Vic Court of Appeal denies liquidators approval of proposed settlement agreement

Recently the Victorian Court of Appeal upheld a decision to deny liquidators approval of a proposed settlement in McDermott and Potts as liquidators of Lonnex Pty Ltd (in liquidation) [2019] VSCA 23. The creditors had been opposed to the settlement.

Background

The liquidators of Lonnex (Ross McDermott and John Potts) had commenced proceedings pursuing claims which arose from a striking series of transactions. Lonnex and a related company Millennium Management Pty Ltd each operated two medical practices at different locations in Melbourne. The day after establishing a tax consolidated group with related entities, Lonnex and Millennium both sold their assets – their 4 clinics – to Lonnex & Millennium Management Holdings Pty Ltd (LMMH) for $22m and $18m respectively. These amounts were payable at LMMH’s option by way of intercompany loans.

On the same day, Lonnex and Millennium forgave those loans.

Under the transactions LMMH acquired some of their liabilities. However others, principally those owing to the Commissioners of Taxation and State Revenue, were left with Lonnex and Millennium. The owner of the shares in LMMH, Dr Geoffrey Edelsten, subsequently onsold them.  (See [4]-[6])

The liquidators of Lonnex claimed inter alia that the release of the debts given by Lonnex to LMMH was an uncommercial transaction under s 588FB of the Corporations Act 2001 (Cth), and an unreasonable director-related transaction under s 588FDA, and sought judgment in the sum of $22m. The liquidator of Millennium (Andrew Yeo) subsequently issued a corresponding proceeding.   LMMH’s defence included arguments that the forgiveness of the loans was part of a larger composite transaction under which benefits flowed to Lonnex and Millennium, such that the impugned transactions were neither uncommercial nor unreasonable. (See [8])

Lonnex’s creditors were recorded in the judgment as including the Commissioner ($7.7m), the State Revenue Office ($264K), “perhaps” Dr Edelston ($3.6m) and minor creditors including Medicare. (See [10])

The Commissioner had funded Lonnex’s liquidators to conduct the Lonnex proceedings up to mediation. Agreement had not been reached on funding beyond that. (See [11])

Following mediation, Lonnex’s liquidators made applications under s 477(2B) and the then s 511 of the Corporations Act for orders directing that they were justified in compromising the proceeding and approving their entry into terms of settlement accordingly. An associate judge refused that application. The liquidators sought leave to appeal. The Commissioner of Taxation, being the largest creditor, appeared in opposition to the liquidators’ application. (See [2]) Indeed the proposed settlement was opposed by the Commissioner, the State Revenue Office, and the trustee in bankruptcy. (See [10])

Broadly, the liquidators argued that the proposed settlement was a reasonable commercial outcome and that they had not been put in funds to contest the proceeding further. The Commissioner disputed the wisdom of accepting the settlement and wanted a different liquidator appointed to pursue Lonnex’s litigation. (See [2]) Senior Counsel for the Commissioner informed the Court of Appeal that if Millennium’s liquidator Mr Yeo were to take over as liquidator of Lonnex, the Commissioner would be prepared to enter into a funding arrangement with him, and that Mr Yeo had consented to act as liquidator of Lonnex.

On the appeal, the liquidators submitted that the associate judge’s discretion had miscarried on several grounds. There was argument on the following issues –

  1. the significance of the fact that funding of the liquidation and the liquidators’ past and future expenses and liabilities had not been secured,
  2. the significance of the creditors’ opposition to the proposed settlement,
  3. the relevance and content of the legal opinion, and
  4. whether the proposed settlement was in the interests of creditors. (See [41])

Another proposed ground of appeal was the liquidators’ contention that the associate judge erred, or his discretion miscarried, in failing to give reasons or adequate reasons, for refusing leave under s 477(2B). (See [40]) The associate judge had stated that the s 477(2B) application was refused for the same reasons as the s 511 application. (See [62])

The Provisions

After the filing of the application, s 511 of the Corporations Act was repealed and replaced by the Insolvency Law Reform Act 2016 (Cth). The liquidators submitted that the principles which formerly covered s 511 applications applied equally to the replacement provisions contained in the Insolvency Practice Schedule (Corporations), namely ss 90-15 and 90-20. The case therefore proceeded as an application under s 511.

To pause here – for any practitioners looking to bring an application now under s 90-15 – I note that on an application for directions in Walley, In the matter of Poles & Underground Pty Ltd (Admin Apptd) [2017] FCA 486 at [41], Gleeson J observed that the question of whether to exercise the power in s 90-15 was “to be answered by reference to the principles applied to the exercise of the discretions previously contained in s 479(3) and s 511 of the Act”. This has since been approved in El-Saafin v Franek (No 2) [2018] VSC 683 at [110] (application by administrators for directions), in Re Hawden Property Group Pty Ltd (in liq) [2018] NSWSC 481; (2018) 125 ACSR 355 at [8] (application for directions), in Krejci (liquidator), re Community Work Pty Ltd (in liq) [2018] FCA 425 at [46] (application for directions and for s 477(2B) approval), in GDK Projects Pty Ltd re Umberto Pty Ltd (in liq) [2018] FCA 541 at [33] (application for the appointment of special purpose liquidators), and in an unreported decision in which I appeared last year for the liquidator Re Cameron Lane Pty Ltd (in liquidation); Playaround Pty Ltd v Peter Robert Vince, Supreme Court of Victoria, 14 August 2018 (appeal from the rejection of a proof of debt).  

Returning to the present case, section 511 of the Corporations Act relevantly provided –

(1) The liquidator, or any contributory or creditor, may apply to the Court:

(a) to determine any question arising in the winding up of a company; or

(b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.

(2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

Section 477(2B) of the Corporations Act provides –

Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:

(a) without limiting paragraph (b), the term of the agreement may end; or

(b) the obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.

