In an article published in the August 2011 edition of the Insolvency Law Bulletin,[1] I discussed two aspects of the winding up of insolvent corporate trustees that remained uncertain. One of those was whether the distribution of the proceeds of trust assets held by an insolvent corporate trustee ought to be in accordance with s 556 of the Corporations Act 2001 (Cth), or on a pari passu basis.
The good news is that following the recent decision in Amerind Pty Ltd (recs and mgrs apptd) (in liq)[2] (Re Amerind), that issue has (it is submitted) been put beyond doubt. The bad news is that the now accepted position is quite unsatisfactory – unsatisfactory not because of any error in the legal reasoning of the judges who have reached the conclusion that a pari passu distribution is appropriate, but rather the practical implications of that approach. The policy reasons which underpin the priority regime in the Corporations Act apply equally regardless of whether a company acts in its own right or as trustee. The injustice perpetrated by the creation of two regimes (one for an insolvent company acting in its own right and another for a company acting as trustee) is amplified by the prevalence of the trading trust in Australian commercial life. Law reform is urgently required, but the form any legislative change may take is unclear.
The decision in Re Amerind was the last of a trilogy of recent decisions supporting pari passu distribution. The first of those decisions was that of Brereton J in Independent Contractor Services (Aust) Pty Ltd (in Liq) (No 2)[3] (Re Independent). The second was the decision in Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq)[4] (Woodgate). In that case, Farrell J adopted Brereton J’s approach, observing:
It is inconsistent with principle to apply the statutory order of priority for payment of the company’s debts out of its own property to the order of distribution of trust property. That this might result [in] two regimes (for trust property and property of the company) is unfortunate, but it is something which courts have had to accommodate.[5]
Criticisms of the approach in Re Independent
In an article in the July 2016 issue of this publication,[6] Dr Garry Hamilton doubted the conclusion reached in Re Independent. He was not alone in his criticism of Brereton J’s approach.[7]
Dr Hamilton’s view relied on the (undoubtedly correct) statement by the High Court in Octavo Investments Pty Ltd v Knight[8] (Octavo) that a trustee’s right of indemnity in respect of trust assets, supported by lien, is of a proprietary nature. Dr Hamilton opined that the definition of “property” in the Corporations Act is wide enough to capture such an interest. It follows, therefore, that the right of indemnity is property of the company over which a liquidator is appointed.[9] One difficulty that has subsequently arisen in respect of the statement of principle in Octavo is that it has been relied upon to justify the proceeds of the property secured by the right of indemnity being available to meet the claims of creditors of the corporate trustee in its own right.[10] The extension of the principle in that way has, however, been rejected on bases including that the trustee’s right of indemnity is subject to the trust creditors’ right of subrogation, itself a proprietary right.[11] Such debates underscore the complex legal issues that arise when corporations law and trust law intersect.
Whatever the merits of the argument propounded by Dr Hamilton, it is unlikely to persuade a judge at first instance how the weight of authority supports the contrary view.
Re Amerind
Re Amerind concerned a company to which receivers and managers were appointed. There was a surplus following the receivers’ realisation of the assets of the company and payment of the secured debt. The issue to be determined was the manner in which that surplus was to be applied.
Re Amerind is significant not only because it results in comity between trial judges in NSW, the Federal Court and Victoria, but by reason of Robson J’s powerful analysis of the relevant authorities. His Honour undertook a detailed and comprehensive survey of the bulk of the authorities dealing with insolvent corporate trustees over the last 40 years.[12]
In particular, his Honour’s reasons explained in detail the justification for departing from the decisions of the Full Court of the South Australian Supreme Court in Re Suco Gold Pty Ltd (in liq)[13] (Re Suco Gold) and the Full Court of the Victorian Supreme Court in Re Enhill Pty Ltd[14] (Re Enhill). Both cases dealt with the manner in which the assets of an insolvent corporate should be distributed, Re Suco Gold being the authority most commonly cited in support of the application of the priority provisions in the Corporations Act to the distribution of the realised assets of an insolvent corporate trustee.
