Over 35 years ago, a Judge said that if a liquidator winding up a trustee company were to lose out in relation to the priority of his remuneration, it would be
“unjust that he should perform his important and sometimes difficult duties without reward. In future it is unlikely that companies carrying on no business but a trust business … will be able to find … a liquidator prepared to accept office …”.
Indeed the Judge queried whether the trading trusts of this kind
“(no doubt entered into for taxation purposes) … should be allowed to exist”: Re Byrne.
Killarnee and Amerind
On 10 and 11 August 2017 a Full Federal Court heard a matter that requires determining whether a liquidator does lose out, extending to the question whether employee priorities likewise lose their priority. The issue in the liquidation of Killarnee Civil & Concrete Contractors WAD181/2016 has been specially referred to a full court by the Chief Justice on the basis of its legal importance.[1]
The background and conflicting case law is very well explained in an article by some of the lawyers involved.[2] Decisions in Re Enhill and Re Suco Gold and Octavo v Knight need to be resolved.
The article refers to a pending decision of the Victorian Court of Appeal from a trial decision in Re Amerind which had confirmed the view taken 35 years earlier, though with much case law in between. [3]
The issue of judicial confusion is whether assets held by a company as trustee are assets of the company or assets of the trust, and if the latter, whether those assets may be used to pay out trust creditors without regard to the priority that applies to the company’s assets under s 556.
More accurately, although with some paraphrasing, the questions set down for the Full Court in Killarnee are these:
- are the assets of a Trust (including the proceeds of sale of those assets) assets in the winding up of the company as trustee of the Trust so that:
(a) the liquidator had power under s 477 of the Corporations Act to sell the trust assets?
(b) the proceeds of sale of the trust assets are to be applied in accordance with the priority regime under ss 555, 556, 560 and 561 of the Act.
- Should the liquidator be directed under s 511 of the Act to deal with the trust assets as assets of the company in the winding up of the company?
- Alternatively, should be the liquidator be directed under s 511 that the trust assets be distributed to unsecured creditors pari passu after providing for the costs of administration (including the administrator’s and liquidator’s remuneration and expenses) only?
The Full Court comprises Chief Justice Allsop, and Justices Siopis and Farrell. At the conclusion of the 10 and 11 August hearing, the Court directed the liquidator to advise those termed the ‘putative replacement trustees’ of the fact that the matter was heard on those dates, that if the PRTs wanted to find out what happened they should contact the liquidator, and that if the PRTs wanted to intervene, they should apply to do so by 8 September 2017.
Consistency?
As to the pending decision in Amerind, while there are general rules about the various Australian courts following each other’s decisions, more particular rules apply when national legislation is being applied, in this case the Corporations Act, where jurisdiction is shared. See Consistency in Judicial Decisions – Marlborough Gold Mines Revisited. See ASC v Marlborough Gold Mines.[4]
The circumstance of a pending state court appeal decision (Amerind), and a soon to be pending federal decision (Killarnee) is novel and how they might be co-ordinated, if at all, is difficult. If a decision in Amerind were to be handed down first, the Full Federal Court might be obliged to have regard to or follow it. A “plainly wrong” outcome would be unhelpful.
Bankruptcy
Meanwhile, in Reehal Holdings [2017] FCA 793 Derrington J said he could not in fact discern from Re Amerind that a liquidator’s priority was in fact lost. But he conceded that “clear principles … have not yet crystallised”. Nor did it seem to him “that there is any authority which is necessarily binding on this Court, although that may be open to debate”.
That debate should be resolved soon.
High Court?
Finally, it should be said though that the extent to which appeal courts, including the High Court, can resolve complex issues that are more in need of law reform, as was suggested in this case 35 years ago, is often shown to be limited.
New Zealand
As to legislative reform, New Zealand has just introduced its Trusts Bill 2017 into parliament which attempts to deal with some of these issues.
Those issues in Australian law are usefully discussed in a (5th) discussion paper of 2010 of the NZ Law Commission: Court Jurisdiction, Trading Trusts and Other Issues – Review of the Law of Trusts. It refers to the uncertainty whether a liquidator is entitled to recover their fees and expenses from trust assets, the “subject of a series of conflicting cases in Australia”. The paper says that “the position in New Zealand appears to be that the liquidator’s expenses and remuneration can be paid from the trust assets. There is also the policy consideration that it would be difficult to find liquidators willing to act as such if their costs could not be recovered from trust assets.413 Without the actions of an insolvency administrator the trust beneficiaries would not receive a distribution” (citations omitted).
The paper also says that Australian courts have taken a “very technical” approach to the issues.
At that time, and it seems, since, no cases in New Zealand had addressed a corporate trustee which has as its only business the administration of a trust. The paper nevertheless says that it may be useful to clarify these issues in trusts legislation. Hence the Trusts Bill 2017.
The paper goes on to discuss the issue of the distribution of assets and priority of creditors in a trading trust, discussing the central decisions of Re Enhill and Re Suco Gold, as to whether the statutory preference regime applies to trust assets recovered via the right of indemnity on liquidation of a corporate trustee, and whether the voidable transaction provisions apply to transactions made with trust creditors, discussing Octavo v Knight. In Levin v Ikiua [2009] NZHC 879, Heath J left open whether Octavo would apply in NZ.
More soon.
[1] Section 20(1A) Federal Court of Australia Act.
[2] How is a liquidator to deal with trust assets in a liquidation, Lee Christensen and Bonnie Scovell
[3] Re Amerind Pty Ltd (Receivers and Managers appointed) (In Liquidation) [2017] VSC 127
[4] [1993] HCA 15; (1993) 177 CLR 485