I pause here to draw attention to the fact – sometimes overlooked – that s 477(2B) is framed as a prohibition. However, if a liquidator has entered into such an agreement without prior creditor or court approval, it can in some cases be possible to obtain retrospective approval from the court (nunc pro tunc). Such an application is often made together with an application under s 1322(4)(a) and (d). By way of example, two cases in which I appeared for the liquidators in obtaining such approval are –

Principles

The Court of Appeal reviewed the key authorities at [63]-[91]. The passages cited by their Honours  focussed upon several issues, including notably the importance of the views of the creditors. For instance at [66] their Honours cited this passage from the judgment of Lindley LJ in Re English, Scottish & Australian Chartered Bank [1893] 3 Ch 385, 409 –

If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the Court can be

At [72] the Court repeated the oft-cited observation of Giles J considering an earlier provision (s 377 of the NSW Companies Code prior to 1992 – authorisation to compromise) in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83, 85-6 –

In any application pursuant to s 377(1) the court pays regard to the commercial judgment of the liquidator… That is not to say that it rubber stamps whatever is put forward by the liquidator but … the court is necessarily confined in attempting to second guess the liquidator in the exercise of his power, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected…to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.

The Court observed that, significantly, Giles J went on to say that it is for these reasons that the attitudes of creditors are ‘important’ in these applications. (See [73])

Following their review of the authorities, their Honours then distilled the following principles at [92]

  1. The nature of the inquiry undertaken by the court when approval is sought under s 477(2B) in relation to a proposed compromise of litigation is different from the nature of inquiry the court undertakes under s 511 when a liquidator seeks directions in relation to such a compromise.
  2. On a directions application the court must be positively persuaded that the liquidator’s decision to enter into the compromise is, in all the circumstances, a proper one. This necessarily involves a broad consideration of all the relevant circumstances. A direction will exonerate the liquidator.
  3. In contrast, the discrete consideration of an application under s 477(2B) involves a more circumscribed inquiry. The court reviews the liquidator’s proposal, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene. An order under s 477(2B) does not constitute an endorsement of the proposed compromise. An approval will not exonerate the liquidator.
  4. Given that the nature of the inquiry undertaken in relation to the directions application is broader than that under s 477(2B), it would usually be convenient to deal with with directions application first, and often that consideration would substantially overtake any discrete consideration of the application under s 477(2B).
  5. The court always pays due regard to the commercial judgment of the liquidator, and, on both applications, the attitudes of creditors are also important.
  6. On both applications, but particularly the application for directions, it would ordinarily be expected that a liquidator would have obtained appropriate legal advice in relation to the proposed compromise, and the nature and content of that advice is a relevant consideration.
  7. While the focus of s 477(2B) is delay, the inquiry under s 477(2B) still requires consideration of the substance of the proposed compromise. If a related application for directions reveals either that the directions should, or should not, be given, discrete consideration of the application under s 477(2B) may be superfluous.

Their Honours then added this at [93]

It can be seen that the authorities present a tension in the circumstances of the applications the subject of the present case. The liquidator is ordinarily best placed to determine what course the liquidation should take, in the interests of creditors, any contributors and the proper recovery of the costs and expenses of the liquidation. the court will generally not enter into the merits of that determination, confining itself to the question whether the proposed course is a proper one for the liquidator to take. At the same time, the interests and wishes of creditors are highly influential and the creditors are, if properly informed, in the best position to evaluate what is in their own interests. As such, the views of the creditors as to the merits of the present proposal are a highly material consideration.

Principles from Newtronics – s 477(2B)

I pause here to note that the principles here distilled by the Court of Appeal are somewhat informed by the circumstances of this case, and partly focussed upon the different functions served by each of s 477(2B) and s 511. On s 477(2B) applications, the Courts often cite and apply the principles as distilled by her Honour Justice Gordon in Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375. It may be useful to repeat them here –

  1. The Court does not simply “rubber stamp” whatever is put forward by a liquidator. (The passage by Giles J in Re Spedley Securities, reproduced above, is often quoted in full together with this principle. Note that its final sentence makes clear that the key consideration is whether the proposal is for the benefit of creditors.)
  2. A Court will not approve an agreement if its terms are unclear.
  3. The role of the Court is to grant or deny approval to the liquidator’s proposal. Its role is not to develop some alternative proposal which might seem preferable.
  4. In reviewing the liquidator’s proposal, the task of the Court is – “[not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in…a hearing de novo [but]…simply to review the liquidator’s proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidator, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the ‘expeditious and beneficial administration’ of the winding up.
  5. Further, in judging whether or not a liquidator should be given permission to enter into a funding agreement (whether retrospective or not), it is important to ensure, inter alia, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a “grossly excessive profit”,
  6. Generally, the Court grants approval under s 477(2B) only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company.

(See Newtronics at [26] and the authorities there cited.)

Application 

The Court of Appeal – in the unanimous judgment of Whelan AP and McLeish and Hargrave JJA – held that the associate judge had not erred.

Their Honours found that the associate judge was correct to regard the wishes of creditors as a “very important consideration”. Indeed they noted that “he would have erred not to have done so” (see [98]). It was clear, however, that the associate judge did not consider himself bound to act in accordance with the creditors’ wishes, taking account of other matters including the funding position, the legal opinion tendered, the relevance of the Millennium proceeding and the possibility that Mr Yeo might be placed in funds to conduct the Lonnex proceeding. Their Honours noted that the fact that the source of those funds would be the principal creditor served to highlight the importance, in this case, of the attitude of creditors to the proposed compromise of the Lonnex proceeding. (See [95] & [98])

The Commissioner had also submitted that there would be adverse consequences for the Millennium proceeding if the Lonnex proceeding were to be settled, which the Court accepted had considerable force. (See [99])

The Court found the absence of funding for the Lonnex liquidators to continue the liquidation was not an “overriding factor” in this particular case. Here there were alternative options, including that the liquidators could resign so that Mr Yeo could be appointed. (See [95]-[96]) Notably, however, the Court observed that in a different case where no compromise has been achieved, it might be proper for a liquidator to discontinue litigation if funds to continue to conduct it are unavailable. (See [97])

Takeaway

This case serves as a warning to liquidators to take heed of the attitude of creditors to a proposed settlement of a claim, particularly majority, unrelated creditors. Certainly it is a reminder that the Courts will treat the creditors’ judgment of what is in their own commercial interests as of importance, in considering an application for approval to enter into a settlement deed and for directions.