While it may have previously been considered that, being decisions of intermediate appellate courts, courts at first instance were bound by them, Robson J explained why this was not the case.
Departure from Re Suco Gold and Re Enhill
The essence of Robson J’s departure from Re Suco Gold and Re Enhill was that those decisions interpreted provisions of the uniform state companies legislation which preceded the Corporations Act. As Robson J explained at great length,[15] appellate courts’ interpretation of the provision of the Companies Acts are not binding in the interpretation of provisions in the Corporations Act, notwithstanding that they are in pari materia (similar to) the relevant provisions of the uniform state companies legislation.
His Honour concluded (as may be expected) that Re Suco Gold and Re Enhill, which dealt with provisions concerning the distribution to creditors of the property of an insolvent company in substantially identical terms to the Corporations Act provisions, were highly persuasive. The difficulty, however, was that Re Suco Gold and Re Enhill both fell into that category and were in conflict with each other. This was because the court in Re Suco Gold had rejected the conclusion in Re Enhill that the trustee’s right of indemnity is property available to the creditors of the company in its own right.[16]
Robson J was therefore faced with two highly persuasive (but not binding) decisions of intermediate appellate courts, and Re Independent, an NSW decision of a single judge of coordinate authority. His Honour referred to the desirability of consistent interpretation of Commonwealth legislation and expressed the view that having regard to the High Court’s remarks in Farah Constructions Pty Ltd v Say-Dee Pty Ltd,[17] the decision of Brereton J in Re Independent should be followed unless it was plainly wrong. In fact, Robson J agreed with Brereton J that the trustee’s right of indemnity is not personal property of the trustee, but is held on trust for the trust creditors[18] and therefore that the trust assets should be distributed pari passu among the trust creditors.[19]
Implications of Re Amerind
An article in the July 2016 issue of this publication[20] discussed some of the implications arising from the rejection in Re Independent of the priority provisions in the Corporations Act. It correctly identified employee entitlements as the most significant casualty. The decision in Re Amerind is a realisation of the concerns expressed in that article.
The Commonwealth Department of Employment was a party in Re Amerind. It had paid accrued wages and entitlements to the former employees under the Fair Entitlements Guarantee Scheme and sought to recover those payments as a priority pursuant to ss 560 and 556 of the Corporations Act. As a result of the rejection of the priority regime, it was found to rank equally with ordinary unsecured creditors. This advantages those ordinary unsecured creditors whose returns are augmented at the expense of the Commonwealth.
The Fair Entitlements Guarantee Act 2012 (Cth) (FEG) does not provide for the payment of all outstanding employee entitlements, and those that are outside the scheme include the superannuation guarantee charge. Readers will recall that in Re Independent, Brereton J considered the application of s 556 of the Corporations Act in the context of a liquidator’s obligation to pay superannuation guarantee charge liabilities from trust property. There is, therefore, a “gap” between the entitlements employees are owed, and those that can be paid under FEG. The rejection of the priority regime for employees of an insolvent corporate trustee is to the disadvantage of those employees, who now rank among ordinary unsecured creditors. What is perhaps most galling for such employees is that “excluded employees” (being directors, their relatives and spouses) who previously sat outside the priority regime are now on equal footing with employees unrelated to the directors of the company.
No s 433 priority
Perhaps the most significant aspect of the decision in Re Amerind is the finding that the trustee’s right of indemnity is not “property of the company” for the purposes of s 433 of the Corporations Act. This is not a surprising result (in light of Robson J’s view that he should follow Re Independent) but is a stark illustration of the injustice perpetrated by the rejection of the priority regime in the Corporations Act.
Section 433 of the Corporations Act gives a priority to employees over the holder of a circulating security interest. It requires a receiver to pay out of the proceeds of property subject to a circulating security interest debts that, in winding up, would be given priority status pursuant to s 556(1)(e), (g) or (h) or s 560 (which concerns amounts which can be broadly described as employee entitlements).
