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.
Tag Archives: trustee’s right of indemnity
Bankrupt trustees – High Court pronounces on what “property of the bankrupt” vests in the trustee in bankruptcy where property had been held on trust
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…
Latest decision of interest in this post-Amerind world dropped today
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.
Newsflash – the High Court’s judgment in Amerind is in
This morning the High Court has handed down judgment dismissing the appeal from the decision of the Victorian Court of Appeal in 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, which itself was the appeal of the decision of Robson J in Re Amerind (receivers and managers apptd)(in liq)  VSC 127; (2017) 320 FLR 118.
The bench comprised Kiefel CJ, Bell, Gageler, Keane, Nettle, Gordon and Edelman JJ. Whilst the decision to dismiss the appeal was unanimous, three separate judgments were written: one by Kiefel CJ and Keane and Edelman JJ, another by Bell, Gageler and Nettle JJ and the third by Gordon J. The decision is: Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth  HCA 20.
My fuller review of the decision will follow. For now, some highlights –
- The High Court unanimously held that s 433 of the Corporations Act applies in the exercise of the power of exoneration in the receivership of a trustee company. Slight points of difference in reasoning between the judgments, but the same result. Kiefel CJ, Keane and Edelman JJ expressly 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.
- The High Court unanimously held that 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 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.
- The High Court went on unanimously to hold that 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.
More to follow.
Newsflash – High Court to hand down judgment in Amerind this Wednesday
The High Court of Australia will be handing down judgment in the Amerind appeal this Wednesday 19 June 2019. Watch this space.
In the meantime, for my review and analysis of the Victorian Court of Appeal decision in Amerind which is the subject of this appeal see 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 Amerind and Killarnee see here.
For those who want more, the submissions that have been filed for each of the appellant (creditor Carter Holt Harvey Woodproducts Australia Pty Ltd), the first respondent (the Commonwealth of Australia, which advanced $3.8m for former employees of the company under FEGS) and the second respondent (the Receivers of Amerind Pty Ltd (Receivers & Managers appointed)(in liquidation)) may be read on the High Court website here.
For now, I note that the submissions for the appellant creditor identified the following three issues for consideration in the appeal –
- Whether the “property of the company” of a corporate trustee under s 433(3) of the Corporations Act 2001 (Cth) includes not only the trustee’s right of indemnity but also the underlying assets to which the trustee company can have recourse.
- The precise nature of, and the limitations upon, a trustee’s right of indemnity where the trustee seeks exoneration in respect of unmet trust liabilities, in particular in the context of the insolvency of the trustee.
- Whether a corporate trustee’s right of indemnity from trust assets is “property comprised in or subject to a circulating security interest” for the purposes of s 433(2) of the Corporations Act.
The appellant submitted, inter alia, that –
- Properly understood, a trustee’s right of indemnity, especially the ‘exoneration arm’ of the right of indemnity, is no more than a right to have trust assets applied to meet trust debts. It confers upon the trustee no interest in the trust assets themselves, or the proceeds thereof.
- A trustee’s right of indemnity is not subject to s 433(2) of the Corporations Act because it is not a “circulating asset” and hence is not property which is “comprised in or subject to a circulating security interest”.
The appellant submitted that if either of these challenges be upheld, the Court of Appeal’s decision cannot stand.
The Commonwealth identified two issues for consideration in the appeal –
- On the basis that the trustee’s right of indemnity gave it a beneficial interest in the assets of the trust – was that interest “property of the company” within the meaning of s 433(3)?
- On the basis that s 433(3) applies to property coming into the hands of a receiver who is appointed by a debenture holder ‘secured by a circulating security interest’ – was it necessary that the trustee’s right of indemnity itself be ‘property comprised in or subject to a circulating security interest’? If so, was the trustee’s right of indemnity such property?
The Commonwealth submitted inter alia that –
- Sections 433, 556 and 561 of the Corporations Act give statutory priority to employees’ claims in insolvency. Insolvency law is statutory and primacy must be given to the relevant statutory text. That statutory priority has been recognised since 1883 in the case of corporate insolvency. The compelling reasons for the statutory priority of employees claims is well known. It is a strong thing to deprive employee creditors of their statutory priority merely because their employer had acted as a trustee.
- There are no non-trust creditors. There is only one trust. This case does not give rise to the question of whether creditors of the company who are not ‘trust creditors’ may be paid from the proceeds of realisation of trust assets.
- A trustee’s right of indemnity (whether by way of reimbursement or exoneration) confers on the trustee an interest in the trust assets which is a proprietary, beneficial interest, and takes priority to the interests of the beneficiaries of the trust. This submission relies on several previous High Court decisions, including Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 and Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226.