Having said that, this was a somewhat unusual case. Each case will turn on its own facts. It will not always be the case when it comes to settling a proceeding that there is another proceeding arising out of the same transaction/s running in parallel, which may be adversely impacted by the settlement. Moreover, where liquidators are without the funds or a creditor willing to fund litigation, there will not always be an alternative convenient option waiting in the wings, of another liquidator who has consented to act with a creditor willing to fund him (and the majority creditor at that).

Big few days next week – not just the banking RC report, but the hearing of the High Court Amerind appeal

The first few days of next week are shaping up to be pretty big. As has been well covered in the press, the final report by of the Banking Royal Commission has now been handed to the Governor-General and will be publicly released on Monday afternoon 4 February 2019 at 4.10pm, coinciding with the sharemarket close. Reportedly Commissioner Kenneth Hayne’s final report stretches to more than 1000 pages.

Then on Tuesday 5 and Wednesday 6 February 2019 is the hearing of the High Court appeal in Amerind, set down for 2 days. To refresh your memories, for my review and analysis of the Victorian Court of Appeal decision in Amerind see here, and for my article considering the Full Federal Court decision in Killarnee and the landscape for liquidating corporate trustees of trading trusts in light of both Amerind and Killarnee see here.

For those who want more, the submissions that have been filed for each of the appellant (creditor Carter Hold Harvey Woodproducts Australia Pty Ltd), the first respondent (the Commonwealth of Australia, which advanced $3.8m for former employees of the company under FEGS) and the second respondent (the Receivers of Amerind Pty Ltd (Receivers & Managers appointed)(in liquidation) may be read on the High Court website.

 

Newsflash – Amerind High Court appeal listed for hearing

The Amerind appeal to the High Court of Australia has reportedly been listed for a 2-day hearing on 5 and 6 February 2019. Watch this space.

In the meantime, for my review and analysis of the Victorian Court of Appeal decision in Amerind see here, and for my article considering the Full Federal Court decision in Killarnee and the landscape for liquidating corporate trustees of trading trusts in light of both Amerind and Killarnee see here.

For those who want more, the submissions that have been filed for each of the appellant (creditor Carter Hold Harvey Woodproducts Australia Pty Ltd), the first respondent (the Commonwealth of Australia, which advanced $3.8m for former employees of the company under FEGS) and the second respondent (the Receivers of Amerind Pty Ltd (Receivers & Managers appointed)(in liquidation) may be read on the High Court website.

Newsflash – Special leave granted in Amerind

Earlier this morning special leave to appeal to the High Court was granted from the Victorian Court of Appeal’s decision in Amerind.  The bench comprised their Honours Gageler, Edelman and Nettle JJ. The transcript is not yet available on Austlii. Their Honours did not need to hear from counsel for Carter Holt Harvey Wood Products Pty Ltd, the creditor who had applied for special leave to appeal.

The five-member Victorian Court of Appeal decision from which special leave to appeal was granted can be read here: Commonwealth of Australia v Byrnes and Hewitt as receivers and managers of Amerind Pty Ltd (receivers and managers apptd)(in liq) [2018] VSCA 41 (Amerind).

My review and analysis of that decision can be read here. For my article considering the Full Federal Court decision in Killarnee and the landscape for liquidating corporate trustees of trading trusts in light of both decisions see here.

Newsflash – Amerind is headed for the High Court

Papers have reportedly been filed with the High Court by creditor Carter Holt Harvey Wood Products Pty Ltd. Watch this space.

In the meantime, for my review and analysis of the Victorian Court of Appeal decision in Amerind see here, and for my article considering the recent Full Federal Court decision in Killarnee and the landscape for liquidating corporate trustees of trading trusts in light of both decisions see here.

New article on Killarnee – trading trusts, statutory priorities on the liquidation of trustee companies, lack of power to sell trust assets

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 (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.

Newsflash – judgment in Killarnee is in

Late this afternoon the Full Court of the Federal Court of Australia delivered judgment in Jones (liquidator) v Matrix Partners Pty Ltd, re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40. The bench comprised Allsop CJ, Siopis and Farrell JJ. The judgment can now be read on Austlii here.

Their Honours delivered three separate judgments. There was unanimity of decision and reasoning on some of the questions answered, but not others. The Court answered the questions posed for decision as follows –

  1. The assets of the Trust are not assets in the winding up of the trustee company Killarnee, such that the liquidator did not have power under s 477 to sell the Trust assets (unanimous).
  2. Two parts –
    1. The proceeds of realisation of Trust assets are to be applied by the Liquidator in accordance with the priority regime under ss 555, 556, 560 and 561 of the Corporations Act (2:1 – Allsop CJ answered yes, Farrell J answered yes but for different reasons, Siopis answered no).
    2. The unfair preference proceeds are to be applied in accordance with the priority regime (unanimous, although with the qualification that this was common ground, which their Honours noted they accepted without undertaking any legal analysis).
  3. Two parts –
    1. The Liquidator should be directed to deal with the proceeds of realisation of Trust assets as assets in the winding up of the Company (2:1 – Allsop CJ answered yes, Farrell J answered yes in substance, Siopis J answered no).
    2. The Liquidator should be directed to deal with the unfair preference proceeds as assets in the winding up of the Company (unanimous).
  4. Neither the proceeds of realisation of Trust assets or the unfair preference proceeds should be distributed by the Liquidator to unsecured creditors of the Trust pari passu after providing for the costs of the administration (unanimous, although Siopis J’s reasons differed to those of Allsop CJ and Farrell J).

