Amerind – insolvent corporate trustees and the Corporations Act 2001 priority regime – still a grey area

23 August 2018
Scott Couper, Partner, Brisbane

The Victorian Court of Appeal in Amerind[1] 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 facts

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 issues

The Court was asked to consider:

  1. In the case of an insolvent trustee, is the right of indemnity from trust assets ‘property of the company’ within the meaning of section 433 Corporations Act?
  2. Does the ‘property’ fall within the ambit of property which is secured by a ‘circulating security interest’?
  3. Are the proceeds of the right of indemnity (whether that be recoupment or exoneration) to be distributed to trust creditors only, or to all creditors?

The first instance decision

At first instance, Justice Robson held that:

  • The receivership surplus, which amounted to a trustee’s right of indemnity of exoneration, was not ‘property of the company’ as required by section 433 of the Corporations Act.  Accordingly, the statutory priority regime did not apply;
  • A trustee’s right of indemnity did not fall under section 340(5) of the Personal Property Securities Act 2009 (Cth) (the PPSA) and therefore it was not a circulating asset; and
  • The surplus should be distributed evenly among all creditors on a pari passu basis.

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 [2016] NSWSC 106.

Unsurprisingly, the Commonwealth appealed the decision.

The appeal

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.[2] 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.[3] 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.

Key takeaway

Amerind supports the view that:

  • The right of indemnity is an asset of the company;
  • The statutory priority regime in section 556 of the Corporations Act applies to the proceeds of trust assets in the case of an insolvent corporate trustee;
  • When analysing whether property is a circulating security interest, the relevant assets to assess are the underlying trust assets, taking into account their characteristics as at the time the receiver is appointed.

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[4] 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.

[1] Commonwealth of Australia v Byrnes and Hewitt as receivers and managers of Amerind Pty Ltd (receivers and managers appointed)(in liq) [2018] VSCA 41.
[2] The judges followed the full court decisions of the Victorian Supreme Court in Re Enhill Pty Ltd [1983] VR 52 and the South Australian full court in Re Suco Gold Pty Ltd (in liq) [1983] 33 SASR 99.  This is to be contrasted to the more recent decisions including Independent Contractor Services (Aust) Pty Limited ACN 119 186 971(in liquidation) (No 2) [2016] NSWSC 106 (which had been followed by the Judge at first instance).
[3] The issue has been discussed in many earlier cases however there is still no clear appellate direction with Re Enhill providing authority for distributing to all creditors and the cases of Re Suco Gold, Re Independent Contractor Services and Lane v Deputy Commissioner of Taxation [2017] FCA 953 deciding that in the case of a right of exoneration, proceeds should only be distributed to trust creditors.
[4] MJM(WA) Enterprises Pty Ltd (in liq) [2018] NSWSC 944.

Authored by:
Scott Couper, Partner
Claudia Dennison, Associate

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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