Law

High Court decision puts employee entitlements first

By 24 June, 2019 No Comments

The decision in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia & Ors [2019] HCA 20 was delivered late last week, and clarifies the application of the Corporations Act 2001 (Cth) (Corporations Act), in relation to an insolvent trustee, acting for a trading trust.  You can read the full decision here.

Background

Amerind Pty Ltd (Amerind) carried out a business exclusively as the trustee of a trading trust. As trustee, Amerind owed money to various secured and unsecured creditors. Amerind had a right of indemnity, allowing it to use trust assets to pay trust debts (right of exoneration) and indemnify itself for trust debts it has paid (right of recoupment). Although a right of indemnity is a proprietary interest over trust assets, beneficiaries may apply to be subrogated to that right.

Receivers were appointed to Amerind after a time of financial hardship, and it was later placed into liquidation. Under the Fair Entitlements Guarantee Scheme the Commonwealth paid employees of Amerind for their accrued entitlements. A net surplus remained after the secured debtor was repaid. The Commonwealth claimed that sections 433 and 556 of the Corporations Act applied, which would see payments being made to the Commonwealth and other employees in priority to the remainder of unsecured creditors. Alternatively, Carter Holt Harvey Woodproducts Australia Pty Ltd (Carter) (as an unsecured creditor) claimed that the surplus was trust property, not “property of the company” and section 556 did not apply. The receivers sought directions from the Court.

Decisions

At first instance the trial judge held in favour of the unsecured creditors, ruling that Amerind’s right of indemnity from trust assets did not constitute “property of the company” and, therefore, section 433 did not apply.

On appeal to the Victorian Supreme Court of Appeal, the Court held that the statutory regime did apply as the “property of the company” includes the corporate trustee’s rights of indemnity.

Carter appealed this decision to the High Court, submitting that a trustee’s right of indemnity does not confer upon the trustee an interest in the trust assets, or the proceeds themselves, and cannot be subject to s433 as the right is not property “subject to a circulating security interest”.

The High Court unanimously rejected the appeal. In the summary of its decision, it stated that “in the winding up of a corporate trustee, the ‘property of the company’ available for payment of creditors includes so much of the trust assets as the company is entitled, in exercise of its right of indemnity, to apply in satisfaction of the claims of creditors, but that proceeds from an exercise of the right of exoneration may be applied only in satisfaction of trust liabilities to which the right relates.” Accordingly, the Court determined that the receivers were required to pay the debts in line with the statutory priorities in section 433(3).

Key Takeaways

This decision has cleared some prior uncertainty as to whether statutory priorities in sections 433, 566 and 561 of the Corporations Act apply in the context of a trading trust, where the trustee is acting solely for that trust. The High Court has demonstrated that section 433 applies to the trustee’s power of exoneration, thereby affording priority to employees over secured creditors of circulating assists, and over unsecured creditors to any assets that remain for distribution.

This case serves as a reminder that practitioners should be cautious when dealing with trust property.

If you require our assistance, or have any queries about this decision or insolvency in general, please contact Aaron McDonald or Luke Davies on (08) 6188 3340, aaron@pragma.law or luke@pragma.law.

 

 

 

 

 

 

 

 

 

Source of photo: Shutterstock

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