I have added a new article to my website reviewing an important decision of the Full Federal Court handed down in November 2020, addressing 3 key questions that arose at the intersection of trust law and bankruptcy law – Commissioner of Taxation v Lane  FCAFC 184 (COT v Lane). Some were similar to those which arise in the context of corporate insolvency law, and were addressed in recent years by the High Court in Carter Holt/Amerind and the Full Federal Court in Jones/Killarnee. The full article can be accessed here.
In a last Amerind-tinged gift before Christmas, the High Court has today handed down another judgment on an issue which lies at the intersection between insolvency law and trust law, although this time in the bankruptcy context. It is the latest in a string of unfolding legal developments at this intersection, including the High Court’s decision in June in Amerind and the Full Federal Court’s decision last year in Killarnee. (For more in relation to those decisions see here (Amerind) and here (Killarnee).)
In this case the High Court unanimously dismissed an appeal from the Full Federal Court concerning whether property held by a bankrupt on trust for another vests in the bankrupt’s trustee in bankruptcy under s 58 of the Bankruptcy Act 1966 (Cth). The decision – which stems from a bankruptcy which has been before the Courts more than once – is Boensch v Pascoe  HCA 49.
The case arose from a claim by the bankrupt Mr Boensch for compensation under s 74P(1) of the Real Property Act 1900 (NSW) on the basis that his trustee in bankruptcy Mr Scott Pascoe had lodged, and later refused or failed to withdraw, a caveat without reasonable cause. Mr Boensch’s claim for compensation was unsuccessful at each stage.
To give you a snapshot of the principles and reasoning on the key issue –
- Upon a person becoming bankrupt, section 58 of the Bankruptcy Act vests “property of the bankrupt” in the trustee of the estate of the bankrupt.
- The “property of the bankrupt” includes real or personal property and any estate or interest in real or personal property belonging to the person at the time of bankruptcy and divisible among the bankrupt’s creditors: s 5(1) of the Bankruptcy Act (definitions of “property” and “the property of the bankrupt”).
- Excluded from the “property of the bankrupt” which vests in the trustee in bankruptcy is property held in trust by the bankrupt for another person: s 116(2)(a) of the Bankruptcy Act.
- It was settled in Octavo that where a person who is a trustee becomes bankrupt, and he/she has incurred liabilities in the performance of the trust, that person’s right to be indemnified out of trust property gives rise to an equitable interest in the property held on trust. This takes that property outside the exclusion in s 116(2)(a), on the basis that the exclusion is limited to property held by the bankrupt solely in trust for another person:  per Kiefel CJ, Gageler and Keane JJ.
- The bankrupt’s entitlement in equity to be indemnified out of the trust property, giving rise to the equitable interest in the property, is property belonging to the bankrupt that is divisible among the bankrupt’s creditors. The right of indemnity is therefore property that vests in the trustee in bankruptcy:  per Kiefel CJ, Gageler and Keane JJ.
- Octavo left open the question of whether the legal estate in the property held on trust by the bankrupt also vests in the bankruptcy trustee, where the bankrupt as trustee held a right of indemnity. This is part of the more general question of whether the legal estate in property held on trust by a bankrupt in which the bankrupt has an equitable interest vests in the bankruptcy trustee:  per Kiefel CJ, Gageler and Keane JJ.
- The more general question was substantially answered in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (Amerind):  per Kiefel CJ, Gageler and Keane JJ.
- The short answer is yes it does. Under the Bankruptcy Act, where a trustee has no beneficial interest, the legal estate does not pass; but where he has, it does pass:  per Kiefel CJ, Gageler and Keane JJ, quoting with approval from Sir George Jessel MR in Morgan v Swansea Urban Sanitary Authority (1878) 9 Ch D 582 at 585. (However note that where, as here, the trust property is real estate, then pending registration on title, what is vested in the bankruptcy trustee by s 58(2) is the equitable estate:  per Kiefel CJ, Gageler and Keane JJ;  per Bell, Nettle, Gordon and Edelman JJ.)
- This answer is informed by a recognition of two things: (1) the fundamental nature of an equitable interest as something that “is not carved out of a legal estate but impressed upon it“; and (2) consistency with the objects of the Bankruptcy Act that the bankruptcy trustee automatically obtains the legal estate in property held by the bankrupt in which the bankrupt has an equitable interest in order better to secure the realisation of that equitable interest for the benefit of creditors:  per Kiefel CJ, Gageler and Keane JJ.