- What matters in the Personal Property Securities Act‘s interaction with the Corporations Act is the nature of the security held by the secured party, not the nature of the interest in the personal property held by the grantor. Even if it was necessary to characterise the trustee’s right of indemnity as an asset subject to a circulating security interest, it was such an asset.
- It follows that, as the Court of Appeal held, s 433(3) was engaged. The Court of Appeal’s decision should be upheld.
We await Wednesday’s judgment with interest.
Big few days next week – not just the banking RC report, but the hearing of the High Court Amerind appeal
The first few days of next week are shaping up to be pretty big. As has been well covered in the press, the final report by of the Banking Royal Commission has now been handed to the Governor-General and will be publicly released on Monday afternoon 4 February 2019 at 4.10pm, coinciding with the sharemarket close. Reportedly Commissioner Kenneth Hayne’s final report stretches to more than 1000 pages.
Then on Tuesday 5 and Wednesday 6 February 2019 is the hearing of the High Court appeal in Amerind, set down for 2 days. To refresh your memories, for my review and analysis of the Victorian Court of Appeal decision in Amerind see here, and for my article considering the Full Federal Court decision in Killarnee and the landscape for liquidating corporate trustees of trading trusts in light of both Amerind and Killarnee see here.
For those who want more, the submissions that have been filed for each of the appellant (creditor Carter Hold Harvey Woodproducts Australia Pty Ltd), the first respondent (the Commonwealth of Australia, which advanced $3.8m for former employees of the company under FEGS) and the second respondent (the Receivers of Amerind Pty Ltd (Receivers & Managers appointed)(in liquidation) may be read on the High Court website.
Newsflash – Amerind High Court appeal listed for hearing
The Amerind appeal to the High Court of Australia has reportedly been listed for a 2-day hearing on 5 and 6 February 2019. Watch this space.
In the meantime, for my review and analysis of the Victorian Court of Appeal decision in Amerind see here, and for my article considering the Full Federal Court decision in Killarnee and the landscape for liquidating corporate trustees of trading trusts in light of both Amerind and Killarnee see here.
For those who want more, the submissions that have been filed for each of the appellant (creditor Carter Holt Harvey Woodproducts Australia Pty Ltd), the first respondent (the Commonwealth of Australia, which advanced $3.8m for former employees of the company under FEGS) and the second respondent (the Receivers of Amerind Pty Ltd (Receivers & Managers appointed)(in liquidation)) may be read on the High Court website.
Newsflash – Amerind is headed for the High Court
Papers have reportedly been filed with the High Court by creditor Carter Holt Harvey Wood Products Pty Ltd. Watch this space.
In the meantime, for my review and analysis of the Victorian Court of Appeal decision in Amerind see here, and for my article considering the recent Full Federal Court decision in Killarnee and the landscape for liquidating corporate trustees of trading trusts in light of both decisions see here.
New article on Killarnee – trading trusts, statutory priorities on the liquidation of trustee companies, lack of power to sell trust assets
I have added a new article to my website reviewing the recent, important decision of Jones (liquidator) v Matrix Partners Pty Ltd, re Killarnee Civil & Concrete Contractors Pty Ltd (in liq)  FCAFC 40; 260 FCR 310 (Killarnee). The full article can be accessed here.
As noted in my alert, last week the Full Court of the Federal Court handed down its much anticipated decision in Killarnee. The issue for the Full Court broadly was how a liquidator is to deal with trust assets in the liquidation of a company which had been trustee of a trading trust.
The three member bench comprised Allsop CJ, and Siopis and Farrell JJ. Unlike in the decision last month in Amerind where the Victorian Court of Appeal spoke with a single unanimous voice, their Honours of the Full Court wrote three separate judgments, with the Chief Justice writing the lead. Overall, while there is sound reasoning and analysis and useful clarity on some points, the Full Court’s decision may be likely to create some other concerns for insolvency practitioners dealing with trustees of trading trusts.
There was unanimity on some issues but not others, and there was a sting or two in the tail. The issue now appears to be resolved that a trustee company’s right of exoneration over the trust assets is property of the trustee company. The Full Court was clear in their view in obiter that trust assets may only be applied in payment of trust debts in exercise of a trustee’s right of exoneration (not non-trust debts). Their Honours also addressed and made clear their position as to the lack of liquidators’ power to sell trust assets, and the need for court order.
