Last Wednesday the High Court handed down its decision in the Amerind appeal. The High Court’s decision is Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth  HCA 20; 368 ALR 390 (Amerind). Their Honours wrote three separate judgments, but were unanimous on the key conclusions reached and in dismissing the appeal.
This case falls at the intersection of insolvency law and trust law, bringing into focus the way they interact, and the fact that despite the longstanding and widespread use of trading trusts in commerce in Australia, our companies legislation makes “little or no provision for corporate trustees which become insolvent” (see , quoting from the ALRC’s General Insolvency Inquiry Report No 45, which noted this lacuna back in 1988).
Fundamentally, the issue for the High Court was whether creditors, who would be priority creditors of an insolvent company, are priority creditors when that company trades as trustee of a trading trust. Put another way, do employees of a company that is in receivership or liquidation have no statutory priority if their employer happens to have been trading as the trustee of a trading trust, and holding its assets on trust? (see -)
In practical terms, the broad issue was how a receiver was to deal with surplus proceeds of the receivership of a trustee company. Did section 433 of the Corporations Act 2001 (Cth) apply such that the statutory scheme of priorities would operate, protecting employee entitlements? One judgment was written by Kiefel CJ and Keane and Edelman JJ, another by Bell, Gageler and Nettle JJ, and the third by Gordon J.
I have previously written on the Victorian Court of Appeal decision in Amerind, the subject of this appeal, which can be read here.
I have also written on the Full Federal Court decision in Jones (liquidator) v Matrix Partners Pty Ltd, re Killarnee Civil & Concrete Contractors Pty Ltd (in liq)  FCAFC 40 (Killarnee) handed down in March last year (2018), just three weeks after the Court of Appeal’s decision in Amerind. Note the questions in Killarnee arose in the liquidation context; those in Amerind in a receivership. For my initial, short summary of Killarnee and the seven propositions to be distilled from it see here. For my article setting out a review and analysis of Killarnee see here.
Early in the Killarnee article I addressed two preliminary issues. These passages are worth repeating here, as an understanding of them is useful to properly digest the analysis of the issues raised in these cases. I do so now –
(1) The nature of trusts
Some general principles about trusts:
A trust has no legal personality. It is not an entity. It is an equitable collection of rights, duties and obligations between beneficiaries, trustee and property. The trustee is bound to deal with trust property for the benefit of the beneficiaries (in a private trust) and in accordance with the terms of the trust.
A trust is not capable of suing or being sued. Third parties dealing with a trust may only do so by dealing with its trustee, be that an individual or a company, both of which do have a legal personality.
(2) The two types of trustee’s indemnity
The second preliminary point which may be useful is an explanation of the difference between the two types of trustees’ rights of indemnity – the right of recoupment / reimbursement, and the right of exoneration. Both of course arise after the trustee incurs a debt on the trust’s behalf, and becomes personally liable for payment of that trust debt.
The right of recoupment/reimbursement arises where the trustee has already paid a trust debt with its own money, and seeks recoupment or reimbursement from the trust. If a trustee exercises a right of recoupment, paying itself back with trust money, that money becomes the trustee’s “own money”. The money forms part of the trustee’s general estate without any attendant equitable obligation. The trustee can keep it, or use it to pay any creditors to whom it owes money (trust or non-trust). It has already paid the trust debt with its own money, and is entitled to the repayment from trust assets in its own right and capacity.
The right of exoneration is different. This is the type of indemnity that will more often be relevant in insolvency (where trust debts remain unpaid). Bear in mind that trustees are personally liable for trust debts. The right of exoneration entitles the trustee to take trust assets and apply them directly to pay trust debts, thereby exonerating the trustee for its personal liability to pay that debt, which is extinguished.
Here is a key difference between the two types of indemnity rights: when a trustee exercises a right of exoneration, those proceeds produced are not entirely the trustee’s “own money”, because they can only be used to pay unpaid trust debts. It is only for that purpose – the payment of trust debts – that the trustee may help itself to the trust assets in the first place. To then keep the money for itself, or use it to pay non-trust creditors, would be in breach of its duties as trustee, and the trusts with which the assets it holds are impressed. Hence the proceeds can only be used to pay trust debts.
That this principle of trust law remains true in insolvency is confirmed in a line of authority culminating in September 2017 in Derrington J’s bankruptcy judgment in Lane, re Lee v Deputy Commissioner of Taxation  FCA 953, in March 2018 in the Full Federal Court’s decision in the liquidation context in Killarnee, and now in the High Court’s decision in Amerind (see below). Both rights of indemnity have been held to create a proprietary interest in trust assets.
The High Court’s decision in Amerind – unanimous on the key conclusions reached – finally puts to bed several points of uncertainty which have vexed receivers and liquidators of trustee companies, particularly in the past few years. I will discuss the judgments below, and consider what the landscape now looks like post-Amerind, including in the bankruptcy context.
Their Honours of the High Court on the Amerind appeal unanimously held that –
- Section 433 of the Corporations Act applies, subject to its terms, on the receivership of a trustee company. That is, subject to its terms, it applies to the distribution of proceeds of trust assets by the receiver/s in payment of unpaid trust debts, in the exercise of the trustee company’s right of exoneration. Slight points of difference in reasoning between the judgments, but the same result. Their Honours were also unanimous that this conclusion applies with equal force in the liquidation context as the same reasoning applies to s 561.
