Trust Me – Amerind appeal delivered and some measure of clarity provided

One of the most vexing issues facing the insolvency profession has been, and continues to be, the interrelationship between insolvency laws and the laws of trusts. With competing lines of authority pronounced by eminent judges, the industry has been in an understandable quandary, and has been awaiting the outcome of 2 appellate cases heard in late 2017.

The first judgment, in respect of appeal in Amerind¹, has been delivered by the Court of Appeal of the Supreme Court of Victoria. The appeal relevantly considered² how a corporate trustee’s right of indemnity from trust assets is to be dealt with in insolvency, and whether the insolvent corporate trustee’s right of indemnity is property of the company within the meaning of s 433 of the Corporations Act (2001) (Cth) (Act)³.

The decision of the Full Court⁴, goes some way to allaying the issues of controversy. In summary the judgment clarifies that the right of indemnity against trust assets is an asset of the Company available for creditors and the priority regime under the Act does apply to priorities for trust creditors.

This may, however, be a whistle stop, a moment of calm on the journey to the High Court for final resolution because judgment in the other appeal case heard in the Supreme Court of Western Australia (Killarnee) is, of course, still pending.

Regrettably (due to the facts of the case), the Court did not consider the situation where there are general creditors and trust creditors and whether property recovered using that right of indemnity is available only for trust creditors or for all creditors. Watch this space.

Brief background of Amerind

Amerind was an application by receivers and managers seeking directions from the Court as to how to deal with the receivership surplus, in circumstances where:

• The company was trustee of a trust had only ever acted in that capacity;
• The company was also in liquidation;
• The Commonwealth Department of Employment (FEG) was seeking to recover, on a priority basis, funds it had paid out for accrued wages and employee entitlements for which it was entitled to subrogate;
• A secured creditor made a claim for the surplus funds in priority to FEG; and
• The receivers were seeking their costs from the surplus.

The case at first instance

At first instance, Robson J of the Victorian Supreme Court⁵ followed the 2016 decision of Brereton J in Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2)⁶ in relation to the application of s556 (and s433) to the distribution of trust property.

In following Re Independent Contractor Services, Robson J determined that the ‘property’ of the company for the purposes of s433 and s556 does not include trust property. Robson J also endorsed the position that where there are multiple creditors of the trust, the creditors share pari passu in the right to be subrogated to the trustee’s equitable lien to enforce the trustee’s indemnity.

The result of this decision was that the Commonwealth (via FEG which had paid employee entitlements and was entitled to subrogate to the employees’ position) was not entitled to priority distribution out of the circulating security asset realisations of the receivership (because the circulating security assets were trust property).

Appeal

The Court considered in detail the two primary lines of authority (from Octavo Investments, to Vacuum Oil, VA Apostolou, Independent Contractors and forward to the recent decision in Lane).

As will be familiar to those in the industry, the essential differences between the competing lines of authority were:

• On the one hand, the VA Apostolou line of authority provides that:
  • the trustee’s right of indemnity or exoneration from trust property is an asset of the Company and liquidators could utilise it to pay their costs and claims of trust creditors, without Court intervention (even if the trustee had been removed and was a bare trustee); and
  • the priority provisions of the Act applied to trust creditors’ claims.
• On the other, the Independent Contractors line of authority provides that:
  • the right of indemnity was a chose in action of a liquidator and, as an equitable right, could only be exercised by approaching the Court; and
  • as trust creditors were not creditors of the company, they ranked pari passu without the priority regime which would otherwise operate under the Corporations Act eg section 556.

Other authorities such as Lane seemed to adopt elements of each, determining:

• The right of indemnity was property of the Company; but
• Any realisation from that right was not subject to the priorities under the relevant legislation⁷.

As set out above, at first instance, Amerind followed the Independent Contractors line of authority – employees’ claims were not allowed any priority out of the trust assets of Amerind and they were found to be payable pari passu with other trust creditors.

On appeal, their Honours found:

• The right of indemnity of a trustee is in fact property of the company in accordance with relevant High Court decisions⁸.

With respect, this aspect ought be relatively uncontroversial – the right is after all a personal chose in action in favour of the trustee⁹.While exercise of that right or indemnity may require court assistance (if for example the trustee were removed and they remained as bare trustee¹⁰), it remains a chose in action in favour of the trustee.

As property of the Company, it would ordinarily be expected to come within the type of property under the control of the liquidator in accordance with s 477(2)(c) of the Act;

• Following from the previous conclusion, once it is found that the right of indemnity or exoneration is property of the Company, the insolvency regime under the Act including the priorities must apply to proceeds so recovered; but
• It was not necessary to decide whether the right of indemnity would be available only for trust creditors, or for creditors generally – as Amerind only operated as trustee of one trust and did not trade in any other capacity.

The Court noted arguments for and against the proposition that the right of indemnity would be available only for trust creditors, but left it for another court to consider and decide.

It is this final issue for which ongoing guidance will need to be sought from a superior court, at the right time.

The first two aspects of the decision may well be subject to consideration both in Killarnee and an appeal. We await the foreshadowed decision in Killarnee¹¹.

This article was written by Warren Jiear, Partner.

¹Commonwealth of Australia v Byrnes & Hewitt in their capacity as joint and several Receivers and Managers of Amerind Pty Ltd (Rcvrs and Mgrs appointed) (in liq) [2018] VSCA 41.
²A further issue concerning the application of the PPSA to various assets and classes of assets is beyond the scope of this article;
³The Corporations Act (2001).
⁴Which should ensure a 7 judge hearing in the High Court if the decision is appealed.
⁵In Re Amerind Pty Ltd (recrs and mgrs apptd)(in liq) [2017] VSC 127.
⁶[2016] NSWSC 106; (2016) 305 FLR 222.
⁷While the Lane decision concerned the Bankruptcy Act, His Honour Derrington J was careful to clarify that the reasoning would equally apply to Corporations Act decisions (although it is strictly obiter).
⁸Savage, Octavo, Bruton, Buckle and CPT.
⁹Subject to any restrictions such as disentitling conduct on the part of the trustee.
¹⁰Bruton Holdings No2; Pleash – Sunshine.
¹¹Martin Bruce Jones as in his capacity as the liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) ACN 085 230 486 v Matrix Partners Pty Ltd Federal Court WAD181/2016, which is subject to appeal and a decision expected soon.