Case: High Court confirms treatment of claims in insolvency of trading trusts

The High Court of Australia has given its judgment on the vexed issue of the treatment of employee claims in the winding up of trading trusts in the decision, Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth & Ors [2019] HCA 20 (Amerind decision).

The question of whether the obligations imposed on a receiver or liquidator to pay, as a priority, certain employee creditors out of circulating assets applies to the trust assets of an insolvent corporate trustee has been debated for a number of decades. 

In the Amerind decision the High Court has provided its long-awaited views on the issue and confirmed that s 433 of the Corporations Act 2001 (Cth) (Act) requires the receivers to pay, out of trust assets, priority employee claims arising from trust liabilities.

Takeaways

The key takeaways from the High Court’s decision are:

  • Trust assets are subject to the trustee’s right of indemnity and s 433 of the Act will operate in respect of realisations of those assets. 
  • While the decision relates to a receivership and focuses on the interpretation of s 433, the reasoning adopted is also applicable to the statutory provisions which apply to liquidation (ss 556, 560 and 561).  
  • The priority for payment of employee entitlements under s 433 (and its equivalents) will only apply to liabilities which are incurred by the trust (the priority does not extend beyond that to a company’s general body of creditors).
  • Additional complex issues remain, including where there are “mixed” liabilities (trust and company liabilities incurred), or multiple trusts administered by a single corporate trustee, among others. While some guidance is provided on some of these issues (particularly in the judgment of Gordon J) it will remain important for insolvency practitioners to obtain specific advice and seek Court directions if the issues remain sufficiently unclear.

It was noted in the judgment that the outcome of the appeal reflects the underlying purpose of the relevant sections of the Act, in particular it was acknowledged (at [57] to [58]) that:

“The fundamental reason why this appeal must be dismissed flows from an appreciation that s 433 of the [Act] is not based upon a conception of a trustee company’s rights that draws a sharp division between, on the one hand, the rights held on trust and, on the other hand, the trustee’s powers in association with those rights, here the power of exoneration [as a subset of the trustee’s right of indemnity]. The rights of the trustee, collectively so viewed, can be used for the benefit of the trustee in discharging debts to trust creditors and, to that extent, when the subject of a circulating security interest they are property of the company coming into the hands of a receiver. From that property the receiver must pay various debts, including employee debts, in priority to any claim for principal or interest in respect of debentures secured by that circulating security interest.
...
It would be perverse if the [Act] operated to deny employee creditors a particular priority over the holders of a circulating security interest solely for the reason that the company which employed them was, perhaps even unknown to the employees, trading as a trustee.”

Background

As members will be aware, this decision is the culmination of a dispute arising from the insolvency of Amerind Pty Ltd (Company). The background facts are re-summarised in the High Court’s judgment and form the important context for the decision. 

The Company was trustee of a trading trust and carried out business solely in that capacity. It had various banking facilities and granted security over all its assets in support of those facilities. The Company was placed into voluntary administration by its directors and following the default under its facilities, it was also placed into receivership.

The receivers of the Company realised its non-circulating assets and the secured debts under the banking facilities were paid in full. A surplus of around $1.6million, from the sale of inventory (circulating assets) remained for distribution. There was a dispute between the Commonwealth (who was a creditor of the Company as a result of paying claims under the FEG scheme) and the appellant in the High Court (Carter Holt), both of whom claimed priority to the remaining funds. 

At first instance (Re Amerind Pty Ltd (rec and man apptd)(in liq) [2017] VSC 127; (2017) 320 FLR 118, Robson J in the Supreme Court of Victoria held that the statutory priority regime did not apply to the distribution of trust property by the receivers. That first instance decision was then overturned by a full bench of the Victorian Court of Appeal in Commonwealth of Australia v Byrnes and Hewitt as receivers and managers of Amerind Pty Ltd (rec and man apptd)(in liq) [2018] VSCA 41; (2018) 54 VR 230. The first instance and Court of Appeal judgments have been previously discussed and summarised for members.

