The Victorian Court of Appeal in Amerind considered whether the right of indemnity from trust assets held by an insolvent trustee company is ‘property of the company’. If so, the Court considered whether the statutory scheme of priority contained in the Corporations Act 2001 (Cth) (Corporations Act) applies to the distribution of the relevant property.
The Receivers were appointed by a lender over the assets of Amerind Pty Ltd (Amerind), an insolvent trustee company. Amerind had no assets of its own. It used trust money to pay trust creditors – there were no non-trust creditors.
Having successfully traded Amerind as a going concern, the Receivers realised the lender’s securities and at the end of the receivership held a surplus of $1.6 million.
The Commonwealth had paid $3.8 million to Amerind’s former employees under the Federal Employee Guarantee (FEG) scheme. A dispute arose between the Commonwealth and other unsecured creditors as to how the surplus should be distributed.
The Receivers sought directions from the Victorian Supreme Court about the distribution of the surplus funds held by them.
The Court was asked to consider:
The first instance decision
At first instance, Justice Robson held that:
In arriving at his decision, Justice Robson relied upon the findings of Justice Brereton in the New South Wales Supreme Court in the case of Re Independent Contractor Services  NSWSC 106.
Unsurprisingly, the Commonwealth appealed the decision.
Is the right of indemnity ‘property of the company’?
The Court of Appeal unanimously held that a trustee’s right of indemnity from a trust amounted to a proprietary interest and that the statutory priority regime under sections 433, 556 and 560 of the Corporations Act applied. That is, once it is determined that the right of indemnity was property of the company, the statutory priority regime will apply.
If so, were the assets which underlie the right of indemnity, as property of the company, subject to a ‘circulating security interest’?
The Court also clarified that, on applying the statutory priority regime, section 433 of the Corporations Act requires a determination as to whether the trust assets underlying the right of indemnity were subject to a ‘circulating security interest’ at the time of the receivership appointment. Significantly, this was in contrast to the original decision which examined the right of indemnity itself.
The Court rejected the argument by the Commonwealth that the pertinent time should be at the time the security was created. Rather, whether an asset is a ‘circulating asset’ is to be determined at the time the receiver was appointed.
In this case, after a detailed analysis of section 340 of the PPSA, in the context of this case, all assets were deemed to be ‘circulating assets’ under section 340 of the PPSA. That is, the assets which underlie the right of indemnity were subject to a ‘circulating security interest’.
How should the surplus funds be distributed?
Whether a receiver of an insolvent trustee should distribute a receivership surplus to trust creditors only or to all creditors both trust and non-trust, was not determined because it was not necessary to do so – all creditors were trust creditors because Amerind did not operate in a capacity other than as trustee. Unfortunately, whether a receiver of an insolvent trustee should make a distributing to trust creditors only, or to all creditors, remains unresolved.
The Court’s decision
The outcome was that the priority regime in the Corporations Act should apply. Having advanced payment on account of wages per section 560 of the Corporations Act, the Commonwealth had the same right to priority of payment as the employees would have under section 556 of the Corporations Act. As such, the Commonwealth was entitled to reimbursement from the receivership surplus in priority to the other creditors by virtue of section 433 of the Corporations Act.
Appeal to the High Court
The trade creditor has sought leave to appeal this decision to the High Court. Watch this space.
Amerind supports the view that:
Notwithstanding this decision it is to be noted that other appellate State Courts and the Federal Court have taken different positions on these issues. Indeed the Supreme Court of New South Wales has recently adjourned the balance of an application for three months to allow the High Court (if special leave is granted) to authoritatively resolve the controversies arising from the conflicting Federal Court and appellate State Court authorities.
Fortunately, on 17 August 2018 the High Court granted special leave to appeal this decision. Until the High Court considers this issue, or Parliament intervenes, the debate about the distribution to trust creditors versus non-trust creditors remains open.
Scott Couper, Partner
Claudia Dennison, Associate