The latest word on dealing with trust assets in the liquidation of trustee companies

Key takeaways

Following in the footsteps of the Victorian Supreme Court in the Amerind appeal, the Full Federal Court has now delivered its decision Re Killarnee Civil & Concrete Contractors Pty Ltd¹, providing further clarification as to how the assets of an insolvent corporate trustee are to be dealt with.

The majority of the Court agreed with the main reasoning of the Victorian Court of Appeal in Amerind, that proceeds from the sale of trust assets are subject to the priority regime in the Corporations Act 2001 (Cth) (the Act), but rejected the notion (which, as we noted in an earlier article, was not explicitly rejected by the Court of Appeal in Amerind), that those proceeds can be distributed amongst the company’s non-trust creditors.  

Background facts & issues

Killarnee Civil & Concrete Contractors Pty Ltd (the Company) carried on the business of a trading trust. All assets were held on trust and all liabilities were incurred by the Company in its capacity as trustee. Upon the winding up of the Company, it was automatically disqualified from continuing as trustee by operation of the trust deed. 

Amongst other things, the Full Court of the Federal Court in exercising its original (not appellate) jurisdiction considered whether:

1. the assets of the trust as at the date of winding up were assets in the winding up of the Company, such that the liquidator could exercise the power of sale under s 477 of the Act;
2. the proceeds of the realisation of trust assets (and any unfair preference proceeds) should be applied in accordance with the priority regime in the Act pursuant to sections 555, 556, 560 and 561;
3. a trustee’s right of indemnity from trust assets, and the proceeds from the exercise of that right, can only be distributed amongst trust creditors, or a company’s creditors more broadly. There are two conflicting authorities on this issue: Re Suco Gold², a decision of the South Australian Full Court, which held that proceeds of trust assets can only be distributed amongst trust creditors; and Re Enhill³, a decision of the Victorian Full Court, which held that a company’s non-trust creditors can also share in the proceeds. 

Outcome

The key outcomes from the majority decision in Killarnee (Allsop CJ and Farrell J) are as follows:

1. the majority agreed with the conclusion on appeal in Amerind that a corporate trustee’s right of exoneration from trust assets is “property” of the company;
2. the Full Court (with the exception of Justice Siopis, who dissented on this issue) therefore concluded that the statutory priority regime established by sections 555, 556, 560 and 561 of the Act applies to the distribution of proceeds from the exercise of that right;
3. the Full Court rejected the approach in Re Enhill, and favoured the approach in Re Suco Gold; meaning that only trust creditors should share in the proceeds of trust assets that have been recovered in exercise of the right of exoneration, being the trustee’s entitlement to directly apply trust assets in payment of unsatisfied trust debts, and, in doing so, exonerating the trustee from its personal liability to pay the debts;
4. whilst applying the statutory priority regime may be relatively simple where there is only one trust, and the company had no non-trustee activities, the Full Court emphasised that the position becomes more complex where there are multiple trusts, or where the trust company itself carried on its own business. In those cases, it would be necessary for a liquidator to consider individually each sub-paragraph of section 556, in case in a particular instance the creditor is not one who ought have access to trust assets;
5. the Full Court held that because the Company ceased being trustee upon the appointment of liquidators, the liquidator did not have the power to sell the trust assets, and ought to have obtained a court order allowing him to do so. The position would have been different had the Company continued as trustee after being placed into liquidation. 

Conclusion

With the Courts in both Killarnee and Amerind having now decided that the statutory priority regime applies to distribution of proceeds from trust assets, liquidators can now proceed with greater certainty in dealing with trustee companies and, in particular, trust creditors of those companies. 

However, at least in Victoria, the position on whether trust assets can be applied in exercise of the trustee’s right of exoneration to pay non- trust creditors is still far from clear. One upshot of the Victorian Court of Appeal decision in Re Amerind is that Re Enhill (i.e. non-trust creditors can share in the proceeds) is still good law in Victoria, despite the equivocal comments made by the Court of Appeal about the soundness of the decision in Re Enhill. In contrast, the Full Federal Court in Killarnee preferred the Re Suco Gold approach (i.e. proceeds of trust assets can only be distributed among trust creditors). It is worth noting that Killarnee is not an appellate decision as the liquidator’s application had been referred up to the Full Court which sat in its original jurisdiction.

Further, the Killarnee decision still leaves liquidators of companies which acted as trustee of multiple trusts, or companies that carried on non-trust business, in a difficult position. Whilst the statutory waterfall will apply to the distribution of the proceeds of trust assets, it must do so in a way that is consistent with the trustee’s right of exoneration, and each creditor’s claim will have to be carefully considered. In our view, this will necessitate an ongoing role for judicial guidance regarding these issues, as liquidators may be left with little option but to seek directions where the position is not clear.

Finally, this decision is a reminder for liquidators of trustee companies, where the trust deed provides for automatic disqualification upon winding up of the trustee, to seek court approval before selling trust assets. Directions could be obtained at the same time as to the manner of distribution of any proceeds.

¹ Jones (Liquidator) v Matrix Partners Pty Ltd in the matter of Killarnee Civil & Concrete Contractors Pty Ltd [2018] FCAFC 40.
² In re Suco Gold Pty Ltd (In Liq) (1983) 33 SASR 99.
³ Re Enhill Pty Ltd [1983] 1 VR 561.