I have added a new article to my website reviewing the recent, important decision of Jones (liquidator) v Matrix Partners Pty Ltd, re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; 260 FCR 310 (Killarnee). The full article can be accessed here.

As noted in my alert, last week the Full Court of the Federal Court handed down its much anticipated decision in Killarnee. The issue for the Full Court broadly was how a liquidator is to deal with trust assets in the liquidation of a company which had been trustee of a trading trust.

The three member bench comprised Allsop CJ, and Siopis and Farrell JJ. Unlike in the decision last month in Amerind where the Victorian Court of Appeal spoke with a single unanimous voice, their Honours of the Full Court wrote three separate judgments, with the Chief Justice writing the lead. Overall, while there is sound reasoning and analysis and useful clarity on some points, the Full Court’s decision may be likely to create some other concerns for insolvency practitioners dealing with trustees of trading trusts.

There was unanimity on some issues but not others, and there was a sting or two in the tail. The issue now appears to be resolved that a trustee company’s right of exoneration over the trust assets is property of the trustee company. The Full Court was clear in their view in obiter that trust assets may only be applied in payment of trust debts in exercise of a trustee’s right of exoneration (not non-trust debts). Their Honours also addressed and made clear their position as to the lack of liquidators’ power to sell trust assets, and the need for court order.

On the scheme of priority issue: the majority of the Full Court ostensibly joined with Amerind and resolved some of the uncertainty of the past few years as to whether liquidators should apply the statutory scheme of priorities under the Corporations Act when liquidating companies which have conducted their business through trading trusts and exercising the trustee’s right of exoneration over trust assts to pay creditors. The majority held that the scheme of priorities applies…mostly. This was one of the stings. Whilst the priority afforded employee entitlements was endorsed, as was that for liquidators’ costs, their Honours in the majority queried whether every element of the priority scheme in s 556 should apply in every case (indeed whether some such debts would even qualify as trust debts in every case) – see the discussion below. Their Honours’ comments and the doubt created in this area suggest that court directions are likely to be advisable for a liquidator dealing with trading trust assets on the question of distribution. Resolution of this uncertainty either by the High Court or by legislation – the latter of which was strongly encouraged by Farrell J – would be welcome, although it may need to be carefully done. This also is discussed in the article.

The specific questions considered by the Full Court on the particular case before them, and their Honours’ answers to those questions, are already set out in my alert of last week and can be read here.

To get straight to it, on my analysis, the propositions to be distilled from the Full Court’s decision in Killarnee are these –

1. The right of exoneration and the lien over trust assets in its support are property of the trustee company. The Full Court agreed with the Victorian Court of Appeal in Amerind on this.
2. Power to sell assets lacking under s 477 as liquidator. The assets of a trust are not themselves assets in the winding up of the trustee company, though they are subject to the right of indemnity and lien. It follows that the liquidator generally lacks power under s 477 to sell the trust assets.
3. Power to sell assets lacking where company no longer trustee. Where the company ceases to be trustee of the trust upon its liquidation under the terms of the trust, it will then generally hold the trust assets as bare trustee (and as former trustee liable for unpaid trust debts, retaining its right of indemnity against those assets). As bare trustee, with a duty and power only to hold and preserve trust assets, the company will generally lack a trustee’s power to sell the trust assets.
4. Power to sell trust assets can be acquired by court order for judicial sale, usually with appointment as receiver of the trust assets to carry out the sale and for the distribution of the proceeds. The liquidator of a trustee company ought approach the courts for authority to sell the trust assets.
5. Scheme of priorities applies (mostly). The majority of the Full Court held 2:1 that the statutory scheme of priorities laid down in the Corporations Act applies to the distribution of trust assets where subject to a right of exoneration. Note however that the majority judgments raise some doubt as to whether this is achieved by the legislation applying or by Equity echoing the scheme. Siopis J dissented on this, but conceded that a similar result could be produced by way of the court, in its equitable jurisdiction, giving directions to a receiver appointed over the trust assets as to the distributions to be made to trust creditors, subject to the circumstances of the particular case.
6. However some elements of the priority scheme may not apply in every case.
   The sting: While the majority of Allsop CJ and Farrell J accepted that the priority scheme generally applies, both queried whether all elements of the scheme applies in every case. Their Honours took the view that each paragraph of s 556 must be interrogated for its meaning and endorsed some – but not all – of the priority debts listed in the scheme. Farrell J specifically questioned whether the costs of the winding up application could even be seen as a trust debt. The Court’s position on the various types of priority debt are identified and discussed in my article (here).
7. Trust assets are not generally available for distribution to non-trust creditors. They may only be used to pay trust creditors. Trust assets may only be applied in payment of Trust debts, where this is done in exercise of the trustee’s right of exoneration (as opposed to the right of recoupment). In re Suco Gold is correct. Re Enhill is not.

The full article can be accessed here.