Trust me again! Where there is ambiguity, just ask the Court

30 July 2018

The appointment of a liquidator to a trustee company and the effect of that appointment has been a topic of great interest. This is particularly so following the decisions in Amerind1 and Killarnee2 which now provide some certainty in relation to statutory priorities on the liquidation of trustee companies, until of course the High Court revisits both decisions. Our recent article on the decision in Amerind can be accessed here. The practical question that insolvency practitioners are then plagued with is what powers they have to deal with the assets of the trust.

Most trust deeds will contain an ipso facto provision by which the office of a trustee company is vacated if that company becomes insolvent and an order is made or a resolution is passed which will have the effect of winding up the trustee company. If the trustee company’s office is removed, it becomes a bare trustee and it is stripped of the power to sell the assets of the trust. However, it is well established that a trustee company has a ‘right of indemnity out of the trust assets in respect of debts incurred by the trustee when properly acting in its role as trustee of a trust and discharging its trading trust obligations‘.3 This right of indemnity is supported by an equitable lien or charge over the assets of the trust.

The question that often arises is whether an administrator or liquidator appointed to a trustee company has the power to deal with the trust assets to satisfy the trustee’s right of indemnity. This question was addressed directly in the recent decision of Freeman; In the matter of Blue Oasis Holdings Pty Ltd [2018] FCA 822 (Freeman). In Freeman, the liquidators appointed to Blue Oasis Holdings Pty Ltd (In Liquidation) (Blue Oasis), a trustee of a family trust, applied to the Court to be appointed as receivers and managers over the assets of the trust, to allow them to realise the assets and apply the proceeds to debts incurred by Blue Oasis in its capacity as trustee.

The Federal Court noted the divergence of opinion between various judges regarding whether a liquidator of a trustee company can sell assets held on trust and went on to observe that in circumstances where there is a lack of clarity:4

… the most sensible course to adopt is to preserve the position, and remove any ambiguity by appointing the liquidators as the receivers of the trust property, and conferring upon them a power expressly to sell the trust assets, to convert them into cash, or deal with them as may be appropriate in all the circumstances, and thus avoid any doubt about whether there is a power to sell.

Accordingly, to remove the difficulties created by the ambiguity as to whether the liquidators in Freeman did have the power to sell assets of the trust, the Court:

  • Appointed the liquidators as receivers and managers with the powers received in section 420 of the Act; and
  • Made an order that the phrase ‘property of the company’ in section 420 of the Act be read as meaning ‘property of the trust’.

A similar application was also made by the administrators appointed to Crusaders Managers Pty Ltd (Administrators Appointed) (Crusaders), the trustee of the Crusaders Trust. In Trenfield, In the matter of Crusaders Managers Pty Ltd (Administrators Appointed) [2018] FCA 876 (Trenfield), the administrators also grappled with the question of whether Crusaders could sell property belonging to the Crusaders Trust for the purposes of exercising its right of indemnity which had arisen by reason of the incurring of the trust debts. Accordingly, the administrators made an application to be appointed as receivers and managers over the assets of the Crusaders Trust.

The Federal Court referred to the well established principles as enunciated in Hosking, re Business Aptitude Pty Ltd (In Liquidation) [2016] FCA 1438, on which a court might appoint a bare trustee or a liquidator of the bare trustee as the receiver of trust property for the purpose of preserving for the benefit of persons who have an interest in it. The question here was whether the same principles also apply to administrators of a company noting that the role of an administrator is substantially different to that of a liquidator.

The Federal Court ultimately held that in this case, special circumstances existed to justify the appointment of the administrators as the receivers of the Crusaders Trust assets. These circumstances related to the administrators having already commenced the process of advertising the underlying assets or business assets of the trust for sale and a contract of sale was expected to be entered in the near future. The administrators had also concluded that the sale of the business as a going concern would ultimately lead to a better result and the employees would retain their employment with the new business.

In both Freeman and Trenfield, an order was also made that the costs, expenses and the remuneration of the respective applicants as receivers and managers be paid from the assets of the Trust.

The decisions in Freeman and Trenfield provide clear examples of when it is prudent for insolvency practitioners to seek direction from the Court, particularly where there is uncertainty as to the extent of their power to realise and sell assets of the trust. Furthermore, given the current state of the law, these decisions also clarify that a liquidator or administrator appointed to a trustee company should approach the Court to be appointed as receivers and managers over the assets of the trust to avoid any uncertainty surrounding the extent of their power of sale as a bare trustee. The Full Court in Killarnee echoed this position and made it clear that liquidators are expected to approach the courts for authority to sell trust assets, stating at times in their decision that this is ‘required’ or ‘needed’. The High Court may still have the last say.

This article was written by Jonathan Kramersh, Partner, and Vesa Prekazi, Associate, in our Melbourne office.

Publication Editor: Grant Whatley.

1 Commonwealth of Australia v Byrnes and Hewitt as receivers and managers of Amerind Pty Ltd (Receivers and Managers Appointed)(In Liquidation) [2018] VSCA 41. We understand that special leave to appeal is being sought in the High Court of Australia.
2 Jones (liquidator) v Matrix Partners Pty Ltd, re Killarnee Civil & Concrete Contractors Pty Ltd (In Liquidation) [2018] FCAFC 40.
3 Freeman; In the matter of Blue Oasis Holdings Pty Ltd [2018] FCA 822, at [9].
4 Freeman, at [18] citing  Bastion v Gideon Investment Pty Limited (In Liquidation) (2000) 35 ACSR 466; [2000] NSWSC 936 at [66], Austin J; QBE Insurance (Australia) Limited v WA Metal Recycling Pty Ltd, in the matter of WA Metal Recycling Pty Ltd (In Liquidation) [2016] FCA 238 at [16], Farrell J.

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