January 2019 | Kieran Kelly

Insolvency practitioners have been faced with uncertainty as to whether the priority regime in the Corporations Act should apply when companies that have conducted their business through a trading trust enter into receivership or liquidation.

Subject to certain “priority” creditor provisions, the Corporations Act seeks to provide for the equal treatment of unsecured creditors. Secured creditors are given priority to recover their claims in full. Expenses properly incurred by a liquidator or receiver and employee claims are also given priority.

The issue of the priority given to employee claims in relation to trading trusts was considered by the Victorian Court of Appeal in Commonwealth of Australia v Byrnes and Hewitt as receivers and managers of Amerind Pty Ltd (receivers and managers apptd)(in liq) [2018] VSCA 41(Amerind).

The Court of Appeal was required to decide if employees were entitled to be paid in priority to unsecured creditors. An unsecured creditor of the company opposed employee payments being given priority to its claim.

The decision turned on the Court of Appeal’s characterisation of a corporate trustee’s right of indemnity. The right of indemnity allows a trustee to reimburse itself for trust debts it has paid, or to exonerate itself of liability for trust debts that remain outstanding. It is an interest over trust assets that ranks ahead of the rights of beneficiaries. The right of exoneration permits a trustee to discharge trust liabilities directly from the assets of the trust.

In Amerind, if the right of indemnity was to be characterised as property of the trustee company, the priority regime would apply and the employees paid in priority.

The Court of Appeal unanimously found this to be the case, finding that the right of indemnity was property of the trustee and that the priority regime applies to proceeds recovered pursuant to a corporate trustee’s right of indemnity and exoneration.

That decision has been appealed to the High Court and is set to be heard on 5 and 6 February 2019. The appellant’s written submissions challenge the characterisation of the trustee’s right of indemnity.

What does all of this mean for insolvency practitioners?

Trading trusts are a very common vehicle used in Australia and it is critical that a uniform approach to the receivership or liquidation of corporate trustees be established.

In the absence of such certainty, insolvency practitioners will remain in a state of flux.

While it is useful that courts have been seeking to resolve the issues that emerge on the receivership or winding up of a corporate trustee, the divergence of judicial opinion has left certain questions unanswered.

The decision of the High Court should provide clear guidance and allow insolvency practitioners to deal with trading trusts assuredly.

We will provide an update when the judgment is handed down.