Insolvent Corporate Trustees – a way forward to realising trust assets

The recent decision of Cremin, in the matter of Brimson Pty Ltd (In Liquidation) [2019] FCA 1023 (Cremin) helpfully clarifies the approach practitioners ought to adopt when realising the assets of an insolvent corporate trustee.

Here, the liquidator was appointed to three companies which each operated “Snooze” franchises in their capacity as trustee of a trust.  The companies:

• operated the relevant businesses exclusively in their capacity as trustee of the relevant trust;
• did not undertake any activities or conduct any business in its own right; and
• at all times held all property on trust for the relevant trust.

Relevantly, the trust deeds for two of the trusts contained clauses that operated to remove the trustees automatically upon the company going into liquidation. As a consequence, those companies were bare trustees of the relevant trusts.  This meant that the trustees (and therefore, the liquidator) had no power under the trust deeds to sell the assets and wind up the respective trusts.

The third trust deed did not contain a clause to the same effect. However, it did contain a clause which provided that upon liquidation of the trustee, the principal was permitted to remove or replace the trustee.

The trust deeds for each trust also did not appear to give the trustee the power to sell the assets, except for the benefit of the beneficiaries.

Against this background, the liquidator applied to the Court for orders, including that he be appointed receiver and manager to the assets and undertaking of the trusts.

In this decision, Justice Moshinsky helpfully steps through some critical principles, including the following:

• Firstly, a company’s right of indemnity and the equitable lien over the trust assets endures, notwithstanding the company’s liquidation.
• Secondly, his Honour observed that it is now settled that a liquidator who is appointed to a now insolvent (former) corporate trustee is not able to sell the trust property without an order of the Court, or by appointment of a receiver of the trust assets.[1]
• Thirdly, his Honour acknowledged that Courts are prepared to make orders permitting the liquidator of a (former) corporate trustee to sell trust assets and observed that the common course is for the liquidator to be appointed as a receiver for the purpose of selling the trust assets and distributing the proceeds among trust creditors.[2]
• Finally, the Court referred to the recent High Court decision of Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth[3]  wherein it was held that proceeds from an exercise of a corporate trustee’s right of exoneration may only be applied in satisfaction of the trust liabilities to which that right relates.

In the result, the Court preferred to make orders appointing the liquidator as a receiver and manager of the assets of each trust and granting the liquidator the powers that a receiver has in respect of the business and property of a company under section 420 of the Corporations Act 2001 (Cth).

The Court also relieved the liquidator from any liability in dealing with property of the two trusts from which the trustee had been removed and provided for his costs and remuneration to be paid in priority from the trust assets.

Key takeaway

In circumstances where a corporate trustee has been removed as trustee upon becoming insolvent, this case highlights that practitioners must approach the Court to obtain appropriate orders to enable the practitioner to deal with and realise the trust assets.

This decision is now the first of a number of decisions[4] which have adopted a similar approach, whereby the Courts have made:

• orders appointing the liquidator as receiver and manager of the trust assets; and

consequential orders for the application of the proceeds of those assets to be distributed to trust creditors.

[1] Cremin, in the matter of Brimson Pty Ltd (in liq) [2019] FCA 1023 (Cremin) at [49], citing Jones v Matrix Partner Pty ltd; re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018) 260 FCR 310 (Killarnee) at [44].

[2] Cremin at [50].

[3] [2019] HCA 20.

[4] See, for example, McLean v Hill, in the matter of TMC Plumbing & Drainage Pty Ltd (in liq) [2019] FCA 1439 and Sprowles, in the matter of Triumph N Triumph Pty Ltd (in liq) [2019] FCA 1461.

Authored by:

Scott Couper, Partner

Jacqueline Ogden, Director