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Competing creditor claims over assets of insolvent trustees

Competing creditor claims over assets of insolvent trusteesThe High Court of Australia has confirmed the status of priority creditors prescribed by s 433 of the Corporations Act 2001 (Cth) incidental to the winding up of a trading trust –  Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20, (known as ‘the Amerind Case’).

The case clarifies that, despite a company trading through a corporate trustee, the prescribed priority for payment to creditors in the event of its receivership must apply. The consequential effect in this case was the prioritisation of employee creditor claims over a second ranking secured creditor.

 

Background

Amerind Pty Ltd was the corporate trustee of a trust which traded in its sole capacity and held trust assets. The company granted Bendigo and Adelaide Bank security over trust assets pursuant to various financial facilities. After defaulting on the facilities, Amerind was placed into receivership by Bendigo Bank, while simultaneously being placed into voluntary administration by its director.

The receivers opted to continue trading under the company however, Amerind was subsequently placed into liquidation by its creditors.

The debt owed to Bendigo Bank as first ranking secured creditor was satisfied through the realisation of non-circulating assets. After the realisation of the company’s circulating assets (less costs), the receivers had surplus funds of $1,619,018 available for distribution between the remaining creditors. They sought directions from the Supreme Court of Victoria over the competing claims between:

  • Carter Holt Harvey Woodproducts Australia Pty Ltd (Carter Holt) as second ranking secured creditor; and
  • the Commonwealth Fair Entitlements Guarantee Scheme on the basis of subrogation after having funded distributions of $3.8 million to former employee creditors of Amerind during the liquidation process.

In Re Amerind Pty Ltd (receivers and managers appointed) (in liquidation) [2017] VSC 127, the Court found that the priority distribution prescribed by s 433 did not apply in this case on the basis that trust assets are not ‘property of the company’.

The Commonwealth appealed and was successful in Commonwealth of Australia v Byrnes and Hewitt [2018] VSCA 41.

The Commonwealth’s argument was framed upon trust principles, namely the trustee’s right of indemnity which empowered it to ‘use trust assets to exonerate itself from debts properly incurred in the course of the trust business’. On this basis, the receivers were entitled to realise trust assets to satisfy the company’s debts which should be paid in the priority prescribed by s 433 – an outcome that favoured the employee creditors’ claim (through the Commonwealth) over that of Carter Holt.

Considering amongst other matters, the earlier decision in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, the Court determined that a trustee’s ‘right of exoneration is property which passes to the trustee in bankruptcy or the liquidator’. It follows that the statutory regime prescribed by s 433 for priority of distribution of such property should apply.

Carter Holt applied for and was granted leave to appeal to the High Court.

 

The High Court decision

Essentially, the High Court had to determine the interplay between a trustee’s right of exoneration in insolvency and s 433(3) – in other words whether a payment to creditors of the trust pursuant to a trustee’s power of exoneration is a payment ‘out of the property coming into [the receiver’s] hands’.

Although there is some digression in reasoning between the judgements delivered, each provide the same outcome with that of Chief Justice Kiefel, Justice Keane, and Justice Edelman confirming:

‘The rights of the trustee, collectively so viewed, can be used for the benefit of the trustee in discharging debts to trust creditors and, to that extent, when the subject of a circulating security interest they are property of the company coming into the hands of a receiver.’

Consequently, a receiver must pay from those assets various debts in the priority prescribed by s 433.

The Court also confirmed that the same conclusion would extend to ss 556 and 561 – in the case of liquidation, and stressed that assets could only be used to satisfy trust debts that are properly incurred by the trustee in executing its duties and are not available for distribution among creditors generally.

The Court also made note of the policy considerations surrounding s 433 and commented on the potential irrationality of denying employee creditors priority over the ‘holders of a circulating security interest solely for the reason that the company which employed them was…trading as a trustee’.

 

Conclusion

A trustee’s right of indemnity or power of exoneration to use trust assets to satisfy trust debts falls within the scope of ‘property of the company’ for the purposes of s 433 of the Corporations Act 2001 (Cth) and the order of priority for payment of creditors prescribed therein must apply.

The case also upholds the policy considerations in providing employees of an insolvent company priority over other creditors for unpaid entitlements.

Notwithstanding the decision in Amerind, and given the popularity of trading trusts as a vehicle for conducting commerce, practitioners must remain vigilant when considering the competing claims of an insolvent trustee, particularly where multiple and complex trust structures are involved, the company has not acted entirely in the capacity of trustee, or where non-trust debts are incurred.

This article is intended to provide general information only. You should obtain professional advice before you undertake any course of action.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9274 8820 or email ch@lawbase.com.au.

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