Decision

The decision of the High Court was unanimous in that all seven judges agreed that the appeal by Carter Holt should be dismissed with costs. However, there are three separate judgments within the decision; Kiefel CJ, Keane and Edelman JJ gave one joint judgment, a second joint judgment was given by Bell, Gageler and Nettle JJ and Gordon J agreed with the judgment of Bell, Gageler and Nettle JJ but provided a separate judgment.  The three judgments each cover the history of the legislation, relevant cases to date and the trust and insolvency principles which were at issue in this matter. 

The key issue considered in the Amerind decision was summarised in the judgment of Kiefel CJ, Keane and Edelman JJ as being whether “…employees of a company that is in receivership or insolvency have no [entitlement to the] statutory priority if that company happens to have been trading as the trustee of a trading trust and holding its assets on trust?” (at [2]). 

At first instance, the trial judge answered the question “yes”. The Court of Appeal answered the question “no”. The High Court has now provided its final word and also answered the question “no”, although it took a different path to reach that conclusion than the Court of Appeal.

Another way to assess the issue is to focus on the following questions, which have now been resolved by the High Court as follows:

1.  Are trust assets of the insolvent corporate trustee available for paying trust liabilities subject to the statutory priority regime in favour of employee entitlements?

A. YES

2.  Can those trust assets then also be used to pay claims for non-trust liabilities?

A.  NO

The trustee’s right of indemnity and s 433

The decision emphasised the need to separate the concept of the trustee’s right of indemnity from the trust assets themselves, even though they are linked.

The judgment of Bell, Gageler and Nettle JJ, at [85], highlights that the failure to keep the concepts separate contributed to the “misconception...that because Amerind’s right of indemnity as such was not property that was subject to a circulating security interest, s 433 did not apply.” It was this misconception that underlies the decision at first instance.

The analysis favoured by the majority of the High Court was that the receivers of the Company were empowered to take possession and control of the assets of the Company, including the inventory, pursuant to the operation of the circulating security interest. At that point in time the trustee’s right of indemnity exists over the whole of that inventory which comes within the receivers’ control. In this sense, the receiver or liquidator ‘takes the trust assets as they find them’, which includes the right of indemnity. 

“Amerind’s right of indemnity was not ‘property [of the Company] comprised in or subject to a circulating security interest’ [the precondition to s 433(3) contained in s 433(2)(a)]...it was not a ‘circulating asset’ within the meaning of s 340 of the PPSA [Personal Properties Securities Act 2009 (Cth)] and thus any security over it was not a ‘circulating security interest’ as defined in s 51C of the [Act]. The property ‘coming into [the receivers’] hands’, and out of which they were to pay the priority ‘debts or amounts’, did not include the right of indemnity itself...It was the inventory itself which was the circulating asset the subject of the subject of a circulating security interest (created by cl 2.1 of the Deed), pursuant to which the receivers were appointed, which attracted the operation of s 433.” (at [86])

Justice Gordon also adopted this approach noting that “[t]here is no provision requiring the trustee’s right of exoneration itself to constitute a circulating asset and, of course, the right is not a circulating asset. It is a fixed asset.” (at [186]).

The judgment of Kiefel CJ, Keane and Edelman JJ (see [47] to [51]) reached the same outcome but instead focused on rejecting the appellant submissions that s 433 was subject to an implied limitation such that the s 433(3) priority should only apply “only over circulating assets that are the property of the company.”

This implied limitation in the operation of s 433(3) was rejected in their judgment because there was no need for any such limitation to be implied, there is no requirement in the wording of s 433 that the trustee’s right of indemnity in the hands of the receiver must itself be subject to a circulating security interest and

“..fundamentally, there is no such implied requirement in s 433 [because] it is incorrect to treat rights held on trust by a company as if they existed separately and independently from its power of exoneration... Amerind’s power of exoneration is the means by which its trust rights can be used for its personal benefit as trustee. It is meaningless to ask whether Amerind’s power of exoneration is subject to the circulating security interest independently of the legal rights to the trust assets to which the power relates.” (at [50]).

