A recent decision by a Victorian Court may settle the confusion associated with the appointment of a liquidator to a corporate trustee of a trading trust.
Robson J in Re: Amerind has chosen to follow aspects of Brereton J’s decision in the (NSW) case of Re: Independent Contractors which attracted a degree of criticism at the time.
Rights of liquidator as trustee
It is often the case that the trust deed provides that a company is removed as trustee upon the appointment of external administrators. In such cases, the liquidator acts as bare trustee.
It has always been clear that a trustee (including a bare trustee) has the right to be reimbursed (from the trust assets) for reasonable expenses incurred in the execution of the trusts powers. The liquidator can therefore rely on an equitable lien as security to enforce his right of indemnity.
However, it has not always been clear as to the liquidator’s power to deal with the trust assets in order to realise them for the benefit of the creditors and to be reimbursed for the associated reasonable costs and expenses.
Company assets v trust assets
The Corporations Act (the Act) allows the liquidator to “sell or otherwise dispose of… the property of the company”.
However, Re: Amerind found that the proceeds of sale of the trust assets were not property of the company. Moneys recovered are trust assets. The Trustee has the right to be indemnified (a right of exoneration) from the trust assets supported by an equitable lien over all the trust assets but restricted to the limit of the liabilities. The right of indemnity and lien is not property of the Company and is not a circulating asset.
Therefore the liquidator does not have the relevant power to deal with trust assets. Trust assets may only be dealt with by the appointment of receivers (possibly by way of appointment of the liquidator as receiver and manager) or by judicial sale.
When a company is placed into liquidation the Corporations Act (s556) provides for certain debts and claims to be paid in priority to all other unsecured debts and claims. These are effectively (in order):
- the petitioning creditor’s taxed costs of the winding up
- the liquidator’s remuneration and disbursements
- employee claims
It follows from the decision in Re: Amerind that because the trust assets (and proceeds of sale of the trust assets) are not property of the company the resulting funds are not subject to the above corporate priority regime.
Liquidator’s remuneration and disbursements
The Liquidators of the trustee company have a right of indemnity from the trust assets for their remuneration and expenses. Courts have previously found that liquidators are entitled to be paid their costs and expenses, whether for general administration work or for administering the trust assets, out of the trust assets.
If the trustee company is in liquidation employees may still claim their unpaid entitlements (but not superannuation) from Fair Entitlements Guarantee (FEG) but FEG cannot now claim any such employee payments as a priority from the company. In Re: Amerind FEG has lost its priority in respect of some $3.8m. Employee super claims also lose their priority.
Furthermore in the case of a company in receivership, s433 of the Act (and s561 for a liquidation) the Act provides that employee claims take priority over any secured creditor claims to circulating assets. This priority for employee claims (and FEG) is also lost.
Secured creditors will be able to deal with (properly secured) trust assets as before although they may now benefit in the absence of employee priorities attaching to circulating assets.
The effect of the recent judgements is that:
- Liquidators must obtain Court approval to deal with the trust assets
- Employees (and FEG) lose their right of priority in respect of their claims against the company (this will also affect any employee claims for superannuation)
- The secured creditor will no longer be required to pay employee claims from the proceeds of circulating assets
- The petitioning creditor no longer has the automatic right to be paid its costs and expenses in respect to the winding up
- The funds available for distribution to creditors are to be paid pari passu
It is expected that FEG may appeal against the judgement or that the Government may consider legislative reform. Otherwise liquidator costs will rise, priority creditors (including employees) will lose out, and employee claims paid by FEG will effectively be subsidised by the taxpayer.
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