- Accordingly the statutory scheme of priority applies to distribution of the relevant trust property, being here the receivership surplus subject to the trustee’s right of indemnity. It follows 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.
- Trust assets may only be used to pay trust creditors on exercise of the power of exoneration in a receivership or in the liquidation of a trustee company, not also non-trust creditors. Re Enhill was wrongly decided. (obiter dicta)
Their Honours were also unanimous, as part of their reasoning, that the previous High Court decisions in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 (Octavo), Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 (Buckle) and Bruton Holdings Pty Ltd (in liquidation) v Federal Commissioner of Taxation (2009) 239 CLR 346 (Bruton Holdings) are correct – a trustee’s right of indemnity (whether reimbursement or exoneration) creates a proprietary interest in the trust assets (see below).
Gordon J addressed several additional issues in obiter, which did not fall for determination in this appeal –
- The same approach applies in the bankruptcy context also. The legislated scheme of priority applies on the bankruptcy of an individual trustee to the distribution of trust assets to which the trustee has a right of indemnity and to the extent of that entitlement. Lane, re Lee v Deputy Commissioner of Taxation  FCA 953 (Lane) was incorrect on this issue. This view is probably supported by the observations of Bell, Gageler and Nettle JJ at .
- Where a company was trustee of multiple trusts, s 433 (or s 561) applies in its terms to each fund separately, to the extent that the fund constitutes circulating assets. Each fund should be kept separate, and where this causes practical difficulties or expense, court directions should be sought. The approach recommended by King CJ in In re Suco Gold (1983) 33 SASR 99 (In re Suco Gold) was also endorsed by Bell, Gageler and Edelman JJ.
- Where a company was trustee of multiple trusts, the costs of administration – which have priority in a wind up pursuant to s 556(1)(a) – should be apportioned across the trusts as outlined by King CJ in In re Suco Gold.
There are several issues not resolved by Amerind. These are addressed below.
**This concludes the summary. There now follows a more detailed treatment of the judgment, for those interested in reading on.
The relevant facts and events are summarised at -, - and - of the High Court judgment, at - and  of the Victorian Court of Appeal judgment, and at  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 assets it held were held on 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 had a right 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
- On the day Administrators were appointed to Amerind, Receivers were appointed by the secured creditor (Bank) to the business with assets that included cash at bank, stock, plant and equipment, and reserve amounts contingently owed to Amerind under the Bank’s debtor finance facility.
- By the time the creditors resolved to wind the company up, the Receivers had realised most of Amerind’s assets and were in a position to retire. The Bank’s secured debt had been discharged by means that included payment of almost $21m. The Receivers held a receivership surplus of $1,619,018,
Before they could retire, the Receivers were confronted with competing claims in relation to that surplus.
One claim to the receivership surplus was by the Commonwealth. The Commonwealth had advanced accrued wages and entitlements totalling $3.8million to Amerind’s former employees pursuant to FEGS (the Fair Entitlements Guarantee Scheme). The Commonwealth’s position was that the priority regime provided for in the Corporations Act applied, by virtue of the application of s 433. 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 competing claim to the surplus was by the appellant, a creditor Carter Holt Harvey Woodproducts Australia (Pty Ltd). Carter Holt submitted that s 433 of the Corporations Act did not apply here on the receivership of the assets held by the trustee of a trading trust to afford priority to the Commonwealth.
The Receivers sought directions from the Court.
The proceedings at first instance and in the Court of Appeal
At first instance, his Honour Robson J agreed with the creditor Carter Holt. He held that s 433 did not apply to the receivership surplus. In summary, his Honour held that the Receivers were not in possession of “property of the company” because the company had no assets of its own with which to pay the trust creditors, only a right of indemnity in respect of trust liabilities; and that right was not personal property of the trustee, but rather was held on trust for the trust creditors. In the alternative, his Honour reasoned, even if Amerind’s right of indemnity was “property of the company” within the meaning of s 433, it was not “comprised in or subject to the circulating security interest” created by the Deed, per s 433(2)(a), and hence s 433 was not engaged. He held, therefore, that the Commonwealth did not have a priority claim to the receivership surplus. (see )
The Victorian Court of Appeal upheld the Commonwealth’s appeal. Broadly, it held that Amerind’s right to be indemnified out of the assets of the trust was “property of the company” and that the receivership surplus fell within s 433 of the Corporations Act. It necessarily followed that the surplus was subject to the priority regime in ss 433(3), 556 and 560. (see ) In terms of the assets which fell within the ambit of “property… secured by a circulating security interest”, the Court of Appeal held that it was not necessary for the right of indemnity to be the subject of a circulating security interest. It was enough if the trust assets were. However even if it were necessary to characterise the right of indemnity as circulating or non-circulating, then the character of the trust assets as circulating was one that “flowed through to the right of indemnity”: see the Court of Appeal decision at  and . (see ) Carter Holt appealed to the High Court.
A. KEY LEGISLATIVE PROVISIONS
Section 433(2) of the Corporations Act
- “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”. [emphasis added] (see )
Kiefel CJ, Keane and Edelman JJ held expressly that the two preconditions in s 433(2)(a) to the operation of the priority regime in s 433(3) are alternative, at -. Gordon took the same approach at - and at . Bell, Gageler and Nettle JJ appeared to treat both as needing to be satisfied. before the operation of s 433(3) is attracted.
