The Amerind High Court decision – welcome clarity for lawyers and insolvency practitioners
By James Hughes, Barrister-at-Law
The Amerind High Court decision1 resolved two issues of “basic principle”2 which have long caused legal uncertainty for insolvency practitioners in relation to the interaction of corporate insolvency and trust law – specifically, a trustee’s right of exoneration out of trust assets.
The Corporations Act makes little or no provision for corporate trustees which become insolvent,3 and there is no distinct insolvency regime for trusts. The decision essentially concerned whether creditors who would be priority creditors of an insolvent company (in this case, employees) have the same priority when that company happens to trade as the trustee of a trading trust.
The context was that, for over a century, employees have had priority in the distribution of property by liquidators over the holders of a floating charge (now known as a circulating security interest).4
The decision resolves controversies about which different courts have come to discordant views, such as whether trust assets are “property of the company” for the purposes of the insolvency regime under the Corporations Act, and whether trust assets can be distributed to all creditors, or only trust creditors.
Relevant provisions of the Corporations Act
The provision central to the decision was s433 of the Corporations Act, which relevantly requires a receiver appointed to “property of the company” by the holder of a “circulating security interest” to observe the same statutory priorities under s556 which apply to employees in the event of a winding up.
Section 560 provides a statutory right of subrogation to a person who advances money for the purpose of paying preferential employee entitlements, such that the person advancing the money has the same priority as the employees under s556.
While the appeal was specifically concerned with the appointment of receivers to property, the conclusions equally apply to a liquidator.5
Amerind Pty Ltd (Amerind) carried on a business solely in its capacity as trustee for a trading trust. It had no assets of its own and relied upon its right of indemnity out of the trust assets to pay its creditors.
Amerind experienced financial difficulty and a secured creditor appointed receivers. The Commonwealth advanced money for the purpose of making payments to Amerind’s employees under the fair entitlements guarantee scheme, totalling $3.8 million.
The receivers realised Amerind’s trust assets and paid the secured creditor in full from the proceeds of the fixed (non-circulating) assets. A surplus of about $1.6 million remained, which was realised from circulating assets. The surplus was the subject of competing claims by unsecured creditors.
One creditor was the Commonwealth, which claimed statutory priority pursuant to s560 in relation to the amounts it advanced to make preferential payments to employees.
The competing claim was made by the appellant, a trade creditor of Amerind, which submitted that s433 was not engaged and did not afford priority to the Commonwealth.
The decision at first instance
The trial judge found that s433 does not apply to trust assets or trustee’s right of indemnity since neither of those are “property of the company” within the meaning of that section. That is, Amerind’s only asset was a right of indemnity in respect of trust liabilities and that right was not personal property of the trustee, but rather held on trust for the trust creditors.
The trial judge also reasoned that even if Amerind’s right of indemnity was “property of the company” within the meaning of s433, it was not property that was subject to a “circulating security interest”, so s433 was not engaged. Therefore, the Commonwealth had no priority.
The Court of Appeal decision
The Court of Appeal of Victoria overturned the trial judge’s decision, finding that it “cannot be seriously doubted” that the right of indemnity by way of exoneration is property of the insolvent trustee company.6 It necessarily followed that s433 must apply.
The Court of Appeal further found that, although the trustee’s right of indemnity was not itself a circulating asset the subject of a circulating security interest, the character of the trust assets (being circulating assets) automatically flowed through to the right of indemnity and so brought the right of indemnity within the reach of s433.
The Court of Appeal found it unnecessary to resolve longstanding controversy as to whether proceeds of trust property are available to be shared among all creditors of a company (as was the law in Victoria articulated in Re Enhill7) or whether trust assets are only available to be shared among trust creditors (as was the law favoured in other jurisdictions, articulated in ReSucoGold8). The Court of Appeal did not decide the point, but noted that, unless and until a subsequent decision of that court decided otherwise, the law as articulated in Re Enhill should continue to be followed by trial judges in Victoria.9
The High Court decision
In three separate judgments, which differ subtly in their formulation of a trustee’s interest in trust property, the High Court unanimously dismissed the appeal.
The appellant submitted that the Corporations Act did not apply to the proceeds of Amerind’s trust assets on two grounds:
- first, because the receivers could only access those proceeds via Amerind’s right of exoneration, which conferred on Amerind no proprietary interest in the trust assets themselves, the proceeds were “trust property” and not “property of the company” to which s433 applied; and
- second, because s433 only deals with circulating assets, and the trustee’s right of indemnity is not a circulating asset (rather, a fixed asset), s433 was not engaged.
The first ground
Each of the judgments focused on the nature of a trustee’s right of indemnity, in particular its right of exoneration, in insolvency. Each judgment held that, to the extent of the power of exoneration, the rights held by a trustee on trust are the “property of the company”, which is available for the payment of trust creditors.
Bell, Gageler and Nettle JJ, with whom Gordon J agreed in a separate judgment, held that the right of exoneration confers on the trustee a beneficial or proprietary interest in the trust assets for the purpose of discharging liabilities properly incurred in the performance of the trust. As explained by Gordon J, it is not the right of exoneration itself that is the proprietary interest, but rather, the right of exoneration generates a proprietary interest in the trust assets. The interest generated by the trustee’s right of exoneration falls within the definition of “property” in s9 of the Corporations Act and, therefore, the phrase “property of the company” within the meaning of s433.
Thus, in a corporate trustee insolvency, the “property of the company” available for the payment of trust creditors includes so much of the trust assets as the company is entitled, in exercise of the company’s right of indemnity as trustee, to apply in satisfaction of properly incurred trust liabilities.
It was further held that the proceeds from the exercise of a corporate trustee’s right of exoneration in respect of trust liabilities may be applied only in satisfaction of the trust liabilities to which the right relates. The approach in Re Enhill was emphatically rejected in favour of that in Re Suco Gold.
The second ground
Each of the judgments found that Amerind’s right of indemnity itself was not property comprised in a “circulating security interest” within the meaning of s433. However, it was unanimously observed that, to say that the right of indemnity was not itself a “circulating asset” is meaningless or irrelevant. The assets realised by the receivers pursuant to the right of indemnity were circulating assets the subject of a circulating security interest that came into the hands of the receivers. To the extent that the receivership surplus represented proceeds of the sale of circulating assets, s433 applied.
The decision also clarified, in ;obiter, that if Amerind had been the trustee of multiple trusts, then a receiver or liquidator should be seen as holding multiple funds, each directed to different groups of creditors. Section 433 (or s561) would then apply to each fund separately, to the extent that the fund constituted circulating assets. It was expressly acknowledged that this approach may lead to practical difficulties and expense, requiring direction from the court in relation to allocation between multiple trusts.
Further, the judgment of Kiefel CJ, Keane and Edelman JJ expressly left open questions about how unsecured non-priority trust creditors rank among themselves, and about the marshalling of claims where a creditor has access to more than one fund.
In short, a trustee’s right of indemnity out of trust assets is property of the company for the purposes of the insolvency regime under the Corporations Act and the property can only be distributed in payment of properly incurred trust liabilities. While the decision left open some questions relating to the distribution of trust property in a corporate insolvency, and may lead in some cases to practical difficulties requiring court direction and extra expense, it provides welcome direction to lawyers and insolvency practitioners in relation to the treatment of trust assets in corporate insolvencies.