More to follow.

 

Heads up – Judgment in Killarnee to be delivered this afternoon

The Full Federal Court matter of Killarnee is listed for handing down of judgment at 5.15 this afternoon. Watch this space.

For more as to the issues arising at the point where trust law intersects with insolvency law, see my review of the recent Victorian Court of Appeal decision in Re Amerind – here.

 

The Amerind appeal – trading trusts, statutory regime of priority applies on receivership of the trustee, employee entitlements protected

As noted in my alert yesterday morning, the Victorian Court of Appeal has handed down it’s decision on appeal from Re Amerind (receivers and managers apptd)(in liq) [2017] VSC 127; (2017) 320 FLR 118. The appeal judgment is now up on Austlii and can be read here: Commonwealth of Australia v Byrnes and Hewitt as receivers and managers of Amerind Pty Ltd (receivers and managers apptd)(in liq) [2018] VSCA 41.

The five member bench comprised their Honours Ferguson CJ, Whelan JA, Kyrou JA, McLeish JA and Dodds-Streeton JA. The judgment was unanimous. At least for Victoria, it resolves the uncertainty  of the past few years following Independent Contractors and Re Amerind as to whether receivers and liquidators should apply the statutory priorities under sections 433, 556 and 560 of the Corporations Act when distributing the assets of corporations who have conducted their businesses through trading trusts. They should; the statutory scheme of priority applies. The fact that the funds are the proceeds of trust assets does not displace the priority regime.

The judgment was divided into two parts. The first part, commanding the bulk of the judgment, dealt with the issue of how a corporate trustee’s right of indemnity from trust assets is to be dealt with in insolvency, whether the receivership surplus in that case was properly characterised as trust property or property of the trustee, and whether the statutory scheme of priority applied. It is this first part I propose to address below.

The second part of the judgment dealt with the second ground on which Robson J had held that s 433 did not apply, namely that the right of indemnity was not subject to a ‘circulating security interest’.

Summary snapshot

To get straight to it, their Honours on the Amerind appeal held that –

  • A corporate trustee’s right of indemnity from trust assets is property of the trustee company within the meaning of s 433 of the Corporations Act. Not property of the trust, as Robson J had held at first instance.
  • The statutory scheme of priority applies to distribution of the relevant property, being the receivership surplus subject to the right of indemnity. This had the result that the Commonwealth’s claim to priority in the distribution of the receivership surplus by virtue of the payments it had made of employee entitlements under FEGS was vindicated.
  • (In the second part of the judgment – certain assets in dispute fell within the ambit of property secured by a ‘circulating security interest’. Their Honours held that the relevant assets in this context was not the right of indemnity but the trust assets. The correct date for assessing whether property is subject to a circulating security interest under s 433 is the date the receiver is appointed and takes possession. The Court also held that on the proper construction of s 340(1) of the PPSA the two limbs (a) and (b) are alternatives. Either may be satisfied to bring property within the definition of a ‘circulating asset’.)

Their Honours took the opportunity to state clearly that Re Enhill remains authoritative in Victoria and must be followed by trial judges here.

However, the Court left open the question of how non-trust creditors (if any) are to be treated on the insolvency of a trustee company. That is, whether on an insolvency a trustee’s right of indemnity must be used in payment of trust debts only, or of non-trust debts of the company also, ranking pari passu. I discuss this below.

Similar issues were also considered by the Full Court of the Federal Court in August last year in a hearing before their Honours Allsop CJ, Siopis and Farrell JJ in In the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016). Their judgment must surely be imminent, and it will be interesting to see how their Honours treat the issues. Given the prevalence of the use of trading trusts in Australia, it would be preferable to have both certainty and a national approach on the receivership or liquidation of corporate trustees.

**This concludes the summary. There now follows a more detailed treatment of the judgment, for those interested in reading on.

**********

The facts

The relevant facts and events are summarised at [3]-[8] and [14] of the appeal judgment and [50] at first instance. The key facts were these –

  • The company Amerind carried on business acting solely in its capacity as trustee of a trading trust
  • It had no assets of its own (save for a nominal sum settled to establish the trust)
  • The liabilities were incurred by Amerind acting as trustee
  • The creditors it had were therefore trust creditors
  • Amerind did not have its own money to meet trust liabilities and then seek to be reimbursed from the trust (by a trustee’s right of recoupment)
  • Rather, Amerind sought to be indemnified from the trust assets for liabilities it incurred in carrying out the trust (also called a trustee’s right of exoneration)
  • As all trust liabilities exceeded the trust assets, the beneficiaries’ interest had been entirely supplanted by Amerind’s right of indemnity
  • The Commonwealth had advanced accrued wages and entitlements totalling $3.8million to Amerind’s former employees pursuant to FEGS (the Fair Entitlements Guarantee Scheme)
  • Following repayment to the Bank through the receivers’ realisation of the Bank’s securities, and after providing for their own estimated remuneration, the receivers held a net surplus of $1,619,018.

Issues then arose as to how that surplus was to be applied. The Commonwealth’s position was that the priority regime provided for in the Corporations Act applied. It followed that by operation of s 560 of the Corporations Act, the Commonwealth had the same rights of priority in respect of the money advanced as do employee claims in a winding up under s 556 of the Act.

The receivers sought directions from the Court.

Submissions and authorities

The receivership surplus was subject to a right of indemnity (supported by a lien) held by the insolvent corporate trustee Amerind. The Commonwealth argued the receivership surplus was therefore the trustee company’s property, not trust property, and it should be applied in accordance with the priority regime provided for under the Corporations Act. The receivers agreed at first instance, and did not take a position on appeal. A creditor Carter Holt Harvey Woodproducts Australia Pty Ltd (CHH) opposed the Commonwealth’s position, contending that the Commonwealth was not entitled to priority because s 433 did not apply. At first instance, Robson J agreed with the creditor CHH. He held that s 433 did not apply to the receivership surplus.

