The final word on the application of the statutory priority regime to insolvent corporate trustees: High Court decision in Re Amerind Christopher Caleo QC (Chair) Stewart Maiden QC Christopher Brown Liability limited by a scheme approved under Professional Standards Legislation.
Introduction The facts and issues in Re Amerind ( Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20) Some trusts basics – exoneration v recoupment Corporations Act provisions and policies How did we get here? Case history Trial and appeal High Court decision Practical implications Questions
The issues How are assets of a trading trust to be applied when the corporate trustee is insolvent? Are trust assets available to pay trust creditors only? Or are the trust assets available to pay all the debts of the trustee company including the costs and fees of the liquidator? Do the priority regimes in the Corporations Act apply or do trust creditors get paid pari passu?
The extent of the issue Trusts are a flexible, tax effective platform for investment in a wide range of assets from family businesses to large scale infrastructure projects. According to the ATO, in the 2014 financial year, there were more tax returns lodged in respect of trusts (802,000: for declared income of $345b) than companies (763,000: $2,700b) or partnerships (344,000: $148b) Indicates widespread adoption of trading trusts, many with corporate trustees While corporate insolvency relatively well understood with clear legislative guidance, uncertainty arises in respect of insolvent corporate trustees If the priority regime under the Corporations Act does not apply – there are implications for the Fair Entitlements Guarantee Scheme ( FEG ) which relies on the employee priorities and s 560 for reimbursement.
Amerind - facts Amerind trustee of a trust Operated business manufacturing and distributing decorative finishes Bank facilities secured over all assets with Bendigo Bank Placed in VA and receivership March 2014 (later liquidation) Receivers operated business short time Receivers sold stock, recovered debtors Sold properties under various guarantees – recovered most of debt FEG paid employees $3.8m Bank repaid in full Receivers had surplus of $1.6m Sought directions on dealing with surplus
Amerind - issues Various issues in earlier decisions not appealed: Whether the company solely traded as trustee Whether the assets ($1.6m surplus) were circulating assets Issues for determination by HCA: Whether the trustee’s right of indemnity is property of the company Whether the $1.6m surplus subject to s 433, despite being trust property
Trust Concepts Trust is not a legal entity Cannot enter contracts, incur debts or hold legal title to assets Trustee personally liable for debts incurred as trustee Trustee indemnified against trust assets Trustee indemnity takes priority over beneficiaries
Recoupment v exoneration Recoupment: Trustee has incurred liability on behalf of trust Trustee paid liability from own assets Trustee seeks reimbursement from trust assets (indemnity) Creditor has no right against trust – it has been paid Exoneration Trustee has incurred liability on behalf of trust Debt remains unpaid Trustee seeks payment of debt from trust assets (indemnity) Creditor has right of subrogation to trustee rights
Recoupment v exoneration Company Trustee Non-trust Recoupment assets Trust assets Exoneration Trust Non-trust creditors creditors
Relevant provisions – s 556 Section 556(1) – prescribed priorities of unsecured debts and claims to be paid in the winding up: Costs of preserving and getting in the property Costs of the wind up application Remuneration and other liquidation expenses Employee entitlements (subsections (e), (g), (h)) Personal injury compensation
Relevant provisions – s 560 If: (a) a payment has been made by a company: on account of wages; or (i) on account of superannuation contributions; or (ii) (iii) in respect of leave of absence, or termination of employment, under an industrial instrument; and (b) the payment was made as a result of an advance of money by a person (whether before, on or after the relevant date) for the purpose of making the payment; then: (c) the person by whom the money was advanced has the same rights under this Chapter as a creditor of the company; and (d) subject to paragraph (e), the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid as the person who received the payment would have had if the payment had not been made
Relevant provisions – s 433 (2) This section applies where: (a) a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by a circulating security interest, or possession is taken or control is assumed, by or on behalf of the holders of any debentures of a company or registered body, of any property comprised in or subject to a circulating security interest; and (b) [company not in liquidation at date of appointment] (3) In the case of a company, the receiver or other person taking possession or assuming control of property of the company must pay, out of the property coming into his, her or its hands, the following debts or amounts in priority to any claim for principal or interest in respect of the debentures: … (c) subject to subsections (6) and (7), next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h) or section 560.
Relevant provisions Section 9 of Corporations Act: “Property” means any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action. Section 340 of PPS Act …personal property is a circulating asset if…the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor's business, free of the security interest
Policy Considerations Statutory priorities (s 556) favour: Employee entitlements Costs of liquidation Employees rights to circulating assets (s 433/561) Lender allows use to operate business Possibly improved by efforts of employees Employees should be paid before lender Unfair if trading trusts excluded – particularly where many employees wouldn’t know they employed by a trust
How did we get here? – case history Octavo (1979) 144 CLR 360 Right of indemnity = proprietary interest Buckle (1998) 192 CLR 226 Exoneration v recoupment – both generate proprietary interest Re Bryne Australia [1981] 1 NSWLR 394 Costs and expenses of liquidator from trust property Re Enhill Pty Ltd [1983] 1 VR 561 Trustee proprietary interest is property of company and subject to statutory regime Available to pay all creditors Re Suco Gold (1983) 33 SASR 99 Only right of recoupment available to non trust creditors Right of exoneration only to benefit trust creditors
Amerind – the proceeding Originally brought to resolve issue re Receivers obligations under s 433, including what assets were properly characterised as circulating assets Brereton J decision in Re Independent Contractor Services Receivers amended – to seek declarations as to whether assets are trust assets and whether priority regime applies Interested parties – FEG and Carter Holt Harvey Other decision following Robson J: Re Mooney’s (Markovic J) Lane v DCOT (Derrington J) FEG appealed to Court of Appeal - Five Judge bench (due to Re Enhill ) At same time – Full Court of FCA heard Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 Carter Holt appealed Amerind to HCA
Amerind – Robson J decision Determined that Amerind conducted its business solely as trustee Right of recoupment v right of exoneration Trust creditors right of subrogation Exclusive to trust creditors The proprietary rights remained within the trust structure – did not come into the hands of liquidator Therefore statutory regime does not apply Proceeds to be distributed to all trust creditors, including employees (pari passu) Distinguished Re Enhill – different statutory regime (Company Law)
Amerind – VCA decision Right of indemnity of corporate trustee is property of the company for purposes of s 433 Re Enhill followed and preferred over Suco Gold Recoupment versus exoneration – applies equally to both Right of subrogation a remedy – not a proprietary right of creditors Court did not specifically deal with the issue of non-trust creditors (as there were none here) – but clearly supported Enhill over Suco Gold Indemnity does not have to be subject to circulating security interest – is enough that the trust assets were If necessary to characterise the indemnity – the circulating nature of the trust assets flowed through
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