BY
Dr Garry J Hamilton - Senior Legal Consultant - Taylor David Lawyers, Adjunct Professor (UQ Law)
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Friday 8th March, 2024
Insolvent Corporate Trustees: Just More Questions
Hearsay is indebted to the eminent corporate lawyer, Dr Garry Hamilton, writing on this important corporate law topic. It repays careful reading.
Until recently, there existed a long-standing divergence of judicial opinion as to whether a liquidator of an insolvent corporate trustee, when enforcing the trustee’s right of indemnity, could apply the proceeds to satisfy the claims of creditors arising from its activities when acting in both its trustee and personal capacity, or in its trustee capacity only. In 1983 the Victorian Court of Appeal in Re Enhill Pty Ltd [1983] 1 VR 561 (Enhill) held that such proceeds were available to satisfy both trust and non-trust creditors, pari passu. In that same year, the South Australian Full Court in Re Suco Gold Pty Ltd (In Liq) (1983) 33 SASR 99 (Suco Gold) held that such proceeds were available to pay trust creditors only.
That divergence of opinion remained unresolved for almost four decades, with the courts constituted by single judges in Victoria following Enhill and those in South Australia following Suco Gold. Finally, the High Court in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth of Australia [2019] 268 524 (Amerind) resolved the impasse when it held that Enhill was wrongly decided (at [44] per Kiefel CJ, Keane and Edelman JJ; at [92] per Bell, Gageler and Nettle JJ; and at [153]-[154] per Gordon J).[1]
The principal reason for the High Court’s decision on this point is perhaps most simply explained by its approval of the comments by King CJ in Suco Gold where the Chief Justice said that Enhill was “in conflict with fundamental principles of trust law” (at [43] citing King CJ in Suco Gold at p 105). This was because, as King CJ concluded, if a trustee in bankruptcy, or a liquidator in the case of a trustee company, were permitted to use trust funds for a purpose other than the discharge of properly incurred trust liabilities, then “the money is being used for an unauthorised purpose and is being used, moreover, for the benefit of the trustee, and of third parties, namely non-trust creditors.” (Amerind at [43] citing King CJ in Suco Gold at p 105).
As far back as 1988, the Australian Law Reform Commission noted that “companies legislation makes little or no provision for corporate trustees which become insolvent”, [2] and as the High Court observed in Amerind (at [1] per Kiefel CJ, Keane and Edelman JJ), “[t]hat observation remains true today.”
It is against this background that a recent (19 December 2023) decision of Colbran, in the matter of Balsub Pty Ltd (in liquidation) [2023] FCA 1635 (Colbran), exposed a question of some practical importance to insolvency practitioners dealing with the liquidation of insolvent corporate trustees. The question was whether recoveries made by a liquidator from directors – resulting from their breach of a provision in the Corporations Act 2001 (Cth) (Corporations Act), requiring them to prevent a company trading whilst insolvent[3] – were available to all creditors, irrespective of whether their debts were incurred by the trustee when acting in its trustee capacity or its personal capacity or both.[4]
If nothing more, the Colbran decision underscores the need for legislative reform of the law relating to the winding up of insolvent corporate trustees.
The decision – by McEvoy J in the Federal Court of Australia – arose from an application by the liquidator for directions on the point. His Honour concluded that such liquidator’s recoveries could be distributed to all creditors, irrespective of whether they had been incurred by the company in its own right or in its capacity as trustee.
In view of the nature of the directions sought by the liquidator, one might have thought that the decisions in Enhill and Suco Gold, and more recently Amerind, would have featured centrally in the adjudication of the issue before the court. Surprisingly however, there is no mention of either Enhill or Suco Gold and only a passing, and presently irrelevant, reference to Amerind.[5]Moreover, there is nothing in the decision which explains any basis on which one might assert an entitlement by a liquidator, when purporting to exercise a right of exoneration from trust assets, to use those assets to pay non-trust creditors.
The reasoning of the courtin Colbran draws heavily on the submissions made by the liquidator,[6] the principal submission being that the provision of the Corporations Act which allows a liquidator to recover loss or damage resulting from directors’ breach of the insolvent trading prohibition, s 588M(2), is based on the principle of “equal sharing”.[7] The submissions refer to the history of that section,[8] to the recommendations of the Harmer Report[9] and to several cases in which the Harmer Report’s recommendations were discussed.[10] From 1981 until the enactment of the current section when the Corporate Law Reform Act 1992 (Cth) commenced on 23 June 1993, individual creditors, acting in self-interest, could prosecute actions against directors resulting from insolvent trading and keep any recoveries made.[11] The Harmer Report recommended however that the main plaintiff in such recovery actions should be the liquidator on behalf of all creditors,[12] and that recommendation was followed.
Colbran deals only with a liquidator’s recoveries from insolvent trading. There are of course other forms of recovery a liquidator may make in respect of events occurring pre-liquidation, and which are voidable under s 588FF at the option of the liquidator. These include unfair preferences, uncommercial transactions and unreasonable director-related transactions.[13] As all such recoveries connote the principle of “equal sharing”, does this mean that all such recoveries should be available to the creditors of the trustee, irrespective of whether they were incurred in a trustee or personal capacity? In the light of the High Court’s determination in Amerind,it seems unlikely that that should be the case.
If nothing more, the Colbran decision underscores the need for legislative reform of the law relating to the winding up of insolvent corporate trustees. The Harmer Report made clear and specific recommendations for reform, however these were not implemented, possibly, it would seem, because the Law Council of Australia (through its Business Law Section) somewhat surprisingly submitted that most of the suggested reforms were either unnecessary or misguided.[14]
To date, however, nothing has been announced by way of legislative reform in this area.
More recently, the Joint Parliamentary Committee on Corporations and Financial Services conducted an inquiry into corporate insolvency in Australia.[15] In its report which was tabled on 28 September 2023, the Joint Committee made 28 recommendations most of which were that “as soon as practical the government commissions a comprehensive and independent review of Australia’s insolvency law”.[16] The recommendation in this particular area was different however: it described reform in this area as “low hanging fruit” which did not need to await a comprehensive review, but which could be dealt with “near term”.[17]
To date, however, nothing has been announced by way of legislative reform in this area. It is to be hoped that Parliament will shortly enact legislation to finally deal with the issues the subject of the Harmer Report’s recommendations in 1988 and more recently the subject of the Joint Parliamentary Committee’s recommendations last year.
[1] The year before Amerind conclusively resolved the issue, the Full Federal Court in Jones v Matrix Partners Pty Ltd (2018) 260 FCR 310 considered that the Suco Gold approach was to be preferred to that in Enhill.
[2] Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) (Harmer Report), p 108 [240].
[3] Section 588G imposes a positive obligation on directors to prevent a company trading if it becomes insolvent. Section 588M(2) provides that a liquidator may recover from a director who has contravened s 588G the loss or damage arising as a result of such contravention.
[4] The liquidator’s analysis showed that creditor claims against the company in its own right were $1,507,325.41 and $2,136,242.52 in its trustee capacity (Colbran at [21]).
[5]Amerind at [71]. That reference is to a one sentence comment by Bell, Gageler and Nettle JJ to s 555 of the Corporations Act which provides that, subject to exceptions, debts and claims rank equally and, in the event of a deficiency in assets, are to be paid pari passu.
[6]Colbran at [1], [6], [37], [39], [41]-[45], [50], [51], [53], [57], [58], [65], [60] and [70].
