The final word on the application of the statutory priority regime - - PowerPoint PPT Presentation
The final word on the application of the statutory priority regime to insolvent corporate trustees: High Court decision in Re Amerind Christopher Caleo QC (Chair) Stewart Maiden QC Christopher Brown Liability limited by a scheme approved under
Christopher Caleo QC (Chair) Stewart Maiden QC Christopher Brown
Liability limited by a scheme approved under Professional Standards Legislation.
The facts and issues in Re Amerind (Carter Holt Harvey Woodproducts
Australia Pty Ltd v The Commonwealth [2019] HCA 20)
Some trusts basics – exoneration v recoupment Corporations Act provisions and policies How did we get here? Case history Trial and appeal High Court decision Practical implications Questions
How are assets of a trading trust to be applied when the corporate trustee is
insolvent?
Are trust assets available to pay trust creditors only? Or are the trust assets available to pay all the debts of the trustee company
including the costs and fees of the liquidator?
Do the priority regimes in the Corporations Act apply or do trust creditors get
paid pari passu?
Trusts are a flexible, tax effective platform for investment in a wide range of
assets from family businesses to large scale infrastructure projects.
According to the ATO, in the 2014 financial year, there were more tax returns
lodged in respect of trusts (802,000: for declared income of $345b) than companies (763,000: $2,700b) or partnerships (344,000: $148b)
Indicates widespread adoption of trading trusts, many with corporate trustees While corporate insolvency relatively well understood with clear legislative
guidance, uncertainty arises in respect of insolvent corporate trustees
If the priority regime under the Corporations Act does not apply – there are
implications for the Fair Entitlements Guarantee Scheme (FEG) which relies
Amerind trustee of a trust Operated business manufacturing and distributing decorative finishes Bank facilities secured over all assets with Bendigo Bank Placed in VA and receivership March 2014 (later liquidation) Receivers operated business short time Receivers sold stock, recovered debtors Sold properties under various guarantees – recovered most of debt FEG paid employees $3.8m Bank repaid in full Receivers had surplus of $1.6m Sought directions on dealing with surplus
Various issues in earlier decisions not appealed:
Whether the company solely traded as trustee Whether the assets ($1.6m surplus) were circulating assets
Issues for determination by HCA:
Whether the trustee’s right of indemnity is property of the
company
Whether the $1.6m surplus subject to s 433, despite being trust
property
Trust is not a legal entity Cannot enter contracts, incur debts or hold legal title to
Trustee personally liable for debts incurred as trustee Trustee indemnified against trust assets Trustee indemnity takes priority over beneficiaries
Recoupment:
Trustee has incurred liability on behalf of trust Trustee paid liability from own assets Trustee seeks reimbursement from trust assets (indemnity) Creditor has no right against trust – it has been paid
Exoneration
Trustee has incurred liability on behalf of trust Debt remains unpaid Trustee seeks payment of debt from trust assets (indemnity) Creditor has right of subrogation to trustee rights
Company Non-trust assets Non-trust creditors Trustee Trust assets Trust creditors
Exoneration Recoupment
Section 556(1) – prescribed priorities of unsecured debts
Costs of preserving and getting in the property Costs of the wind up application Remuneration and other liquidation expenses Employee entitlements (subsections (e), (g), (h)) Personal injury compensation
If:
(a) a payment has been made by a company:
(i)
(ii)
(iii) in respect of leave of absence, or termination of employment, under an industrial
instrument; and
(b) the payment was made as a result of an advance of money by a person
(whether before, on or after the relevant date) for the purpose of making the payment; then:
(c) the person by whom the money was advanced has the same rights under this
Chapter as a creditor of the company; and
(d) subject to paragraph (e), the person by whom the money was advanced has,
in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid as the person who received the payment would have had if the payment had not been made
(2) This section applies where:
(a) 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; and
(b) [company not in liquidation at date of appointment]
(3) 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: …
(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.
Section 9 of Corporations Act:
“Property” means 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.