Applying this analysis, the surplus held by the receivers as a result of realisations of the Company’s inventory was properly subject to s 433 (albeit that the judgments took slightly differing approaches to reach that determination).

Application of statutory priority scheme to distribution of trust property

Helpfully, the High Court also confirmed that the reasoning it applied to s 433 in the receivership context was also applicable to s 561 in respect of liquidations. 

In addition to confirming that its reasoning in this case would also apply in a liquidation context, the decision also confirmed that the statutory priority scheme (pursuant to s 556(1) and ss 560 and 561 conferring the Commonwealth priority for amounts advanced under the FEG scheme) would apply to the distribution of the trust property in the winding up of an insolvent corporate trustee. (See for eg discussion at [88] to [90]).

Re Enhill – wrongly decided

In terms of the High Court’s consideration of the existing authorities in this issue, the various judgments which have dealt with this issue were all covered.  In summary, the High Court (across the judgments) took the following approach:

  • The reasoning in In re Suco Gold Pty Ltd (In liq) (1983) 33 SASR 99 was preferred over the “…’distinctly fragile’ decision of the Full Court of the Supreme Court of Victoria in Re Enhill Pty Ltd [1983] 1 VR 561” (Re Enhill) (at [38]).
  • The aspect of Re Enhill which asserted that the proceeds from the sale of trust assets could be used to pay out the claims of the general body of creditors was “wrongly decided” (at [44]).
  • Much of the key reasoning of the Full Federal Court in Jones v Matrix Partners Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (In liq) (2018) 260 FCR 310, particularly Allsop CJ, was confirmed by the High Court (for eg at [92]).

Only for trust liabilities

Given the finding that Re Enhill was wrongly decided in the scope of operation which it gave to the statutory priority the High Court in this decision emphasised that the statutory priority will be limited in application “... to discharge properly incurred trust liabilities.” (at [98]).

In this case, given the Company had only incurred liabilities in its capacity as trustee of the trading trust, the entitlement to apply the surplus in full to discharge the priority employee entitlements was clear as all of those liabilities were ‘trust liabilities”.

Remaining issues

The judgment of the High Court also acknowledged that there are certain matters not directly covered by this case and complications may arise where the corporate trustee has incurred liabilities in both its own right and acting as trustee, or in cases where the corporate trustee acted as trustee of more than one trust (at [97]). Other additional questions may also arise concerning the order of priority to be applied to trust creditors after the payment of priority debts and the marshalling of claims (at [56]).

While the option of seeking directions from the Court as to the desired course in the circumstances of these “additional issues” will always remain (under particularly s 90-15 of the Insolvency Practice Schedule) Gordon J in her judgment did provide useful guidance.  For example, at [167] to [172], she considers the issue of costs in cases where there are multiple trusts or trust and non-trust activities. In this section she considered the reasoning of King CJ in In re Suco Gold and acknowledged that the adopting an approach of “equality is equity” may be appropriate and “[t]here is no reason why the approach of King CJ should not be extended to apply to an administrator or provisional liquidator of a trustee of a trading trust: their expenses should be regarded as debts of the corporate trustee which would have priority ... as expenses incurred in preserving, realising or getting in the property of the company. (at [171]).

The overall effect of the judgment was summarised by the High Court itself in its summary as:

“…in the winding up of a corporate trustee, the "property of the company" available for payment of creditors includes so much of the trust assets as the company is entitled, in exercise of its right of indemnity, to apply in satisfaction of the claims of creditors, but that proceeds from an exercise of the right of exoneration may be applied only in satisfaction of trust liabilities to which the right relates.  The Court also held that s 433(3) required the receivers to pay the debts in accordance with the statutory priorities in a winding up.  A majority reasoned that Amerind's right of indemnity was not "property [of the company] comprised in or subject to a circulating security interest", but the inventory itself was such "property of the company" and the receivers were, as Amerind would have been, entitled to apply the proceeds of its realisation in satisfaction of the claims of trust creditors.”

Read the full judgment or read the summary issued by the High Court.