Section 433(3) of the Corporations Act
Section 433(3) is concerned with the distribution of circulating assets and provides –
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:
(a) first, any amount that in a winding up is payable in priority to unsecured debts pursuant to s 562,
(b), next, if an auditor of the company had applied to ASIC under s 329(6) for consent to his, her or its resignation as auditor and ASIC had refused that consent before the relevant date – the reasonable fees and expenses of the auditor incurred during the period beginning on the day of the refusal and ending on the relevant date;
(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. [emphasis added]
The word “property” is relevantly and widely defined in s 9 to mean –
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…
See the discussion below as to what was seen to constitute “property of the company” in this case of receivership of the assets of a trustee company.
Sections 556(1)(e), (g) or (h) and 560 of the Corporations Act set out the scheme which applies in liquidations, giving priority to certain claims, including claims by employees and by those, here the Commonwealth, who advance funds on behalf of the employer to meet them. (see )
Section 340 of the Personal Property Securities Act defines “circulating asset” to include personal property in respect of which a security interest has been granted where “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”.
B. KEY CONCLUSIONS ON WHICH THE HIGH COURT WAS UNANIMOUS
1. Section 433 of the Corporations Act applies, subject to its terms, on the receivership of a trustee company. That is, subject to its terms, it applies to the distribution of proceeds of trust assets by the receiver/s in payment of unpaid trust debts, in the exercise of the trustee company’s right of exoneration. Kiefel CJ, Keane and Edelman JJ pointed out that the same reasoning applies to s 561, which is the provision cognate to s 433 but relevant to liquidators rather than receivers. (see ) Gordon J also observed that the conclusions in this appeal apply with equal force to a liquidator of a trustee company dealing with trust assets and a right of indemnity over them. (see ) Bell, Gageler and Nettle JJ held similarly at .
The High Court was unanimous in this conclusion. The fact that the company traded through a trading trust and held assets and incurred debts as a trustee, rather than in its own capacity, does not impede the application of ss 561 and 433.
I turn to discuss the analysis. It should be remembered that the slight differences in paths of reasoning reached the same destination, hence in practical terms the differences may be of greater academic interest than of legal significance.
The question of what was the relevant “property of the company”
As Gordon J noted, s 433 relevantly applies to “property of the company” and requires that employees’ claims have priority in the distribution of “property of the company” to which the section applies (circulating assets). The Commonwealth enjoys that priority in the shoes of the employees by virtue of s 560, where it has paid out employees’ claims. (see )
The Commonwealth submitted that Amerind had a proprietary interest in the receivership surplus and that s 433 applied to Amerind’s proprietary interest in the receivership surplus as “property of the company”. ()
The creditor Carter Holt submitted that the receivership surplus fell outside the scope of s 433 because, among other things, s 433 only deals with circulating assets, and the trustee’s right of exoneration – the relevant property of the company, so it was argued, not any underlying interest in the receivership surplus – was a fixed asset, not a circulating asset. (see ) Carter Holt contended that the right of indemnity itself had to be comprised in or subject to a “circulating security interest” as defined by s 51C, in order for s 433 to apply. (see ) The High Court rejected this submission.
Note that Carter Holt’s argument involved notionally severing the trustee’s right of exoneration from the proprietary interest it generated in the assets. As Gordon J observed, the right of exoneration and the trustee’s proprietary interest in the fund are inextricably linked. (see )
Bell, Gageler and Nettle JJ – the trust assets themselves are “property of the company”, to the extent that the company has a beneficial interest in them
On the question of what was the relevant “property of the company” per s 433(3), Bell, Gageler and Nettle JJ’s approach was that the “inventory itself” or the “trust assets themselves” were property of the company coming into the Receivers’ hands. To the extent of Amerind’s right of indemnity, that property would yield proceeds of realisation from which Amerind was entitled to discharge properly incurred trust liabilities, and out of which the Receivers were bound to pay priority debts or amounts in accordance with s 433(3). [emphasis added] (see ,  and )
Their Honours disagreed that the relevant “property of the company” “coming into [the receivers’] hands” per s 433(3) was Amerind’s right of indemnity. It could not be, because it was not a “circulating asset” within the meaning of s 340 of the PPSA, and thus any security over it was not a “circulating security interest” as defined in s 51C of the Corporations Act. (see ) The inventory itself was the relevant circulating asset which was “comprised in or subject to a circulating security interest” (per s 433(2)(a)) created by Amerind in favour of the Bank. (see )
Their Honours observed that in the winding up of a corporate trustee, the “property of the company” that is available for the payment of creditors includes so much of the trust assets as the company is entitled, in exercise of its right of indemnity, to apply in satisfaction of the claims of trust creditors. Thus here, where the liabilities identified in s 556(1)(e) were trust liabilities, the “property of the company” that would have been available for the payment of creditors in the event of a winding up would have been so much of the trust assets as would be sufficient to pay or satisfy the claims of trust creditors. (see )
Gordon J – the trustee company’s proprietary interest in the trust assets is the relevant “property of the company”
Gordon J’s approach was that Amerind’s interest in the receivership surplus generated by its right of exoneration out of those assets was “property of the company” within the meaning of s 433(3), based on a proper understanding of the nature of the right of exoneration and due regard to the broad definition of “property” in the Corporations Act. [emphasis added] (see ) At  her Honour observed –
…The trustee’s proprietary interest in the trust assets, generated by the right of exoneration, clearly falls within the broad definition of “property” [in s 9] and thus the phrase “property of the company” used in s 433(3) of the Corporations Act.