Section 340 of PPS Act
…personal property is a circulating asset if…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
Statutory priorities (s 556) favour:
Employee entitlements Costs of liquidation
Employees rights to circulating assets (s 433/561)
Lender allows use to operate business Possibly improved by efforts of employees Employees should be paid before lender
Unfair if trading trusts excluded – particularly where many
Octavo (1979) 144 CLR 360
Right of indemnity = proprietary interest
Buckle (1998) 192 CLR 226
Exoneration v recoupment – both generate proprietary interest
Re Bryne Australia [1981] 1 NSWLR 394
Costs and expenses of liquidator from trust property
Re Enhill Pty Ltd [1983] 1 VR 561
Trustee proprietary interest is property of company and subject to statutory
regime
Available to pay all creditors
Re Suco Gold (1983) 33 SASR 99
Only right of recoupment available to non trust creditors Right of exoneration only to benefit trust creditors
Originally brought to resolve issue re Receivers obligations under s 433,
including what assets were properly characterised as circulating assets
Brereton J decision in Re Independent Contractor Services Receivers amended – to seek declarations as to whether assets are trust assets
and whether priority regime applies
Interested parties – FEG and Carter Holt Harvey Other decision following Robson J:
Re Mooney’s (Markovic J) Lane v DCOT (Derrington J)
FEG appealed to Court of Appeal - Five Judge bench (due to Re Enhill) At same time – Full Court of FCA heard Re Killarnee Civil & Concrete
Contractors Pty Ltd (in liq) [2018] FCAFC 40
Carter Holt appealed Amerind to HCA
Determined that Amerind conducted its business solely as trustee Right of recoupment v right of exoneration Trust creditors right of subrogation Exclusive to trust creditors The proprietary rights remained within the trust structure – did not come into
the hands of liquidator
Therefore statutory regime does not apply Proceeds to be distributed to all trust creditors, including employees (pari
passu)
Distinguished Re Enhill – different statutory regime (Company Law)
Right of indemnity of corporate trustee is property of the company for
purposes of s 433
Re Enhill followed and preferred over Suco Gold Recoupment versus exoneration – applies equally to both Right of subrogation a remedy – not a proprietary right of creditors Court did not specifically deal with the issue of non-trust creditors (as there
were none here) – but clearly supported Enhill over Suco Gold
Indemnity does not have to be subject to circulating security interest – is
enough that the trust assets were
If necessary to characterise the indemnity – the circulating nature of the trust
assets flowed through
4 questions posed:
Did liquidator have power to sell trust assets? Did priority regime in Act apply? Should trust assets be treated as assets in the winding up of the Company? Alternatively, should the proceeds be distributed to trust creditors pari passu?
1- No power of sale – bare trustee - Court approval required 2- recoupment v exoneration – right or indemnity is property - Suco Gold
favoured – public policy
3- indemnity is property of the company 4- Priority regime applies
Kiefel CJ, Keane and Edelman JJ:
Right of exoneration = proprietary right to trust assets Exoneration right limited to payment of trust creditors Therefore non-trust creditors cannot be paid from trust assets Suco Gold triumphs Trustee right to trust assets – is “property” per s 433
Bell, Gageler, Nettle JJ:
Right of indemnity confers beneficial interest in the trust property and falls within
s 9 definition of “property”
Distinguish between trust property and trustee proprietary/beneficial interest in
trust property (indemnity) – two distinct properties
Indemnity not a circulating security interest (433(2)) – it is the Surplus (stock) that
triggers s 433
“property” includes so much of the trust assets that the company is entitled to Suco Gold prevails.
Gordon J
Agreed with Bell, Gageler and Nettle JJ Right of exoneration from the Surplus is “property” for purposes of s 433 Exoneration is a fixed asset – but does not affect operation of 433 – proprietary
interest in circulating assets
Suco Gold prevails
Gordon J – other issues in Obiter:
Multiple trusts – each fund dealt with separately. If difficulties,
application to Court – equity may need to intervene, e.g. Hotchpot
Costs and remuneration across multiple trusts – debts of corporate
trustee – priority under s 556 – apportioned to respective trust – if difficulties, apply to Court
Conclusion of Derrington J in Lane v DCOT (2017) 253 FCR 46 – re
proceeds of trusts cannot be proceeds of property of bankrupt (per ss 108 and 109) is wrong
Status as trustee
Upon appointment – consider status of trustee Ipso facto clauses – or replacement trustee Held as bare trustee Orders from court – appointment – nunc pro tunc – s 477
Recoupment v exoneration Enhill v Suco Gold Trust and non-trust assets/creditors Multiple trusts Remuneration and costs