On 23 December 2020, the Federal Court handed down an important decision in relation to the status of trust assets of corporate trustees in liquidation.
Hughes, in the matter of Substar Holdings Pty Ltd (in liquidation) is authority for the proposition that where a Liquidator is appointed over a corporate trustee, and the underlying trust deed vacates the trustee’s appointment when a winding up order is made through a disqualification clause, the appropriate course of action is for the Liquidators to apply to the Court to be appointed as Receivers over the trust assets.
When a company is at or nearing insolvency, a liquidator can be appointed to take control of the business, sell the company’s assets and distribute the proceeds to creditors.
When the company is a corporate trustee, complexity can arise in relation to the realisation of the trust assets for the benefit of creditors. The right of indemnity or exoneration entitles the corporate trustee to access trust assets “to satisfy debts properly incurred by the company in performance of its duties as trustee”.
Pragma Lawyers acted for the liquidators (Liquidators) of Substar Pty Lty (in liquidation) (Company) who were appointed on 4 August 2020. After months of what his Honour referred to as “evasive or, at the very least, unhelpful conduct” by the Company to cooperate with the Liquidators, an order was obtained pursuant to section 57(1) of the Federal Court of Australia Act 1976 (Cth) to appoint the Liquidators as Receivers and Managers of the Trust assets.
Relevantly, a disqualification clause in the trust deed provided that “the trustee of the trust will be … vacated if … the trustee enters into liquidation or has a receiver appointed”. This means that the Company became a bare trustee upon liquidation with no rights to deal with the trust assets in any way other than to transfer them to the beneficiary in accordance with the Trust Deed. His Honour stated that this effectively prevented the Liquidators “from carrying out their statutory obligations” and so was appropriate in these circumstances to appoint the Liquidators as receivers.
Where there is uncertainty surrounding the extent of their power to realise and sell Trust Assets, Liquidators should apply to a Court for appointment as a Receiver and Manager.
This ensures they are able to carry out their duties in winding up the company and safeguard the trust property for those who have an interest in it.
You can read a full copy of the decision here. You can read The West article on the case below.
For assistance or advice in regards to corporate insolvency, please reach out to Aaron on (08) 6188 3341 or firstname.lastname@example.org.