Gordon J took the view that the trustee’s right of exoneration is a fixed asset which is the “gateway” or “means” by which the circulating security interest is exercised over the circulating (trust) assets, and by which s 433 applies to the proceeds of sale of those assets. Her Honour observed that there is no provision requiring the trustee’s right of exoneration itself to constitute a circulating asset. The text of s 433 does not require it. (see  and )
Her Honour discusses trust law principles as to the right of exoneration and the proprietary interest it generates in the trust fund, taking priority over the interests of beneficiaries, and makes this observation at  –
Where a corporate trustee becomes insolvent, those principles do not change. Where s 433 applies, it operates on its terms, on the trustee’s interest in the trust fund to the extent that that interest is in circulating assets. Section 433 takes the property of the company as it finds it. Section 433 does not and cannot operate only on the source of the trustee’s interest in the trust fund, namely the right of exoneration.
Kiefel CJ, Keane and Edelman JJ – the trustee’s rights to the trust assets are themselves circulating assets and are “property of the company”  / the trust assets are the “property of the company”, to the extent the trustee can use them for its own benefit 
Kiefel CJ, Keane and Edelman JJ rejected Carter Holt’s submission on this, observing that fundamentally, it is incorrect to treat rights held on trust by a company as if they existed separately and independently from its power of exoneration so that it could be said that (i) the rights held on trust, and subject to the circulating security interest, are not the property of the company, but (ii) the power of exoneration, which is the property of the company, is not subject to the circulating security interest. (see )
Their Honours’ view was that Amerind’s power of exoneration is the means by which its trust rights can be used for its personal benefit as trustee. They observed that it is meaningless to ask whether Amerind’s power of exoneration is subject to the circulating security interest independently of the legal rights to the trust assets to which the power relates. They concluded that Amerind’s legal rights to the trust assets, to the extent that it has power to use them for its own benefit, are thus themselves circulating assets and are “property of the company” within s 433. (see )
Their Honours stated the same reasoning applies to s 561, which is the provision cognate to s 433 but relevant to liquidators rather than receivers. Section 561 applies to “property of a company available for payment of creditors other than secured creditors”. (see )
At  their Honours state that the trust assets are the property of the company held by the Receivers, although only to the extent to which the company could use them for its own benefit by its power of indemnity.
Discussion of the proprietary interest in trust assets generated by the right of indemnity
Gordon J endorsed Allsop CJ’s confirmation in Killarnee that the right of exoneration generates a proprietary interest on the part of the trustee in the trust fund (see ). Allsop CJ had observed in Killarnee at  –
The property in the hands of the trustee remains trust property, but subject to the trustee’s proprietary interest that exists for the purpose of paying the creditors. The property is not held on trust for the beneficiaries alone; the proprietary interest of the trustee is preferential to the interests of the beneficiaries, but that interest of the trustee is shaped by its purpose and origins in the trust relationship – to pay trust creditors in order to exonerate itself from those debts…
Gordon J noted at  that the principle that the right of exoneration generates an equitable interest in the trust fund that is proprietary in nature was subsequently restated by Allsop J also in Killarnee at  as follows –
Thus, in one sense, what exists can be seen to be an equitable proprietary interest or charge or lien in or over trust assets; but any enforcement by a Court of Equity is not of a security interest or a right created over the interests of the beneficiaries, but rather the enforcement by a Court of Equity of a prior proprietary interest in the trust fund to support the right of indemnity.
At - Gordon J endorsed the approach of Allsop CJ to the right of exoneration and its generation of a proprietary interest in the trust fund as consistent with a number of decisions of the High Court, including Octavo at pp 369-70 (a proprietary interest), Buckle at - (a beneficial proprietary interest), and Bruton Holdings at  and  (a lien which amounts to a proprietary interest in trust assets). Her Honour goes on to state at  that the proprietary interest generated by a trustee’s right of exoneration in trust property is in the nature of a security interest in the form of an equitable lien.
Bell Gageler and Nettle J noted at  that a trustee’s right to be indemnified out of trust assets for trust liabilities takes priority over the beneficiaries’ claim on the trust assets. Their Honours then said this –
[I]t is said that the trustee has an equitable charge or lien over the trust assets. It is not, however, a charge or lien comparable to a synallagmatic security interest over property of another. It arises endogenously as an incident of the office of trustee in respect of the trust assets.
Sidebar: “Synallagmatic” is derived from an ancient Greek term, and describes a contract in which each party is bound to provide something to the other. “Endogenously” is a term more often used in the sciences, particularly biology, meaning proceeding from within, or derived internally.
They continue at  –
To describe it as constituting a beneficial interest in the trust assets, and so to property, thus acknowledges the characteristic blending of personal rights and obligations with proprietary interests which is the “genius” of the trust institution. Such a beneficial interest falls naturally and ordinarily within the definition of “property” in s 9 of the Corporations Act.
2. Accordingly the statutory scheme of priorities in s 433(3) applies to distribution of the relevant trust property, being here the receivership surplus subject to the trustee’s right of indemnity. It follows from this 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 is vindicated.
