A recent decision in the Victorian Supreme Court of Appeal is creating a lot of chatter among insolvency practitioners.
In Commonwealth of Australia v Matthew James Byrnes and Andrew Stewart Reed Hewitt in their capacity as joint and several Receivers and Managers of Amerind Pty Ltd (Rcvrs and Mgrs Apptd) (in Liq) & Ors  VSCA 41 (the Amerind Appeal Decision), the Court set aside the trial judge’s findings that employees of insolvent trading trusts were not entitled to prove as priority creditors in the winding up of an insolvent corporate trustee.
The decision benefits employees who generally would not be aware of how the company that employs them is structured. This lack of understanding could put employees at a disadvantage and the Amerind Appeal Decision means that employees of corporate trading trusts will now not be disadvantaged in insolvency situations.
Amerind was the corporate trustee of a trading trust. While the trust was being wound up, a question arose as to the whether the proceeds of realisations made by its receivers and managers should be distributed in accordance with the priority regime contained in the Corporations Act 2001 or in accordance with trust law.
The outcome for particular creditors would differ depending on which set of rules was applied. For example, employees would receive less if trust law, rather than the Corporations Act, was applied.
According to Jirsch Sutherland Partner Amanda Young, there was a number of major issues to consider such as was the surplus held by the Receivers Trust property and whether the priorities in sections 433, 556 and 560 applied.
“Amerind acted solely as trustee of the relevant trading trust,” Amanda says. “The liabilities Amerind incurred were therefore the liabilities of the trust and its creditors were trust creditors. It had no assets of its own. The right of indemnity should therefore extend to the assets as if they were property of the company.”
Amanda says there were conflicting authorities, specifically:
- Re Enhill Pty Limited  VR 561, interpreted section 433 as the trustee had a right of indemnity from trust assets and therefore the priority regime of 433, 560 and 556 applies.
- Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2)  305 FLR 222, said the priority regime did not apply to trust property and the trustee’s indemnity did not apply because section 556 is concerned only with assets beneficially owned by the company.
“Initially in Amerind, the court held the priority regime does not apply to trust assets,” Amanda says. “Section 433(2) refers to an equitable or legal interest belonging to the company, not an interest belonging to someone else. The decision was that the right of indemnity and related lien over the trust assets do not become property of the company, which were not incurred on behalf of the trust.”
The Court rejected this conclusion and instead found that the right of indemnity was the property of the company and the priority regime therefore applied.
“The issue now is with how trust creditors are to be treated,” Amanda says. “Do they rank equally with company creditors?”
She adds another issue to consider is whether the property comprised, or was subject to, a circulating security interest and whether it was present at the date of the appointment.
“No doubt there will be much discussion in the coming days and weeks regarding this case,” she says. “Given the prevalence of use of trading trusts in Australia, it would be good to have some certainty on how to deal with them going forward.”
Background to the case
Amerind Pty Ltd (receivers and managers appointed) (in liquidation) (‘Amerind’) operated a business as the corporate trustee of a trading trust. It had no assets of its own to run the business but as a trustee, it was entitled to be indemnified from the trust assets for liabilities it incurred on behalf of the trust.
Amerind became insolvent and Receivers were appointed by Bendigo and Adelaide Bank. Under the Fair Entitlements Guarantee Scheme, the Commonwealth paid $3.8 million to Amerind’s former employees toward their outstanding wages and other entitlements. After the bank was paid, the Receivers were left with a surplus of around $1.6 million.
The question was whether the surplus was property of the company to be distributed according to the priority regime in the Corporations Act 2001 (Cth) (‘the Act’).
The Court of Appeal held that the Commonwealth (in place of the employees, following its advance under the Fair Entitlements Guarantee Scheme) was entitled to be paid by the Receivers before other creditors from particular assets (such as cash in Amerind’s trading account) because the priority regime in the Act applied.
The trial judge found that Amerind’s right of indemnity was not property of the company and that, consequently, the priority regime did not apply to the receivership surplus. The Commonwealth appealed that decision.
The summary of the Court of Appeal’s judgment delivered on February 28, 2018 can be found here.
Source: Supreme Court of Victoria, 2018