and 561 of the Corporations Act 2001 (Cth) will apply in the winding up of a corporate trustee, the Amerind decision will not be the last word. Insolvency practitioners will still need to take care when applying sections 433, 556 and 561, particularly where the company operated as trustee for multiple trusts and/or in a non-trust capacity.
Key findings in Amerind at a glance
While the High Court delivered three separate judgments, each characterising and approaching the resolution of the issues in a different way, all judgments reached the same conclusion on the primary issues for determination:
- A corporate trustee has a proprietary interest in the trust assets, which is created by the trustee's right of indemnity. The proprietary interest falls within the broad definition of property of the company and is, therefore, "property of the company" for the purposes of section 433 of the Act.
- Section 433(3) of the Act requires receivers to pay the debts of the corporate trustee in accordance with the statutory priorities in a winding up. The order of priorities in section 556 is to be similarly followed in the distribution of the proceeds of the trustee's rights of indemnity among trust creditors.
- The proceeds from an exercise of the trustee's right of exoneration may be applied only in satisfaction of trust liabilities to which the right relates, following In Re Suco Gold Pty Ltd (In Liq) (1983) 33 SASR 99 (Re Suco).
Are the right of exoneration, and the surplus held by the receivers, "property of the company" within the meaning of section 433?
The trustee's right of exoneration – the right to discharge trust liabilities directly from the assets of the trust – and the trustee's proprietary interest in the trust fund are inextricably linked. A corporate trustee's right of exoneration is a proprietary interest of the trustee in the trust assets. The proprietary interest generated by the trustee's right of exoneration is not the right of exoneration itself. The right of exoneration generates a proprietary interest in the trust assets, which takes priority over competing interests of beneficiaries.
The trustee's interest in the trust fund rises and falls as debts are incurred on behalf of the trust, and satisfied out of the fund.
Is an insolvent corporate trustee's right of indemnity property comprised in or subject to a "circulating security interest" within the meaning of section 433?
For the purposes of section 433, the right of indemnity itself does not constitute property subject to a circulating security interest, and is not itself a circulating asset.
The inventory, and later the surplus proceeds held by the receivers, was the circulating asset subject to a circulating security interest, pursuant to which the receivers were appointed. It was those assets that attracted the operation of section 433.
Similarly, in the event of a winding up, where the liabilities identified in section 556(1)(e) are trust liabilities, the priority regime section 556 and section 561 is to be applied from trust assets.
Trust property to non-trust creditors: Re Suco v Re Enhill
A flow-on effect from the High Court's decision is that the existing tension between the Full Court of the South Australian Supreme Court's decision in Re Suco and the Victorian Supreme Court's decision in Re Enhill Pty Ltd [1983] 1 VR 561 (Re Enhill) appears to have been resolved.
In effect, in Re Suco the Court held that despite the right of indemnity forming property of the company for the purposes of the corporations legislation, that did not authorise a division of the trust property amongst the trustee’s non-trust creditors. In Re Enhill, the Court held to the contrary, that the trust assets were available for creditors generally and not limited to only trust creditors.
The High Court agreed with Justice Robson at first instance in connection with Re Suco, to the effect that:
- proceeds from an exercise of a corporate trustee's right of exoneration in respect of trust liabilities may be applied only in satisfaction of the trust liabilities to which that right relates; and
- unlike in Re Enhill, the power of exoneration does not apply unconditionally in payment of trust and non-trust creditors alike.
Practical implications for insolvency practitioners dealing with multiple trusts or non-trust operations
The High Court acknowledged that complications will arise if the company conducts business as trustee for multiple trusts and/or in a non-trust capacity.
The High Court's approach is that a receiver or liquidator should create multiple funds, referrable to the assets of each separate trust. Sections 433 or 561, as the case may be, would then apply to each fund separately, to the extent that each fund comprises circulating assets. In relation to costs of an administration given priority under section 556(1)(a), the High Court considered that such costs should be regarded as debts of the corporate trustee and those debts have priority under section 556(1)(a).
It may not always be possible to readily attribute a particular asset to a particular trust. The High Court confirmed it is open to a receiver to apply pursuant to section 424, or a liquidator pursuant to section 90-15 of Schedule 2 to the Act, for directions from the Court as to how to allocate the assets or liabilities between the trusts, or to apportion the expenses across the multiple trusts.
The High Court did not specifically address whether assets of a trust can be applied to a liquidator's remuneration. However, Justice Gordon stated that the approach of Chief Justice King in Re Suco should be adopted – a liquidator is entitled to have recourse to the property of the trustee to meet costs and expenses of the winding up and the liquidator's remuneration, so far as they are incurred in relation to each trust.
It remains to be seen how these practical issues are addressed on a case by case basis. Insolvency practitioners and lawyers alike should continue to approach the application of sections 433, 556 and 561 with care.