On the Case: Issue 21

Insolvency Law –A separate regime for trusts or not?

In this edition of On The Case, Adjunct Professor Philip Stern, discusses the Independent Contractors decision of Justice Brereton of the Supreme Court of NSW¹ and the current very confused situation which has arisen from a number of conflicting decisions dealing with insolvency law as it pertains to insolvent trading trusts.

The Independent Contractors Decision

The main determination arising from Independent Contractors, for the purposes of this article, was that the Court held that creditors of a trust, where a trustee company is in liquidation, are subrogated on an equivalent basis to a liquidator’s lien (security) over trust assets for obligations incurred previously by the trustee company. Thus all creditors share equally in the assets of a trust, notwithstanding that s556 Corporations Act 2001 (Cth) (Corporations Act) applies a priority regime for unsecured creditors of a company .A consequence of the abrogation of that priority regime in a trustee company context, is that the costs of a creditor who procures a Court order to liquidate that company ,and all unpaid employee entitlements, rank equally with all other creditors on a proportionate basis in receiving the proceeds of asset realisations (after insolvency practitioner costs as ordered by a Court). In contrast in a standard corporate insolvency, where s556 applies the costs of the creditor who obtained the liquidation order and all unpaid employee entitlements are paid in priority to general creditors.

Brereton J considered that Suco Gold² a decision of the Full Court of the Supreme Court of South Australia in (was wrongly decided and declined to follow it. Suco Gold found that the then Corporations Law payment priorities applied to trusts where the corporate trustee was in liquidation.

Have the Courts subsequently applied Independent Contractors?

Riordan J of the Supreme Court of Victoria in Freelance Global³ considered the issue. Riordan J did not refer to Independent Contractors and held, inter alia, that

…the Court has power to order that the trust assets be applied to meet claims under s556 of the Corporations Act in the course of the winding up…....the liquidators were required to discharge the pre-liquidation liabilities that had been incurred (albeit as trustee) in the order of priority set out in s556 of the Corporations Act⁴.

White J of the Federal Court of Australia in Reborn Enterprises⁵ followed Suco Gold and did not explicitly consider Independent Contactors. He ordered that the proceeds of sale of trust property be applied to discharge the company’s liabilities, all of which were incurred as a trustee, in accordance with s556 priorities.

The Supreme Court of Victoria in Pharmore⁶, considered it was bound to follow Suco Gold and explicitly did not follow Independent Contractors. The Court held:

The liquidators have a right to be indemnified from the assets in the Trust. The property of the Trust is subject to statutory priorities and is available for the costs and expenses and remuneration of the liquidators (pursuant to s 556(1)(a) of the Corporations Act 2001 (Cth)).

An order was made, following Freelance Global that the liquidator’s remuneration be paid from realisation of trust assets.
However in Bell Hire⁷ Farrell J of the Federal Court explicitly followed Independent Contractors. In that case, Her Honour considered it questionable whether the costs of the winding up application were trust debts since winding up is about the status of the company as such, not its functions as trustee⁸. However if the costs of the winding up application are an incident of the trust’s business then the claim by a creditor for the costs of the winding up application rank pari passu (i.e. rateably) with other trust creditors, outside the priority conferred by s 556. In this Farrell J followed Independent Contractors. She also stated:

..It is inconsistent with principle to apply the statutory order of priority for payment of the company’s debts out its own property to the order of distribution of trust property. That this might result in two regimes (for trust property and property of the company) is unfortunate ,but it is something which courts have had to accommodate⁹.

The liquidator also was obliged to seek Court approval for his fees given that the all assets of the company were held as trust property. Farrell J approved the fees sought as she considered the work done, expenses incurred and rates charged were proper and reasonable¹⁰.

Conclusion

It is unsatisfactory that different courts throughout the country have differing views on whether the Corporations Act or the principles of trust law apply to creditors of a trust when a trustee company goes into liquidation. A consequence of not applying Corporations Act priority payment entitlements to liquidated trustee companies is potential significant detriment to unpaid employees (or, where applicable, the Federal Government which stands in the employees’ shoes if it pays employees under the Fair Entitlements Guarantee Act 2012 (Cth).There is also a disincentive for creditors to take liquidation action against insolvent trustee companies as the creditor‘s costs reimbursement will not be prioritised on trust asset realisations. The position requires either legislation or strong appellate authority to clarify the legal position.

This article was originally published by Woodgate & Co, Level 8, 6-10 O’Connell Street, Sydney and their willingness to permit its republication is gratefully acknowledged.

¹ In The Matter of Independent Contractors Services (NSW) Pty Limited (No2) [2016] NSWSC 106,23 February 2016
² Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 
³ Freelance Global Limited (in liq) v Bensted [2016] VSC 181,13 May 2016
⁴ Ibid, pars 82 (b),(c)
⁵ In the matter of Reborn Enterprises Pty Ltd (in liq) [2016] FCA 1197,23 September 2016
⁶ In the matter of Pharmore Pty Ltd (in liq) VSC 15 November 2016
⁷ Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583 ,23 December 2016
⁸ Ibid [34]
⁹ Ibid,[37]
¹⁰ Ibid,[23]