Killarnee Civil – Further clarity on the distribution of trust assets

Background

Since at least 1983, when the decisions in Re Enhill Pty Ltd¹and Re Suco Gold² were handed down by Full Federal Court of Australia and the Full Court of the Supreme Court of South Australia respectively, there has been judicial divergence as to whether a trustee’s rights of exoneration and recoupment constitute “property” of a corporate trustee in the context of the priorities regime in in sections 443(3), 556 and 560 (Priorities Regime) of the Corporations Act 2001 (Cth) (Corporations Act) or the equivalent provisions of the Bankruptcy Act 1966 (Cth).  At a broad level, the competing views have been:

• That the trustee’s right of “indemnity” (as distinct from either a right of exoneration or recoupment) is property of the company and that the proceeds of the right of indemnity are available for distribution amongst all of the trustee company’s creditors³; and
• That whilst the trustee’s right of indemnity is property of the company, proceeds of the right of exoneration are available for distribution only amongst trust creditors (as opposed to proceeds of the right of recoupment which, it has been said, may be available for distribution amongst all of the trustee company’s creditors)⁴.

Resolution of the question is important for the purpose of guiding distribution of fund held by liquidators of corporate trustees.

Fortunately, the Courts seem aware of the need to resolve this difficult question which has, in the last four months, been considered by two intermediate appellate Courts. In February 2018, the Victorian Court of Appeal handed down its decision in Commonwealth v Byrnes and Hewitt (Re Amerind)⁵. In in summary and in broad terms, the Court of Appeal found that:

• That the right of exoneration of a trustee is property of the company⁶; and
• That the insolvency regime, including the priorities regime, in the Corporations Act therefore applies to proceeds recovered pursuant to the rights of indemnity and exoneration⁷.

The decision in Re Amerind left open the question of whether the right of indemnity is available only for trust creditors or creditors generally⁸.

Killarnee Civil

More recently, the Full Court of the Federal Court of Australia handed down its decision in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (Killarnee)⁹. Due to the lack of agreement on the relevant questions, the matter was heard by the Full Court in its original jurisdiction¹⁰.

The relevant company carried on a concrete and construction business as trustee of a trust. The company only operated in its capacity as trustee of the trust and held all its assets on terms of the trust. All claims and liabilities were entered into in furtherance of the objects and purposes of the trust.

Questions for the Court

The Full Court was asked to answer a number of questions including, relevantly:

1. Whether the assets of the trust at the time of the resolution to wind up the company (including the proceeds of sale of the assets) were assets in the winding up of the company so that the liquidator had the power under s.477 of the Corporations Act to sell the trust assets?
2. Whether the proceeds of realisation of the trust assets were to be applied in accordance with the Priorities Regime?
3. Whether the liquidators should be directed under section 511 of the Corporations Act that the proceeds of the trust asset be distributed to unsecured creditors of the trust pari passu after providing for the costs of administration (including the administrators’ and liquidators’ remuneration and expenses) only?

Does section 477 of the Corporations Act empower liquidators to sell trust property?

Although finding, rather unsurprisingly in light of the authorities, that the right of exoneration and its lien in support are property of the trustee company¹¹, the Full Court unanimously answered the first question in the negative.

As a bare trustee, the company itself has no power to dispose of the assets and the existence of the trustee’s lien in respect of a right of exoneration as it does not enliven the section 477 Corporations Act power to sell the trust assets¹². That is not to say, however, that liquidators can never sell trust assets.  As Allsop CJ stated:

“…where there appears to be no issue but that the right of exoneration exhausts the trust property, the liquidator holding as he does the property and the equitable lien or charge could be given power to sell the property without the need to be appointed a receive to hold trust property for the benefit of beneficiaries after exhaustion of the right of exoneration.  The proceeds of sale can then be dealt with by the liquidator (as the product of the exercise of the right of exoneration) in accordance with the Corporations Act in the manner and for the reasons set out…below.  It is unlikely that there would be any reason why the Court would not make such an order, here, nunc pro tunc, permitting the sale of trust assets.”¹³

The importance for liquidator’s to seek approval of the Court before selling trust assets was echoed by Siopis J who held that “the only basis upon which the company could sell the trust assets was in reliance upon its equitable lien, and that required intervention of a court exercising equitable jurisdiction…”¹⁴.

Distribution of proceeds from realisation of trust assets

As to the second and third questions, Allsop CJ and Farrell J held, for different reasons, that that proceeds of the realisation of trust assets are to be applied in accordance with the Priorities Regime, at least in part, either because of a direct application of the Priorities Regime or through a Court of equity following the relevant provisions¹⁵. Conversely, Siopis J held that the Priorities Regime does not apply to a trustee company’s right of indemnity¹⁶.

The Chief Justice noted that application of the Priorities Regime is easiest where the company has only ever acted as a corporate trustee for one trust¹⁷. As his Honour said, “in such circumstances, the property of the company that includes the right of exoneration and the funds obtained from its exercise is to be distributed in accordance with the statutory command…the words of the statute are to be applied to direct distribution of the property of the company”¹⁸. In more complicated situations, such as where the company has administered more than one trust or conducted affairs in its own right, it is necessary to consider the policy reasons behind each provision comprising the Priorities Regime¹⁹.

Importantly for liquidators, Allsop CJ and Farrell J both considered there to be good policy reasons for affording priority to liquidators’ costs and remuneration as well as to employee entitlements²⁰.

Key points

That no two members of the Full Court agreed on the reasons as to why or why not the Priorities Regime may apply to a trustee company’s right of indemnity suggests that the jurisprudential developments in this area of law are far from complete. Nevertheless, the decision in Killarnee, together with the decision in Re Amerind, provides some guidance and comfort for liquidators of corporate trustees. It can now be said with some level of certainty that:

• A trustee’s right of exoneration is property of the company;
• A trustee’s right of recoupment is property of the company;
• Section 477 of the Corporations Act does not empower liquidators of corporate trustees to sell trust property;
• In order to sell trust property, liquidators must obtain direction from the Courts exercising their equitable jurisdiction;
• Whether because of a direct application of the Priorities Regime and / or equity following the statutory process, liquidators’ costs and remuneration and employee entitlements will likely be afforded priority over claims of other creditors to funds realised through distribution of trust property, including a trustee’s right of exoneration; and
• Due to their competing interests in trust property, beneficiaries have a right to be heard when liquidators seek directions and may well seek leave to be joined to any such proceeding²¹.

This article was written by Wayne Jenvey, Partner and Stephanie Derrington, Solicitor.

Publication Editor: Grant Whatley, Partner.

¹Pursuant to the applicable provisions of the trusts legislation in the relevant jurisdiction.
²Ibid at [139].
³Ibid at [109]-[111], [200]-[201].
⁴Ibid at [151]-[191].
⁵Ibid at [102].
⁶Ibid.
⁷Ibid at [103]-[104], [108] and [201].
⁸Ibid at [106], [112]-[120] and [201]. The implications of this finding and the Court’s underlying consideration for FEG is an important matter which is appropriate for discussion in another publication.
⁹Ibid at [91].
¹⁰Ibid at [79], [82] and [210].
¹¹Ibid at [89].
¹²[2018] FCAFC 40.
¹³Ibid at [3].
¹⁴Ibid at [282]-[284].
¹⁵Ibid at [124] and [273].
¹⁶Ibid at [281].
¹⁷[2018] VSCA 41.
¹⁸Re Enhill [1983] 1 VR 561, 564-569.
¹⁹Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 105.
²⁰[1983] 1 VR 561.
²¹(1983) 33 SASR 99.