Each of the judgements included some general discussion of principle and policy, the proper construction of these legislative provisions, and the approaches taken on these issues in favour of the application of the scheme of priority in the Corporations Act on the insolvency of a trustee company.
Keifel CJ, Keane and Edelman JJ approached the proper construction and operation of section 433 noting that that provision and its antecedents were enacted against the background of, and assumed the operation of, fundamental principles of trust law. (see )
In their conclusion, their Honours Keifel CJ, Keane and Edelman JJ returned to the broader issues in explaining their reasons why the appeal must be dismissed and s 433 applies –
- Section 433 of the Corporations Act is not based on a conception of a trustee company’s rights that draws a sharp division between rights held on trust on the one hand, and the trustee’s powers in association with those rights (its power of exoneration) on the other. The rights of the trustee collectively can be used for the benefit of the trustee in discharging debts to trust creditors and, when the subject of a circulating security interest, they are property of the company coming into the hands of a receiver. From that property the receiver must pay various debts, including employee debts, in priority to any claim for principal or interest in respect of the secured creditor’s debenture. (see ) Their Honours considered this conclusion was fortified by two further considerations –
- This obviously fits with the underlying purpose of provisions such as ss 433 and 561. It would be perverse if the Corporations Act operated to deny employee creditors priority over the holders of a circulating security interest solely for the reason that their employer, possibly unknown to them, was trading as a trustee.
- Section 433 was enacted in 2001 at a time when the decision in In re Suco Gold had stood for 17 years and “was both well-regarded and followed (though by no means universally) including in relation to priorities and liquidator’s costs”, as observed by Allsop CJ in Killarnee. (see )
Bell, Gageler and Nettle JJ observed that it is wrong to presuppose that s 556 and its precursors cannot apply in terms to the proceeds of realisation of a trustee’s right of indemnity because such provision are “addressed only to distribution of assets beneficially owned by the company and available for division between general creditors” (quoting from Heydon and Leeming, Jacobs’ Law of Trusts in Australia, 8th ed (2016) at [21-15]). (at ) I note this is a rejection of the view to that effect that had been advanced by Brereton J in Independent Contractor Services (Aust) Pty Ltd (in liq) [No 2]  NSWSC 106; (2016) 305 FLR 222.
Their Honours referred to the oft-stated maxim that bankruptcy legislation has no application to trust assets, but noted that this has the capacity to mislead. This is because on the bankruptcy of an individual who is a trustee, creditors may be paid out of property held on trust to the extent that the bankrupt has a beneficial interest in the trust assets, and thus to the extent of the bankrupt’s right of indemnity. (see )
Bell, Gageler and Nettle J state that the position under the Corporations Act is comparable. The liquidator of a company assumes control of the company’s assets subject to equities. Accordingly the liquidator must deal with assets held by the company as trustee in accordance with the terms of the trust. But to the extent that the company has a beneficial interest in the trust assets, by reason of the company’s right of indemnity in respect of properly incurred trust debts, the trust assets are property of the company available for the payment of creditors. (see )
Their Honours endorsed Allsop CJ’s recent observation in Killarnee that there is no reason in principle or by reference to text or context why the statutory order of priorities should not be followed in the distribution of the proceeds of the trustee’s right of indemnity among trust creditors. Nor, they suggested, is there any reason to suppose that is not what Parliament intended in their renactment of s 292 of the Companies Act in effect as s 556 of the Corporations Act, given the wide-spread use of companies as trustees of business trusts in Australia, and against the background of the decision in In re Suco Gold and its general acceptance. Their Honours concluded that section 556 should be understood as applicable to trustee corporations and their property of all kinds. (see )
Gordon J noted that historically employees have been given priority in the event of a corporate insolvency in relation to circulating assets (formerly floating assets). In construing these provisions, the High Court should be slow to attribute an intention to Parliament to create two classes of employees in insolvency: those employed by a company acting in its own capacity, and those employed by a corporate trustee acting in that capacity. (see )
Gordon J concluded that the Court of Appeal was correct to hold that s 433 operated on the trustee’s proprietary interest in the trust fund and required the application of the statutory priority rules in s 433 to the receivership surplus. (see )
3. Trust assets may only be used to pay trust creditors on exercise of the power of exoneration in a receivership or in the liquidation of a trustee company, not also non-trust creditors. Re Enhill was wrongly decided. Obiter.
