Getting the priorities right – the Amerind appeal

Articles Written by Eve Thomson (Partner), Nicholas Edwards (Senior Associate), Fraser Andrews

Justice Robson’s decision in Re Amerindwas one of a number of recent authorities which created doubt as to how the statutory insolvency regime, and in particular how the priority waterfall, should be applied to recoveries from trust assets. The Victorian Court of Appeal, constituted of a full bench of five judges, has now handed down its decision on appeal2, overturning Justice Robson’s decision and restoring some measure of certainty for insolvency practitioners dealing with trustee companies.  

Following this decision it is clear that the proceeds from the realisation of trust assets (in Victoria at least) should be distributed to trust creditors according to the statutory waterfall, and the status of priority creditors such as employees (and FEG should they make advances to account for entitlements) is preserved.

Original Decision

For a full background of the facts in Re Amerind, please view our previous article here

In short, receivers of a trustee company sought directions as to whether the priority regime in sections 433(3), 556 and 560 of the Corporations Act 2001 (Cth) (Act) applied to the proceeds of sale of trust assets, insofar as those assets were, as at the date of appointment, also circulating assets within the meaning of s 340 of the Personal Property Securities Act 2009 (Cth) and s 51C of the Act.   

In his decision at first instanceJustice Robson held that Amerind’s right of indemnity from trust assets did not constitute ‘property of the company’ and therefore the payment waterfall regime outlined in sections 433 and 556 of the Act did not apply to proceeds from those assets. As a consequence, employees of Amerind (and the Commonwealth’s Fair Entitlement Guarantee Scheme on their behalf) did not enjoy a preferred priority position under s 433.

His Honour’s decision was consistent with other recent decisions such as that of Brereton J in Re Independent Contractor Services3, and Farrell J in Woodgate, In the matter of Bell Hire Services Pty Ltd (In Liq)4,which were to the effect that the priority regime in s 556 did not apply to trust assets. As well as creating uncertainty for insolvency practitioners, the decision had the effect of altering (for corporate trustee employers) the longstanding legal and public policy position, that employees should enjoy a priority position.

Appeal

The Commonwealth appealed the decision of Robson J on a number of grounds. The issue for the Court came down to whether the statutory insolvency regime applies to the distribution of assets that are subject to a right of indemnity held by an insolvent corporate trustee, and if so, how, if at all, do trust principles apply in that situation. 

Outcome

The Court of Appeal allowed the appeal and overturned Robson J’s decision. In a lengthy judgment, the Court examined the history of authorities regarding the application of the statutory regime in a trust context, noting various inconsistencies between authorities (some of which it did not resolve). 

In particular, the Court noted that the High Court judgment in Octavois authority for the propositions that:

  • an insolvent trustee company’s right of “exoneration” from trust assets, for liabilities properly incurred in the performance of a trust, is a proprietary interest which passes to the liquidator; and
  • the respective statutory regime must apply to the disposition of that property.

The Court held that Robson J’s conclusion that the corporate trustee’s right of indemnity was not “property of the company” could not be sustained in the light of the High Court’s decision in Octavo.

The Court also accepted the reasoning in Re Enhilland Re Suco Gold7, and held that if the right of indemnity is property of the company, the statutory insolvency regime must apply to it, such that s 433, 555 and 556 apply.    

The Court also examined Derrington J’s conclusions in Lane(which was decided in a bankruptcy context), and disagreed with his conclusion that there is a distinction between the property of the bankrupt (including the right of indemnity), and the proceeds from the exercise of that right of indemnity.

The Court observed that this did not resolve the question of whether the distribution of proceeds from trust assets in accordance with s 556 is limited to trust creditors, or extends to other creditors of the trustee company. This is an issue which was not resolved by the High Court in Octavo and which remains the subject of conflicting authorities. Regrettably all of Amerind’s creditors were trust creditors, so the Court of Appeal had no need to decide this issue. The Court did, however, lend some limited support to the approach taken in Re Enhill, where the proceeds of the trustee’s right of indemnity were held to be available for distribution to all creditors of the company, regardless of whether they were trust creditors.      

Conclusions

The Court of Appeal’s decision is significant. It removes some of the uncertainty that had been created by decisions such as Independent Contractor Services and Re Amerind. Practitioners can have greater confidence when dealing with trust assets that the statutory distribution regime applies. 

Whilst the decision is of the Victorian Supreme Court, and so will not be binding nationally, it is important to note that the Court of Appeal relied upon an existing High Court judgment in Octavo in making its decision. It is also hoped that a national approach may soon be achieved, with the issue likely to be addressed by the Full Federal Court in Re Killarnie Civil and Concrete Contractors Pty Ltd (in liq) (WAD181/2016).

That is not to say that all conflict between authorities has been resolved. The Court of Appeal has highlighted the remaining uncertainty as to whether proceeds from trust assets should be distributed only amongst only trust creditors, or creditors more broadly. This could be a real and substantial issue for practitioners dealing with companies that acted as trustee of multiple trusts, or where the company had non-trustee activities. It is a space that we, and insolvency practitioners alike, will continue to watch.


Re Amerind (receivers and managers apptd) (in liq) [2017] VSC 127; (2017) 320 FLR 118.

Commonwealth of Australia v Byrnes and Hewitt as receivers and managers of Amerind Pty Ltd (receivers and managers apptd) (in liq) [2018] VSCA 41.

Re Independent Contractor Services (Aust) Pty Ltd (in liq) [No 2] (2016) 305 FLR 222.

[2016] FCA 1583.

Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360.

Re Enhill Pty Ltd [1983] 1 VR 561.

Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99.

Lane (Trustee), Re Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).