Their Honours held here that by reason of his having an entitlement to indemnification out of the trust property, the bankrupt Mr Boensch had an equitable interest in the Rydalmere property which subsisted at the time of his bankruptcy. It followed that that equitable interest, and with it the equitable estate in the Rydalmere property, vested in Mr Pascoe as the trustee in bankruptcy of the estate of Mr Boensch. The equitable estate so vested in Mr Boensch was a caveatable interest: - per Kiefel CJ, Gageler and Keane JJ.
Interestingly, the High Court decided this issue in the absence of a determination by the primary judge and the Full Court on the question of whether the bankrupt held a right of indemnity against the trust property, although the question was raised by the pleadings of the trustee in bankruptcy Mr Pascoe. Both judgments discuss this matter.
Broadly, where a bankrupt held property as a trustee and had a right of indemnity in the trust assets, the property will vest in the bankruptcy trustee, subject to the trust:  per Bell, Nettle, Gordon and Edelman JJ.
However where a bankrupt held property on trust for another but held no interest in the property at all, whether vested or contingent, and no matter how remote, that property will not vest in the bankruptcy’s trustee upon bankruptcy:  per Bell, Nettle, Gordon and Edelman JJ.
To put it this way, at  their Honours Bell, Nettle, Gordon and Edelman JJ quoted with approval from Farwell LJ in Governors of St Thomas’s Hospital v Richardson  1 KB 271 at 284 –
The property of the bankrupt does not include property held by the bankrupt on trust for any other person. But it does include property held by the bankrupt on any trust for his own benefit, and when … he holds property to secure his own right of indemnity in priority to all claims of any cestui que trust, and the retention of such property is necessary to give full effect to such right, it follows that the property, ie the legal estate, and right to possession vest in the trustee in bankruptcy to the extent to which they were vested in the bankrupt…
Just a note to alert readers that the latest decision of interest in this post-Amerind world dropped today in the Federal Court in Queensland. The liquidators of an insolvent corporate trustee successfully obtained orders appointing them receivers of the assets of two trusts to enforce the rights of exoneration and liens of the former trustee. The application was contested by the new trustee of the property trust, who sought to sell the key asset itself (a hotel – freehold title to the land). Note the orders made (order 6) as to recourse to the assets of the trusts for the receivers’ remuneration, costs and expenses regarding each trust and the winding up of the company generally.
The case was the decision of Derrington J in Connelly, in the matter of Gregorski Investments Pty Ltd (in liq) v 320 Nominees Pty Ltd as trustee of the Gregorski Property Trust  FCA 1400.
I have added a new article to my website reviewing last week’s important High Court decision in the Amerind appeal – Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth  HCA 20; 368 ALR 390 (Amerind). The full article can be accessed here.
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)  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.
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)  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)  VSCA 41; (2018) 54 VR 230.
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’.
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 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 , 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 )
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 -).
I pause here to note that unlike the Court in the Re Amerind appeal, in Lane v Deputy Commissioner of Taxation  FCA 953 (discussed below) Derrington J saw this distinction between the two distinct forms of a trustee’s right of indemnity as critical. At  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  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  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 - the Court reviewed English and Australian authorities on this issue handed down between 1802 and 2012. At  their Honours distilled these conclusions from those authorities –
- 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.
- 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.
- 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.
- In re Richardson  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  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 ). 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 ). 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 ).
Twenty years later in Chief Commissioner of Stamp Duties (NSW) v Buckle  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 ). The High Court affirmed this in Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation  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 ).
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 ).
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 -.
Re Enhill, Re Suco Gold, Independent Contractors. From  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  VicRp 52;  1 VR 561 is discussed from . 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 ). 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 -). 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 ).
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 ).
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 ).
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 ).
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 ).
The turning point came in 2016 in Re Independent Contractor Services (Aust) Pty Ltd (in liq)[No 2]  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 ).
First instance judgment in Re Amerind. In Re Amerind (receivers and managers apptd)(in liq) 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 ). 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 ). 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 ).
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 ). 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 ).
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 ).
Lane v Deputy Commissioner of Taxation  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 ).
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 ).
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 ). 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 ). 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 ).
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 ).
From  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 ).
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 ).
At  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 )
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 )
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 ).
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 ).
However the Court of Appeal held that in their view Re Suco Gold and Re Enhill are correct on this issue, repeating twice that:
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 ). 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 ).
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 )
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 ). However at  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 ). 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 )
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)  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 – this decision was appealed to the High Court, which handed down judgment on 19 June 2019 unanimously dismissing the appeal. My summary posted the morning of the decision is here.
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)  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  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 -). 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.