In the decision below, the Victorian Court of Appeal had observed that because all of Amerind’s creditors were trust creditors, it was unnecessary to decide whether the proceeds of realisation were distributable among creditors generally, as was held in Re Enhill, or only as between trust creditors, as was held in In re Suco Gold. However the Court of Appeal stated that until and unless the issue was authoritatively determined, trial judges in Victoria should continue to follow Re Enhill Pty Ltd  1 VR 561 (Re Enhill). (see )
Keifel CJ, Keane and Edelman JJ noted that just as a trustee’s ability to exercise its power of exoneration for personal benefit is limited to the terms of the power of exoneration, so too is the trustee in bankruptcy or liquidator limited by the terms of the power of exoneration in the exercise of control over the trust rights. (see ) They observed that it would be manifestly unjust and contrary to principle if a liquidator or trustee in bankruptcy were able to assert control over property of the trustee company or bankrupt but at the same time were able to reject the terms and conditions on which the trustee procured that property. (see )
At - their Honours discussed the “distinctly fragile” 1983 decision of the Full Court of the Victorian Supreme Court in Re Enhill, upon which the Commonwealth had relied in support of one of its arguments, in which it had been held that after payment of the priority debts, the proceeds of the sale of trust assets could be used to discharge debts owing to both trust creditors and non-trust creditors. Keifel CJ, Keane and Edelman JJ observed that contrary to that decision, the liquidator took the power of exoneration with all of its characteristics, including its intrinsic limit precluding it from being used to meet debts other than those incurred by the trustee with authority for the conduct of the trust business. Their Honours concluded that Re Enhill was wrongly decided. (see )
Bell, Gageler and Nettle J noted that a significant part of Robson J’s reasons at first instance, and a substantial part of the Court of Appeal’s reasons, were directed to this question of whether an insolvent corporate trustee’s right to be indemnified for trust liabilities out of trust assets constitutes property of the company that may be applied only in payment of the claims of trust creditors (per In re Suco Gold) or also those of non-trust creditors (per Re Enhill ). (see )
Their Honours stated that Robson J was correct – the proceeds from a corporate trustee’s exercise of its right of exoneration may only be applied in satisfaction of the trust liabilities to which that right relates. Their Honours quoted with approval from the judgment of King CJ in In re Suco Gold, and noted this view was affirmed by the Full Federal Court last year in Killarnee. (see )
Gordon J noted that this was not in issue in this appeal as Amerind only had trust creditors, however the question is important. (see )
Her Honour observed that the position is straightforward where a right of reimbursement is exercised. The trust assets that are the subject of the right of reimbursement are the trustee’s personal assets, which fall into the trustee’s general estate, and will be divisible among creditors of the trustee generally. (see ) In the case of a right of exoneration, circulating assets which are the subject of the right of exoneration may only be applied to satisfy trust debts and are not available to creditors generally. (see ) Contrary to the primary submission of the Commonwealth on this point, section 433 does not purport to change the nature and character of property that falls under the control of the receiver as property of the company. Amongst other reasons to reject that submission, Gordon J observed that “legal restrictions inherent in property must be respected where there is no clear statutory mandate to adopt any other approach”. (see -)
C. ADDITIONAL ISSUES
Under a heading of “Appellant’s other arguments”, Gordon J went on to address several additional matters which Carter Holt had contended supported its construction of s 433 from . Her Honour noted that these did not fall for determination in this appeal, hence these observations should be treated as obiter. The first of those is already discussed immediately above. These are the balance.
(1) Bankruptcy context – the scheme of priority in the Bankruptcy Act applies similarly where assets held on trust subject to a right of indemnity
A submission was made for Carter Holt that if s 433 were found to apply to proceeds of the trustee’s right of exoneration, this would create a distinction between the treatment of a corporate trustee in insolvency and a trustee individual in bankruptcy. Gordon J did not accept that submission. Her Honour observed that the right of exoneration and the proprietary interest generated in the trust fund means that the “trust property” to which the trustee has an interest ceases to be aptly described as property “held on trust” but instead is property of the trustee subject to limitations as to use. So much was made clear in Buckle. (see )
It follows, so Gordon J concluded, that there is no apparent inconsistency between the corporate insolvency priority regime and s 116(2)(a) of the Bankruptcy Act 1966 (Cth), which provides that property held by a bankrupt in trust for another person is not property divisible amounts the creditors of the bankrupt. Her Honour referred to Lane (trustee) re Lee v Deputy Commissioner of Taxation  FCA 953; (2017) 253 FCR 46,where Derrington J had held that money to be paid from trust assets to trust characters could not be characterised as “proceeds” within the scope of the phrase “proceeds of the property of the bankrupt” as that phrase is used in ss 108 and 109(1) of the Bankruptcy Act, with the result that the scheme of priority set out in s 109(1) would not apply in the bankruptcy of an individual trustee. Gordon J disagreed, with a succinct: “That conclusion is wrong”. (see ) This view is probably supported by the observations of Bell, Gageler and Nettle JJ at 
(2) Multiple trusts – to be treated as separate funds
Bell, Gageler and Nettle JJ, who addressed this issue too, noted that unlike the present case, there may be complications where a corporate trustee has carried on business as trustee of more than one trust, or both as trustee of a trust and on its own account. However their Honours observed that the solution proposed by King CJ in In re Suco Gold coheres to the law of trusts and has common sense to commend it. That solution is to construe s 556 in such circumstances as if the liquidator of the corporate trustee held separate funds, each for a different group of creditors. Their Honours acknowledged that it may not provide the whole of the answer where, for instance, expenses such as wages and salaries of employees have been incurred by a company partly on one account and partly on another. However situations of that kind are not insuperable and, as concluded by Allsop CJ in Killarnee at , fall to be resolved by the application of principle to the text of the legislation in the particular circumstances of each case. (see )
Gordon J simply observed that if there are multiple trusts, the insolvent corporate trustee should be viewed as holding multiple funds, each directed to different groups of creditors, as discussed in Killarnee at . If Amerind had been a trustee of multiple trusts, s 433 (or s 561) would have applied in its terms to each fund separately, to the extent that the fund constituted circulating assets. (see ) There is nothing in the text of s 433 (read with s 9) to suggest that s 433 intends to sweep away the limitations and attributes of each proprietary interest of the trustee in each trust fund. (at ) Section 433 is simply applied separately to each fund. (see )
Gordon J accepted that that approach may lead to practical difficulties and expense, in which case equity may need to fill the vacuum left by the failure of the statute to deal expressly with multiple trust funds, as also was noted in Killarnee at . Receivers or liquidators could apply for directions from the court in such cases. What will be appropriate will vary from case to case. Hotchpot (like marshalling) is one possibility, an illustration of the maxim that equity is equality. Gordon J stated that if there are multiple trust funds they should be kept separate and, where this presents difficulties seek directions from the court. (see -)
(3) Costs of administration where there are multiple trusts, or trust and non-trust activities
Gordon J referred to s 556(1)(a) which provides that in the winding up of a company “expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business” must be paid in priority to all other unsecured debts and claims. Her Honours noted two issues may arise, and addressed them in turn.