On the scheme of priority issue: the majority of the Full Court ostensibly joined with Amerind and resolved some of the uncertainty of the past few years as to whether liquidators should apply the statutory scheme of priorities under the Corporations Act when liquidating companies which have conducted their business through trading trusts and exercising the trustee’s right of exoneration over trust assts to pay creditors. The majority held that the scheme of priorities applies…mostly. This was one of the stings. Whilst the priority afforded employee entitlements was endorsed, as was that for liquidators’ costs, their Honours in the majority queried whether every element of the priority scheme in s 556 should apply in every case (indeed whether some such debts would even qualify as trust debts in every case) – see the discussion below. Their Honours’ comments and the doubt created in this area suggest that court directions are likely to be advisable for a liquidator dealing with trading trust assets on the question of distribution. Resolution of this uncertainty either by the High Court or by legislation – the latter of which was strongly encouraged by Farrell J – would be welcome, although it may need to be carefully done. This also is discussed in the article.
The specific questions considered by the Full Court on the particular case before them, and their Honours’ answers to those questions, are already set out in my alert of last week and can be read here.
To get straight to it, on my analysis, the propositions to be distilled from the Full Court’s decision in Killarnee are these –
- The right of exoneration and the lien over trust assets in its support are property of the trustee company. The Full Court agreed with the Victorian Court of Appeal in Amerind on this.
- Power to sell assets lacking under s 477 as liquidator. The assets of a trust are not themselves assets in the winding up of the trustee company, though they are subject to the right of indemnity and lien. It follows that the liquidator generally lacks power under s 477 to sell the trust assets.
- Power to sell assets lacking where company no longer trustee. Where the company ceases to be trustee of the trust upon its liquidation under the terms of the trust, it will then generally hold the trust assets as bare trustee (and as former trustee liable for unpaid trust debts, retaining its right of indemnity against those assets). As bare trustee, with a duty and power only to hold and preserve trust assets, the company will generally lack a trustee’s power to sell the trust assets.
- 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.
- Scheme of priorities applies (mostly). The majority of the Full Court held 2:1 that the statutory scheme of priorities laid down in the Corporations Act applies to the distribution of trust assets where subject to a right of exoneration. Note however that the majority judgments raise some doubt as to whether this is achieved by the legislation applying or by Equity echoing the scheme. Siopis J dissented on this, but conceded that a similar result could be produced by way of the court, in its equitable jurisdiction, giving directions to a receiver appointed over the trust assets as to the distributions to be made to trust creditors, subject to the circumstances of the particular case.
- However some elements of the priority scheme may not apply in every case.
The sting: While the majority of Allsop CJ and Farrell J accepted that the priority scheme generally applies, both queried whether all elements of the scheme applies in every case. Their Honours took the view that each paragraph of s 556 must be interrogated for its meaning and endorsed some – but not all – of the priority debts listed in the scheme. Farrell J specifically questioned whether the costs of the winding up application could even be seen as a trust debt. The Court’s position on the various types of priority debt are identified and discussed in my article (here).
- Trust assets are not generally available for distribution to non-trust creditors. They may only be used to pay trust creditors. Trust assets may only be applied in payment of Trust debts, where this is done in exercise of the trustee’s right of exoneration (as opposed to the right of recoupment). In re Suco Gold is correct. Re Enhill is not.
The full article can be accessed here.
Newsflash – judgment in Killarnee is in
Late this afternoon the Full Court of the Federal Court of Australia delivered judgment in Jones (liquidator) v Matrix Partners Pty Ltd, re Killarnee Civil & Concrete Contractors Pty Ltd (in liq)  FCAFC 40. The bench comprised Allsop CJ, Siopis and Farrell JJ. The judgment can now be read on Austlii here.
Their Honours delivered three separate judgments. There was unanimity of decision and reasoning on some of the questions answered, but not others. The Court answered the questions posed for decision as follows –
- The assets of the Trust are not assets in the winding up of the trustee company Killarnee, such that the liquidator did not have power under s 477 to sell the Trust assets (unanimous).
- Two parts –
- The proceeds of realisation of Trust assets are to be applied by the Liquidator in accordance with the priority regime under ss 555, 556, 560 and 561 of the Corporations Act (2:1 – Allsop CJ answered yes, Farrell J answered yes but for different reasons, Siopis answered no).
- The unfair preference proceeds are to be applied in accordance with the priority regime (unanimous, although with the qualification that this was common ground, which their Honours noted they accepted without undertaking any legal analysis).
- Two parts –
- The Liquidator should be directed to deal with the proceeds of realisation of Trust assets as assets in the winding up of the Company (2:1 – Allsop CJ answered yes, Farrell J answered yes in substance, Siopis J answered no).
- The Liquidator should be directed to deal with the unfair preference proceeds as assets in the winding up of the Company (unanimous).
- Neither the proceeds of realisation of Trust assets or the unfair preference proceeds should be distributed by the Liquidator to unsecured creditors of the Trust pari passu after providing for the costs of the administration (unanimous, although Siopis J’s reasons differed to those of Allsop CJ and Farrell J).
More to follow.