Before addressing the issue the Court went on a journey from [19], giving detailed consideration to key principles and tracing through the authorities on the difficult questions that arise in resolving this issue. As it may be useful for practitioners to be aware of what was said, I will summarise those remarks here.

Nature of trust liabilities. Ordinarily a trustee is entitled to be indemnified from the trust assets against liabilities properly incurred. The trustee has a charge or lien over the trust assets for the purpose of enforcing that indemnity. In some circumstances creditors of the trustee whose debts were incurred in discharge of the trust may be subrogated to the trustee’s rights (at [22])

Nature of the trustee’s right of indemnity and creditors subrogation. A trustee’s right of indemnity may take the form of recoupment / reimbursement for trust debts already paid from the trustee’s own money, or of exoneration for trust debts not yet paid (at [23]-[27]).

I pause here to note that unlike the Court in the Re Amerind appeal, in Lane v Deputy Commissioner of Taxation [2017] FCA 953 (discussed below) Derrington J saw this distinction between the two distinct forms of a trustee’s right of indemnity as critical. At [36] of Lane Derrington J observed –

“[T]he right of a trustee to be indemnified from the assets of the trust falls into two distinct parts. First where a trustee has discharged a trust debt out of their own funds, the trustee is entitled to reimbursement out of the trust funds in an equivalent amount. That occurs by money being transferred by trust funds to the trustee who receives an absolute, beneficial interest in that money. That right in relation to satisfied trust liabilities is often referred to as the right of “recoupment”. Second, the trustee is entitled to meet unsatisfied trust debts directly from the trust assets by utilising the right of “exoneration”. Pursuant to this right, the trustee directly applies trust assets to discharge the indebtedness by paying trust funds directly to the trust creditor…This process of “exoneration” does not involve the trustee obtaining any beneficial interest in the assets which are used to discharge the trust debts.”

At [38] of Lane, Derrington J goes on –

“The important distinction between these two aspects of the trustee’s right of indemnity is usefully essayed in…[two texts on subrogation]. In the former work the learned author identifies that a trustee is restricted in the use of the right of exoneration to use it for the purpose of discharging his liability to the trust creditors and no other.”

Finally at [40] Derrington J concludes –

“[S]ome of the authorities concerning the trustee’s right of indemnity from the trust assets do not always maintain this critical distinction between the right of “recoupment” or “reimbursement” on the one hand, and the right of “exoneration” on the other. However the distinction is fundamental. If what comes into the hands of a bankruptcy trustee is a trustee’s right of recoupment, it is a right to take money from the trust funds for the benefit of the insolvent trustee’s estate. It is, in effect, the payment of an amount owing to the trustee for the purposes of reimbursing the trustee’s personal estate. Such a payment is received by the bankruptcy trustee as part of the bankrupt’s personal estate and is available to meet the claims of both trust and non-trust creditors. However, the position is markedly different when what the bankruptcy trustee receives is merely a right or entitlement to have trust assets applied to discharge trust debts. That is a considerably more limited right.”

As will be seen below, this view was not shared by the Court of Appeal.

Returning to the Amerind appeal judgment, from [28]-[56] the Court reviewed English and Australian authorities on this issue handed down between 1802 and 2012. At [57] their Honours distilled these conclusions from those authorities –

  1. There has been long standing, if not uniform, acceptance of the proposition that upon insolvency the trustee’s right of indemnity passes to the insolvent trustee’s insolvency administrator.
  2. Trust creditors deal with the trustee on the footing of the trustee’s personal liability. They may be subrogated to the trustee’s right of indemnity, but any such subrogation cannot yield greater rights than the trustee itself has.
  3. The right of subrogation is better characterised as a remedy. It is based upon the unconscionability of liabilities incurred to augment trust assets not being met out of those assets. Its goal, as revealed by the early cases, was not the protection of trust creditors, but rather the prevention of the unjust enrichment of beneficiaries.
  4. In re Richardson [1911] 2 KB 705 suggests that the right of indemnity cannot be exercised so as to meet the claims of non-trust creditors. Liverpool and the NZ decision in Jarvis would confine In re Richardson to circumstances where the indemnifying party (the beneficiaries, in effect) is ‘concerned’ as to the application of the money. (Note this may rarely be the case on insolvency.)

The statutory insolvency regime. The pari passu principle for the equal treatment of creditors’ claims applying what remains of the insolvent’s property is embodied in s 555 of the Corporations Act. Section 556 then provides for certain debts to be paid in priority to all other unsecured debts. Property held by the insolvent on trust is not property of the company and is excluded from distribution to the company’s creditors.

Employee claims have long been accorded priority over the claims of the holder of a floating charge or circulating security. Section 433 provides that a receiver who takes possession or assumes control of property of the company secured by a ‘circulating security interest’ must pay, out of property coming into his her or its hands, specified debts in priority to any claim for principal and interest under the debentures. Those specified debts include those afforded priority under s 556(1)(e),(g) or (h) or s 560 of the Act. These are the provisions which give priority to employee claims, and to those who advance funds to meet them.

The High Court in Octavo, Buckle and Bruton. The High Court’s decision in Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 establishes that an insolvent trustee’s right of indemnity against trust property for trust debts, gives the trustee a proprietary interest in the trust property (at [96]). On liquidation, the trustee company’s liquidator has access to that proprietary interest for the benefit of the trustee’s creditors.

The Court of Appeal expressed the view that Octavo establishes not only that the right of exoneration is property which passes to the trustee in bankruptcy (vests) or the liquidator (control), but also that the respective statutory regimes must apply to the disposition of that property. The Honours’ view was that Octavo does not, however, provide clear guidance on whether distribution is confined to trust creditors (at [100]). Indeed the Court noted that Octavo gives conflicting guidance on this question. The plurality in Octavo made conflicting remarks as to whether the proceeds of a trustee’s right of indemnity would, on insolvency, be confined to trust creditors, or whether the trustee’s non-trust creditors (if any) could share in the distribution (see [98]).