(a) On what basis can a “relevant authority” (defined as the liquidator, provisional liquidator or administrator) be paid out of the assets of the trust fund where the company was trustee of a trading trust?
Gordon J stated that the “relevant authority” appointee can be treated as a trust creditor on the same basis on which King CJ dealt with a liquidator’s expenses in In re Suco Gold. In that case a predecessor to s 556(1)(a) of the Corporations Act, which was relevantly similar, provided that costs and expenses of winding up be paid “in priority to all other unsecured debts”. Gordon J noted with approval at  that King CJ there stated –
The expression ‘other unsecured debts’ appears to imply that the costs and expenses of winding up….are regarded by the statute as debts of the company. As the company’s obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee’s right of indemnity. [the emphasis added is her Honour’s]
(b) How should costs of that external administrator be distributed against assets of the trust where there is a corporate trustee of multiple funds?
Gordon J then quoted further from King CJ in In re Suco Gold with approval at  –
On these principles which I have discussed, the liquidator is entitled to have recourse to the property of each trust for the purpose of meeting the costs and expenses of winding up, the petitioner’s costs and the liquidator’s remuneration, so far as they are incurred in relation to each trust. As there are no non-trust assets or liabilities, all the expenses are attributable to one or other of the trusts and must be apportioned between them. the liquidator will be able to make an estimate of the work and expense involved in the liquidation so far as it relate to each trust. Where no apportionment is possible, the maxim that equality is equity should provide the solution to the problem of apportionment. ( the emphasis added is her Honour’s)
Gordon J observed there is no reason why the same approach should not be extended to apply to an administrator or provisional liquidator of a trustee of a trading trust: their expense should be regarded as debts of the corporate trustee which would have priority under s 556(1)(a) of the Corporations Act as expenses incurred in preserving, realising or getting in property of the company. (see )
Gordon J went on to state that distribution of those expenses between multiple trusts with a single trustee should adopt the approach of King CJ set out above. The expenses of the winding up could be apportioned across each trust on the basis of the extent to which the work of the relevant authority related to each trust. However, if apportioning the expenses across multiple trusts created practical difficulties, the insolvency appointee should apply to the court for directions in relation to their costs. Her Honour noted that, adopting and adapting what Allsop CJ said in Killarnee at , these complexities, as well as others, can and will be resolved by application of principle and the text of the legislation, in a manner reflected by the approach of King CJ in In re Suco Gold. (see )
(c) Case handed down just after Amerind – illustrates problem where all assets are trust assets but trustee also acted in non-trust capacity
I note that the day after the High Court handed down its decision in the Amerind appeal, Derrington J handed down judgment in Staatz v Berry, re Wollumbin Horizons Pty Ltd (in liq)(No 3)  FCA 924. This was a case where a deed purporting to create a unit trust was held to have been ineffective, and the company had held the trust property on a bare constructive trust.
On the question of the costs of the liquidation and remuneration, the liquidator sought an order for those to be payable from the proceeds of sale of the trust property. He submitted that the only assets available were the trust assets, such that the net proceeds of sale should be available to meet the winding up costs.
However, Derrington J noted that the company’s business was not solely that of acting as the trustee of the trust found to have existed, being the bare constructive trust. As the unit trust the object of the company’s business had failed, several activities of the company were outside the scope of the actual bare trusteeship and many debts incurred were not trust debts. It followed that the winding up of the company did not merely involve the administration of the company as trustee. It involved the winding up of the company apart from its role as trustee. (see )
Derrington J held that no global order could be made allowing the liquidator to recover all of the costs of the general liquidation work from assets of the trusts. An apportionment would be necessary to separate the costs of the administration and winding up relating to the trust from other costs. (see ) The liquidator could have recourse to the trust assets for his costs and expenses of the liquidation and recovery of his remuneration to the extent to which his work concerned the assets of the trust, and a portion of the cost of the general liquidation matters should also be met out of the trust assets, having regard to the principles identified by Finkelstein J in 13 Coromandel Place and summarised by Derrington J in 2017 in Lane. (see )
At  Derrington J refers to the High Court’s judgment delivered the day before in the Amerind appeal. He notes the indication by Gordon J at - that a liquidator’s costs and expenses so far as they relate to the trust might be regarded as trust debts. Derrington J remarks –
Accepting that to be the case, the result would be the same and the liquidator is not entitled to charge the trust assets with the costs of general insolvency work which is not referable to the trust.
