An important decision has been handed down by the High Court of Australia which relates to the order of payment of statutorily preferred debts out of trust property held by an insolvent corporate trustee. There has long been frustration that the Australian companies legislation makes little clear provision for corporate trustees that become insolvent and this decision brings welcome clarity to an area of considerable practical importance, as well as guidance on some complex areas of the law of trusts more broadly. The decision is of interest to financiers, insolvency practitioners and statutorily preferred creditors.
- Where a trustee’s right to be indemnified out of trust property for liabilities it properly incurs is realised through its right of exoneration (as opposed to its right of reimbursement), the proceeds may only be used to pay trust creditors. This decision resolves a long line of conflicting Australian authorities on this point.
- Where a company that is a trustee goes into liquidation, the trust property available to the trustee to pay the trust creditors must be applied in the statutory order of priority under section 433 of the Corporations Act 2001 (Cth). For example, certain employee entitlements will rank ahead of other creditors’ claims. It follows that, if a receiver is appointed by the holder of a circulating security interest granted by the trustee, the receiver must apply the proceeds of that circulating security interest in payment of statutorily preferred creditors to the extent those proceeds are available under the trustee’s right of exoneration.
Amerind Pty Ltd was the trustee of a trading trust and it solely held trust property and liabilities. In its capacity as trustee, it owed money to a secured creditor, employees and certain other creditors. The secured creditor, Bendigo and Adelaide Bank Ltd (Bank), held security over various assets, including inventory and receivables, which was registered on the PPSA. The Bank appointed receivers and Amerind went into liquidation. After the Bank had been fully repaid, the receivers held surplus proceeds of enforcement. A competition for the surplus arose between the Commonwealth of Australia, which had paid certain employee entitlements, and other unsecured creditors.
Section 443(3) of the Corporations Act 2001 (Cth) states that a receiver “taking possession or assuming control of property of the company must pay, out of the property coming into his, her or its hands” certain statutorily preferred debts, including certain employee entitlements. The Commonwealth argued that it should be paid in preference to other unsecured creditors in accordance with the statutory regime in section 556 of the Act. The other unsecured creditors argued that the statutory regime did not apply as the surplus was trust property and not private property of the company. They argued that all creditors (being only trust creditors) should be paid equally. The question turned on what was “property of the company” for the purposes of section 433(3). The judge at first instance found in favour of the other unsecured creditors.
The Court of Appeal held that Amerind’s right as trustee to be indemnified out of the trust property was ‘property of the company’ and that sections 433 and 556 of the Act therefore applied to the distribution of the surplus. It also held that, as the proceeds were property of Amerind subject to a circulating security interest in favour of the Bank, the receivers were required under section 433(3) to pay the statutorily preferred claims out of those proceeds.
The High Court dismissed the appeal from the Court of Appeal’s decision. It considered the two ways in which a trustee’s right to be indemnified out of trust property for the liabilities it properly incurs may be exercised, namely:
- by way of a right of reimbursement, which applies where the trustee has discharged a liability from its own resources. In that case, the trustee has a right to be reimbursed for this expense from the trust property.
- by way of a right of exoneration, which applies where the trustee has properly incurred, but not yet discharged, a liability. In that case, the trustee may use the trust property to discharge the liability.
The High Court held that, in the winding up of a corporate trustee, the ‘property of the company’ available for payment of all creditors (both trust and non-trust) includes so much of the trust property as the trustee is entitled, in the exercise of its right of reimbursement, to apply in satisfaction of the creditors’ claims. That is, property of the trust received by way of a right of reimbursement becomes the trustee’s own property and so is available to be distributed to all of its creditors, not just trust creditors. In contrast, proceeds from the exercise of a right of exoneration may be applied only in satisfaction of trust liabilities to which the right of exoneration relates and so are only available to pay trust creditors.
It also held that, in any event, section 433(3) applied and required the receivers to pay the debts in accordance with the statutory priorities in a winding up. The judge at first instance was correct that the proceeds from an exercise of a trustee’s right of exoneration in respect of trust liabilities may be applied only in satisfaction of the trust liabilities to which that right relates. However, he was wrong in holding that it then followed that the statutory order of priority for the payment of debts was inapplicable. As Kiefel CJ, Keene and Edelman JJ stated, “It would be perverse if the Corporations Act operated to deny employee creditors a particular priority over the holders of a circulating security interest solely for the reason that the company which employed them was, perhaps even unknown to the employees, trading as a trustee”.
 Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth of Australia & Ors  HCA 20