Twenty years later in Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226, the High Court recognised the traditional distinction between rights of exoneration (for trust debts not yet paid) and recoupment (for trust debts already paid by the trustee). However the Court affirmed that the trustee’s right of indemnity, in either manifestation, conferred on the trustee a beneficial proprietary right in the trust assets (at [106]). The High Court affirmed this in Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346. The High Court there characterised the trustee’s right of indemnity as a proprietary interest in the trust assets, irrespective of whether it took the form of recoupment or exoneration, by virtue of the lien which survived the loss of office as trustee (at [114]).

The Court of Appeal concluded that the High Court has made it clear that the trustee’s right of indemnity, both as to recoupment and exoneration, constitutes a proprietary interest in the trust assets which, in the corporate insolvency context, is ‘property of the company’. The statutory provisions governing corporate insolvency have changed over time, but none of those changes have altered or affected this position (at [124]).

I pause here to note that it is interesting how different courts in Australia can review the same High Court authorities and draw different conclusions from them as to what they establish as authoritative. In contrast with the Re Amerind appeal decision, see Lane at [96]-[99].

Re Enhill, Re Suco Gold, Independent Contractors. From [125] their Honours reviewed cases applying the English and High Court authorities on the trustee’s right of indemnity and insolvency, prior to the Amerind decision. The main cases considered were these –

Re Enhill Pty Ltd [1983] VicRp 52; [1983] 1 VR 561 is discussed from [136]. There Young CJ observed that the Victorian Full Court had to treat Octavo  as authority for the proposition that the right of a trustee to be indemnified out of the assets of the trust, or the proceeds of the exercise of that right, are assets of the trustee in a winding up.

Young CJ took the view that the proceeds of the trustee’s lien on a bankruptcy or liquidation are available for division amongst the company’s creditors generally, not only among trust creditors (at [144]). Lush J agreed, taking the view that although the case before him in Re Enhill did not concern a competition between trust and non-trust creditors, they should stand on the same footing (at [154]-[155]). He acknowledged however that there can never be exacted from the trust property, by the trustee or by the trust creditors, an amount which is greater than the trust debts (at [158]).

Shortly after Re Enhill in Victoria, the Full Court of the South Australian Supreme Court handed down Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99. As in Re Enhill, the practical problem exposed in Re Suco was that the winding up could not proceed unless the liquidator could have recourse to trust funds to meet the costs and expenses of liquidation. King CJ rejected the liquidator’s submission, based on Re Enhill, that the right of exoneration entitled the trustee to transfer trust property to himself to meet unpaid trust debts, which property then ceased to be trust property and was, on insolvency, divisible amongst the general body of creditors. King CJ noted this to be ‘in conflict with fundamental principles of the law of trusts’ (at [171]).

Unlike Young CJ’s application of Octavo in Re Enhill, King CJ in Re Suco stated that in his view Octavo did not lead to the conclusion that the trust assts (to the extent of the trust liabilities) pass to the trustee in bankruptcy or the liquidator for the benefit of the general body of creditors (at [175]).

King CJ acknowledged that the trustee’s indemnity passes to the trustee in bankruptcy or liquidator, and that the proceeds of that indemnity were therefore part of the estate divisible amongst creditors. However King CJ drew a crucial distinction between the right of recoupment and the right of exoneration. In cases of recoupment, the right of indemnity can produce proceeds for division among the creditors generally. However not so in cases of exoneration. If a trustee takes trust property into his possession to satisfy his right to be indemnified for unpaid trust liabilities, that property retains its character as trust property and may be used only for the purpose of discharging the liabilities incurred in the performance of the trust (at [176]).

On the case before him, King CJ concluded that the liquidator was bound by s 292 of the Companies Act to pay the debts (which were all trust debts) in the specified order of priority, having recourse to the property of each trust to pay the debts incurred in performing it, and if there was any surplus after the priority payments, paying other trust debts pari passu (at [180]).

The turning point came in 2016 in Re Independent Contractor Services (Aust) Pty Ltd (in liq)[No 2] [2016] NSWSC 106; (2016) 305 FLR 222, when Brereton J held that the statutory priority scheme in s 556 did not apply to trust assets, and the creditors share pari passu in the trust assets after providing for the costs of administration. His Honour’s view was that s 556 was concerned only with the distribution of assets beneficially owned by a company and available for division between its general creditors, and trust principles provided that trust creditors’ claims rank pari passu (from [186]).

First instance judgment in Re Amerind.  In Re Amerind (receivers and managers apptd)(in liq)[2017] VSC 127; (2017) 320 FLR 118 Robson J controversially held that the trustee’s right of indemnity was not ‘property of the company’ within the meaning of s 433(3) of the Corporations Act and was not available to meet other liabilities of the company. Rather, the right of indemnity and lien could only be used to satisfy liabilities incurred on behalf of the trust (at [194]). His Honour concluded that the corporate trustee’s right of indemnity and lien, of which the receiver’s surplus was the proceeds, was ‘property held in trust’, rather than ‘the corporate trustees own beneficial personal property’. In his view the indemnity was not a personal asset of the trustee; rather it was trust property (at [197]). Hence he found that the receivers were justified in proceeding on the basis that the receivership surplus was properly characterised as property of the trust (at [201]).

Robson J acknowledged that Re Enhill and Re Suco Gold had both held that the statutory regime did apply where the assets of a company are held on trust. However his Honour preferred Brereton J’s reasoning in Re Independent that the statutory provisions applied only to ‘property of the company’ and that the trustee’s right of indemnity was not ‘property of the company’ (at [203]). His Honour took the considered view that the Victorian Full Court’s decision in Re Enhill, which had not been followed in the Federal Court or any other state of Australia, was not binding on him (at [208]).