Thus, in a case where the only assets are trust assets, but it appears the trustee may have also acted in a non-trustee capacity, it would appear that an early application to the court for directions as to the apportionment and payment of general liquidation costs may be prudent.
D. OTHER ISSUES WHICH REMAIN UNRESOLVED
After payment of the priority debts, the correct order of priority between trust creditors
This was an the issue Keifel CJ, Keane and Edelman JJ noted might arise but did not fall to be resolved in this appeal. (see )
However as Bell, Gageler and Nettle JJ noted at , this is something that was addressed in In re Suco Gold, where King CJ observed at 109-110 that –
If there is a deficiency in the assets of a particular trust, the non-priority debts applicable to that trust would have to rank pari passu.
The marshalling of claims where a creditor has access to more than one fund.
Keifel CJ, Keane and Edelman JJ noted that this was a question which had been reserved for later hearing by the primary judge. (see )
Question of power of sale of trust assets
For some time, liquidators of trustee companies have relied on s 477(2)(c) of the Corporations Act as a source of power to sell trust assets, especially in light of decisions such as Apostolou v VA Corporation of Australia Pty Ltd  FCAFC 103. However this has become less certain in recent years. It was not an issue addressed in Amerind. (I note that trust deeds that do (or used to) contain ipso facto clauses ousting a company as trustee upon its liquidation do not necessarily contain a clause to the same effect upon a receivership. I note too that a receiver may also have powers under the security instrument.)
In Killarnee, the Full Federal Court held that the power to sell assets is lacking under s 477 as liquidator of a trustee company. The Full Federal Court there held that 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 proprietary interest/lien. It follows that the liquidator generally lacks power under s 477 to sell the trust assets.
The Full Court also held that the power to sell assets as trustee is lacking where the company is no longer trustee. Where the company ceases to be trustee of the trust upon its liquidation under the terms of an ipso facto clause 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 and interest/lien 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. It will have lost the powers of sale held under the terms of the trust deed, upon ceasing to be trustee of the express trust.
The Full Federal Court in Killarnee had observed that the 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. I note that another method of addressing this lack of power, taken in some cases of liquidation of trustee companies, has been to approach the court seeking a conferral of power on the bare trustee under the relevant state trusts legislation – for example in Victoria the relevant provision is s 63 of the Trustee Act 1958 (Vic), in NSW it is s 81 of the Trustee Act 1925 (NSW) – as well as for directions as to a proposed distribution and any associated questions that have arisen.
Certainly in Killarnee, the Full Federal Court made its position clear that it expects liquidators to approach the courts for authority to sell the trust assets, stating variously that this is “required” or “needed” (see  and  per Allsop CJ,  per Siopis). See my article on Killarnee for further reading of what their Honours said on this issue of power.
This position remains unchanged by the High Court’s decision in Amerind. The question did not arise in Amerind and so was not addressed.
CONCLUSION – Takeaways
As noted above under “Summary Snapshot”, the High Court in Amerind was unanimous as to the application of s 433 in the receivership of a trustee company and the application of its scheme of priorities on the distribution of trust assets by the receiver to the extent of the trustee’s right of indemnity and proprietary interest in those assets.
The High Court made it clear that the same conclusion applies on the liquidation of trustee companies and the application of the statutory scheme of priorities in that context also.
Gordon J was clear in obiter that the same conclusion also applies in the bankruptcy context on the bankruptcy of an individual trustee, which view is probably supported by the remarks of Bell, Gageler and Nettle JJ as noted above.
The High Court was also unanimous that trust assets may only be used to pay trust creditors, In re Suco Gold is correct, and Re Enhill is not to be followed.
Gordon J in obiter gave guidance as to the handling of these matters where there are multiple trusts, and how the costs of administration are to be handled in that context.
The recent decision of Staatz, handed down a day after Amerind shows that difficulties may arise with regards to having general liquidation costs paid out of trust assets where a trustee company acted not only in a trustee capacity but also in a non-trustee capacity.
The question of a liquidator’s power to sell trust assets in the liquidation of a trustee company remains unresolved, and at this stage if an ipso facto clause has been triggered, the Full Federal Court’s clear statement in Killarnee of the need to seek the conferral of such power from the court ought be heeded.
Finally, I note that in stating that the scheme of priorities applies to trustee companies, the High Court made no comment about the remarks of Allsop CJ and Farrell J in Killarnee that some elements of the priority scheme may not apply in every case and that each paragraph of s 556 must be “examined” (Allsop CJ at ) or “interrogated” (Farrell J at ) for its meaning. In Amerind, their Honours of the High Court appeared to have no such qualms, and referred to the application of the scheme of priorities without qualification. It may be that in many cases, no real question may arise. However in a particular case, if the circumstances raise doubt about whether a particular category of debt is properly wholly seen as a trust debt payable out of trust assets, or as a non-trust debt, then court directions would of course be prudent.
I acknowledge that applications for court directions add another layer of work and expense for liquidators, and can unfortunately further erode the proceeds available for distribution to creditors. Those proceeds are of course frequently meagre, and the responsibility to keep administration costs as low as reasonably possible is something of which insolvency practitioners are conscious, and properly so. However as matters presently stand, the courts ought be heeded when they instruct us as to where the line is drawn and when they will expect that their supervisory role is to be engaged.