The policy rationale for this position was articulated by Barwick CJ in Stein v Saywell[21] as follows:
A creditor who accepts a floating charge over a company’s assets allows the business of the company to be carried on and the assets of the company which are subject to the floating charge to be altered, perhaps augmented, by the efforts of the company and its employees. The holder of the floating charge is not to be able to displace the priorities which the legislation accords certain debts which accrue during the carrying on of the business; amongst those priorities is certain remuneration of employees of the company.
There can be no credible argument that these policy considerations carry any less weight by reason that the company conducting the business does so as trustee of a trust.
Law reform
The idea that a corporation acting as trustee should be treated in the same way (at least in an insolvency context) as a company acting in its own right is not new. A recommendation to the effect that any reference in the corporations legislation to business or affairs of a company for the purpose of the insolvency provisions of the legislation should include a reference to its business or affairs as trustee of a trust was made in the Harmer Report.[22] While we can only speculate as to the reasons for the Commonwealth Parliament’s decision not to adopt that recommendation, it may be by reason of a (at least perceived) constitutional impediment to the Commonwealth making laws in respect of trusts. It is beyond the scope of this article to undertake a detailed consideration of the form of any future laws that address the unsatisfactory position that has arisen in respect of employee entitlements in the insolvent administration of a corporate trustee. It is sufficient to observe that such law reform may be complicated by reason of the necessary involvement of states’ legislatures for constitutional reasons.
Prime Minister Mr Turnbull recently defended the use of family trusts as a legitimate form of business structure which are very widely used in small businesses. While it is unlikely that Mr Turnbull had employee entitlements in mind when making those comments, it is hoped that any media attention on the issue of trusts generally will increase the likelihood that the laws in respect of insolvent corporate trustees, neglected for so long by the legislature, will garner some attention. In the meantime, cases like Re Amerind will likely continue to demonstrate the commercial monstrosity that is the fruit of the union of the law of trusts and the law of limited liability companies.[23]
[1] S Guthrie and B Shaw “Corporate trustees — what’s an insolvency practitioner to do?” (2011) 12(1) INSLB 2.
[2] Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2017] VSC 127 ; BC201701878.
[3] Independent Contractor Services (Aust) Pty Ltd (in Liq) (No 2) (2016) 305 FLR 222 ; (2016) 34 ACLC 16–004 ; [2016] NSWSC 106 ; BC201600871.
[4] Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583 ; BC201611352.
[5] Above n 4, at [37].
[6] G Hamilton “Winding up insolvent corporate trustees — what happened to the liquidator?” (2016) 17(6) INSLB 103.
[7] See for example D Butler and A Connelly “Practicalities of winding up trusts and realising trust assets” (2016) 28(3) ARITA J 24 at 28.
[8] Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 ; (1979) 27 ALR 129 ; BC7900099.
[9] Above n 6.
[10] Re Enhill Pty Ltd [1983] 1 VR 561 at 564.
[11] Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 per King CJ.
[12] Above n 2, at [55]–[260].
[13] Above n 11.
[14] Above n 10.
[15] Above n 2, at [261]–[333].
[16] Above n 2, at [313]–[315].
[17] Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 ; (2007) 236 ALR 209 ; [2007] HCA 22 ; BC200703851 at [135].
[18] Above n 2, at [333].
[19] Above n 2, at [372].
[20] R Rowley, G Woodgate and P Stern “Further implications arising from the Independent Contractor Services decision” (2016) 17(6) INSLB 107.
[21] Stein v Saywell (1969) 121 CLR 529 at 544.
[22] Australian Law Reform Commission General Insolvency Inquiry Report No 45 (1988) www.alrc.gov.au/sites/default/files/pdfs/publications/alrc45_Summary.pdf.
[23] See H A J Ford “Trading trusts and creditors’ rights” (1981) 13(1) Melbourne University Law Review 1.