Before the Court of Appeal, the Commonwealth submitted that Robson J erred in denying employees their rightful status as priority creditors. His Honour’s reasoning was contrary to the High Court’s recognition in Octavo, Buckle and Bruton that the trustee’s right of indemnity (including for exoneration) was a beneficial interest in trust property amounting to a proprietary interest. That analysis was applied by the Full Courts in Re Enhill and Re Suco Gold so as to conclude that the statutory order of priorities applied to the distribution of the property (at [212]).

Lane v Deputy Commissioner of Taxation [2017] FCA 953. Five months after Re Amerind,  Derrington J held in Lane that contrary to Re Independent and Re Amerind, the trustee’s right of indemnity for exoneration was a proprietary right which vested in an insolvent trustee’s trustee in bankruptcy and, by analogy, would also be ‘property of the company’ in the corporate context. But it was a limited right with a sole purpose to pay trust debts, which did not alter on insolvency (at [239]).

In Lane the question was whether trust funds were distributable to all creditors, or only to trust creditors. His Honour held that the right to be indemnified out of trust property (right of exoneration) was personal property of the trustee, “being a right to exercise power with respect to property within the meaning of s 116(1)(b) [of the Bankruptcy Act]…” (at [244]).

As touched on above, in Lane Derrington J analysed the nature of the indemnity, emphasising the distinction between rights of exoneration and recoupment, and concluded that the trustee is restricted in the use of the right of exoneration to using it for the purpose of discharging his liability to the trust creditors and no other (at [246]). The entitlement of trust creditors to be subrogated to the trustee’s right of indemnity was an important factor in Derrington J’s analysis. It gave them in his view a favoured position, and while it did not make them secured creditors, in Derrington J’s view they were akin to secured creditors in some respects (at [256]). His Honour also doubted whether, in the corporate context, ss 555 and 556 could apply to property comprising a trustee’s right of exoneration (at [258]).

Both Re Enhill and Re Suco Gold had characterised the trustee’s right of indemnity as property of the company divisible among creditors according to the statutory order of priorities (at [260]).

From [263] the Court of Appeal compared the reasoning in Re Enhill with that in Re Suco Gold, on the question of whether the trustees’ right of indemnity for exoneration in insolvency could only be used for the satisfaction of trust creditors’ claims, to the exclusion of general creditors. They noted that this question had less practical significance than perhaps anticipated. Many of the decided cases concerned trustee companies with trust liabilities only. Typically the only claims arguably not trust-related were the liquidator’s claims for costs, fees and expenses. It has been held that where it is established the liquidator’s work and costs were essential or beneficial to the trust, the related claims may be satisfied on the basis of Re Suco Gold, alternatively under the principles of Universal Distributing (at [260]).

Their Honours noted that prior to Lane, it seemed that no court had found it necessary to determine the controversy generated by the different holdings in Re Enhill and Re Suco Gold over whether the proceeds of the right of indemnity for exoneration are divisible amongst all creditors or trust creditors only. That was also the position in the instant case, as Amerind had only trust creditors. (at [261]).

At [266] the Court of Appeal noted that Young CJ in Re Enhill took the view that when insolvency intervened, the antecedent obligation to exercise the right of indemnity to meet the claims of trust creditors only was overriden by the prescribed statutory order of priorities. They noted that this approach had the advantage of consistency, but also drawbacks. It renders the trust creditors’ right of subrogation of little or no substance in the very circumstance which would trigger it. It creates a position where, on one view, there is an unauthorised application of trust assets.

However their Honours did not attempt to resolve the issue of whether the right of exoneration can be applied to pay trust creditors only, or trust and general creditors of the trustee, and seemed to doubt that it could be resolved at all:

“It seems to us to be unlikely that any analysis can comprehensively reconcile the competing considerations at play, all of which are supported to some degree in the diverse relevant authorities.” (at [267])

1. Is the right of indemnity property of the trustee company?

The answer given was yes, the right of indemnity by way of exoneration is property of the insolvent trustee company. They categorically overturned Robson J’s holding on this, stating that:

“The primary judge’s conclusion that the corporate trustee’s right of indemnity by way of exoneration was not ‘property of the company’ cannot be sustained in the light of relevant High Court authority.” (at [269])

They discussed and disagreed with his Honour’s reasoning, and observed that as Derrington J had cogently explained, in the light of the High Court decisions in Savage, Octavo, Bruton, Buckle and CPT, it cannot be seriously doubted that the right of indemnity by way of exoneration is property of the insolvent trustee company (at [273]).

2. Is the distribution of the relevant property governed by the Corporations Act?

The answer given was yes.

In Lane, Derrington J held that the right of exoneration was property of the insolvent trustee, but that the provisions of the Bankruptcy Act governing distribution of the insolvent’s property did not apply. He declined to follow Re Suco Gold and Re Enhill on this point (at [274]).

However the Court of Appeal held that in their view Re Suco Gold and Re Enhill are correct on this issue, repeating twice that:

“Once it is accepted that the right of indemnity is property of the insolvent, the insolvency legislation must apply.” (at [276] and [281])

Their Honours conceded that whilst it might be accepted that, at least where beneficiaries have an interest in the discharge of trust debts, the right of exoneration must only be used for that purpose, the imposition of a requirement of ‘directness’ was not, in their view, a requirement found in the existing authorities (at [279]). In any event, the existence of an inherent limitation on what use the right of indemnity could be put (ie to pay only trust creditors), given that it is ‘property’ in the relevant sense, would not justify a conclusion that the statutory regime did not apply (at [280]).

3.  Is the distribution confined to trust creditors? 

The Court of Appeal returned to this issue, but concluded it was unnecessary to decide this question on the application before them. The right of indemnity is property of the company, and the statutory regime applies to its distribution.

“Whether that property has an inherent characteristic which confines its distribution to trust creditors is not one that we need to decide, as all of Amerind’s creditors are trust creditors.” (at [282])

Their Honours recognised that principles of trust law favoured the approach in Re Suco Gold trust giving cogency to the view confining the use of the right of exoneration to the payment of trust debts only (at [283]). However at [284] their Honours then listed four considerations in favour of the Re Enhill approach that trust creditors and general creditors rank equally on a distribution of property constituted by the right of exoneration.

