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Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Insolvency of trading trusts – Keay comments

Our 10th edition of Keay’s Insolvency was published in 2018 just after the Victorian Court of Appeal decision in Amerind, and that decision was included in our detailed analysis of the issues involved. We explain the High Court appeal decision, with more commentary to be issued in forthcoming draft updates to Keay

The High Court has now dismissed the appeal from that decision confirming that in the case of a trading trustee company under insolvent administration, with all liabilities arising in its capacity as trustee, employees remain priority creditors to share in the trust assets, payable according to the priorities under s 556 Corporations Act: Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20. Specifically, the “property of the company” for the purposes of s 433 of the Corporations Act, by which employee payments prevail over a circulating security interest, includes the trust assets to which the company is entitled in exercise of its right of indemnity, including through its power of exoneration.

Changes to Keay’s Insolvency

For the benefit of those who have their 10th edition of Keay, or access to it, we are updating two parts, in chapters 14 and 15. We will issue these shortly. Whether that text remains intact for any 11th edition will depend on any subsequent cases, or law reform.

We are considering changes to ch 4, in relation to assets in a bankruptcy, in light of Justice Gordon’s comment that a statement of the law in Lane, in the matter of Lee [2017] FCA 953 was “wrong”.

Ratio of the decision

In more detail, we see the ratio of the High Court’s ‘decision’ as, in respect of a company that operates a business that is held and operated on trust for beneficiaries (a “trustee company” holding “trust property”):

  • the right of a trustee company’s “right of indemnity” out of trust assets, in particular its power to use trust property to exonerate itself from debts properly incurred in the course of its business, confers an equitable beneficial interest in the trustee company that, together with the legal interest of the company, makes that trust property “the property of the (trustee) company”;
  • as such, the trust property of a trustee company in external administration is “property of the company” within s 474 Corporations Act, and other related sections;
  • those creditors are to be paid any dividend in accordance with the priorities under s 556. That necessarily includes employees;
  • section 433 can apply to distributions from trust property covered by a circulating security interest, in favour of employees, and thereby the Commonwealth;
  • given that all of Amerind’s creditors were trust creditors, no issue arose as to trust assets being available for other creditors. But the High Court overruled Re Enhill (trust assets were distributable among creditors generally) and upheld Re Suco Gold (trust assets are only available for trust creditors);
  • The right to property of the company nevertheless has limits imposed on the right to indemnity, for example that the debts were properly incurred. Creditors and liquidators take the property subject to those limits.

Other issues

While the decision in Independent Contract Services to the contrary concerning the inapplicability of s 556 was found to be wrong and not to be followed, the general views in Lemery Holdings and other cases about the limits of liquidators’ powers, for example, on the power of sale, and payment of fees and expenses for non-trust work, remain valid: as the most recent decision in Staatz v Berry, in the matter of Wollumbin Horizons Pty Ltd (in liq) (No 3) [2019] FCA 924 shows. Other issues involving both trust and non-trust liabilities, multiple trusts, and practitioners’ remuneration will be covered in the chapter updates to Keay.

Bankruptcy law

Although the High Court’s decision was not about a bankruptcy, nevertheless many of the fundamental issues arise there. Under s 116(2)(a) of the BA, property held by the bankrupt on trust for another person is not divisible property. According to Gordon J, the right of exoneration of a bankrupt who held property on trust and the proprietary interest thereby generated means that the property ceases to be aptly described as property “held on trust” but instead is to be regarded as property of the bankrupt subject to limitations as to its use.

To the extent that in Lane v Deputy Commissioner of Taxation, the Federal Court held that money to be paid from trust assets to trust creditors could not be characterised as “proceeds of the property of the bankrupt” in ss 108 and 109(1) of the Bankruptcy Act, that was wrong.

Gordon J concluded that it followed that

“there is no apparent inconsistency between the corporate insolvency priority regime and s 116(2)(a) of the Bankruptcy Act …”.

Conclusion

The High Court does not address any of the issues raised in the case law about ejection clauses and bare trustees, in essence because neither were relevant facts before it in the appeal.

The appeal was never the best vehicle to resolve all of the problems with trusts and insolvency, but it has resolved some of them.

In terms of the economic cost already imposed on the insolvency system by this legal issue, and other like complexities, we suggest that statutory law reform is required.  It has been a mere but irritating distraction that has taken many an insolvency practitioner away from their real tasks.

Michael Murray and Jason Harris, authors of Keay’s Insolvency [now on sale!]

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