The Court of Appeal concluded that the receivership surplus was not trust property but was trustee property, and that the priority regime in ss 433(3), 556 and 560 applied to that surplus insofar as those assets were circulating assets at the relevant time (at [285]). They then clearly laid down the following guidance –

“[W]hilst the discussion above discloses that there must be some doubt about which of Re Enhill or Re Suco Gold is correct, it suffices to say that unless and until a subsequent appellate decision decides otherwise, the law as it stands in Victoria as articulated in Re Enhill should continue to be followed by trial judges in this State.” (at [286])

Conclusion

As noted above, their Honours concluded that the receivership surplus subject to the trustee’s right of indemnity was not trust property (but rather property of the trustee company), and the priority regime in ss 433(3), 556 and 560 of the Corporations Act applied to that surplus insofar as those assets were circulating assets at the relevant time.

Two final points. First, I would suggest that in bankruptcy cases (as opposed to corporate insolvency) Derrington J’s judgment in Lane is likely to trump the Court of Appeal’s decision on the Amerind appeal as authoritative in the bankruptcy context.

Secondly, Re Amerind had been having a disturbing ripple effect in other insolvent trading trust cases handed down in the intervening months before the appeal decision, which should now ease. For instance, in a case I appeared in for which judgment was delivered by Robson J last week, Re Mamounia Pty Ltd (in liq) (No 2) [2018] VSC 65, a question arose as to whether the liquidators of a trustee company had power to direct payment of a sum held by a firm of solicitors under a solicitors’ general possessory common law lien to be applied in payment of the solicitors’ fees. (Due to the nature of the common law lien, the solicitors’ right was only a passive right to retain the sum, without a power to pay themselves the fees owing by the insolvent client on multiple files.) The doubt arose in light of the then principle in Re Amerind  that a trustee’s right of exoneration itself was a trust asset and not an asset of the trustee, from which it followed that the power the liquidators would otherwise have under s 477 of the Corporations Act in dealing with property of the trustee company may be lacking. The liquidators of Mamounia, a bare trustee, sought power to be conferred upon them or the company under s 63 of the Trustee Act, if otherwise justified in directing the payment to be made. His Honour agreed to make orders conferring the requisite power under s 63 of the Trustee Act, also noting that Universal Distributing may assist the liquidators, at least for the portion of fees owing that related to work performed in producing the sum held.

At least in Victoria, then, calm has largely been restored and life as it was for insolvency practitioners administering insolvent trustees of trading trusts pre-Amerind may resume. However it remains to be seen what the future holds.

No doubt much virtual ink will be spilt in discussing the Court of Appeal’s judgment in the coming days and weeks. We wait with interest to see how the Full Court of the Federal Court treats these issues in its decision which is surely imminent in In the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016). Given the prevalence of the use of trading trusts in Australia, it would be preferable to have both certainty and a national approach on the receivership or liquidation of corporate trustees.

*Postscript #1 – the Full Court of the Federal Court handed down its decision in Killarnee on 21 March 2018. My post giving a snapshot analysis of the decision may be read here, and my article reviewing the decision in Killarnee more closely may be read here.

*Postscript #2 – special leave to appeal to the High Court from the Victorian Court of Appeal’s decision in Amerind has been sought and granted in August 2018 – per my update here. As at 19 October 2018 a hearing date has not yet been allocated. 

Newsflash – judgment in the Amerind appeal handed down this morning

This morning a 5-member bench of the Victorian Court of Appeal handed down judgment in the appeal from the decision of Robson J in Re Amerind (receivers and managers apptd) (in liq) [2017] VSC 127; (2017) 320 FLR 118. The bench comprised Ferguson CJ, Whelan JA, Kyrou JA, McLeish JA and Dodds-Streeton JA.

In a unanimous judgment overturning the decision of Robson J, the plurality held that Amerind’s right of indemnity as trustee over trust assets for liabilities it incurred on behalf of the trust was property of the company (not, as his Honour had held at first instance, property of the trust) and that the priority regime in the Corporations Act therefore applied.

The Court held that the Commonwealth (following its advance under FEGS) was entitled to be paid by the Receivers before other creditors from particular assets.

Their Honours did however uphold Robson J’s decision that certain property in issue was subject to a circulating security interest, including cash in Amerind’s trade account, funds advanced to Amerind under a factoring arrangement, and miscellaneous receipts.

I note that there is also a judgment which addresses similar issues pending since it was heard on 10-11 August 2017 by the Full Court of the Federal Court in In the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016). I will keep an eye on that also.

More to follow re Amerind, with links to the judgment, once it is up on Austlii.

If anyone cannot wait that long, I recommend that you read the bankruptcy judgment from August last year of Derrington J in Lane v Deputy Commissioner of Taxation [2017] FCA 953. In it, Derrington J took a different view to some of the conclusions of Robson J in Re Amerind. On the question of whether the trustee’s right of indemnity and lien was property of the trust or of the trustee, Derrington J queried whether a conclusion that the right of exoneration was property of the trustee necessarily meant that it was available to the trustee’s general creditors. His Honour took the view that whether the right of exoneration was a trust asset or a trustee asset, there was only one method by which the right could be exercised and that was by the application of trust funds to paying the claims of trust creditors (whether by the trustee or by the trust creditors exercising their right of subrogation to the right of exoneration and lien). Even if the right of exoneration is an asset of the trustee, any property received by a bankruptcy trustee is subject to all of the liabilities and equitable interests existing prior to the bankruptcy. Accordingly the trustee, and subsequently its bankruptcy trustee or its liquidator, could only ever apply trust funds in discharge of trust debts (at [94]-[117]). Derrington J concluded in that case that a trustee’s right of exoneration from trust property was an asset of the trustee.

Watch this space.