Andrew Lacey
Managing Principal
On 19 June 2019, the much-anticipated High Court appeal in the matter of Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20 (also known as the “Amerind appeal”) was handed down.
The decision resolves a long line of competing authorities which debate the nature of a corporate trustee’s right of indemnity from trust assets, and whether those assets, when the corporate trustee becomes insolvent, are available to creditors in the same manner (and in the same order of preference) as any other liquidation. The High Court found that the trustee’s right of indemnity is ‘property of the company’, meaning that they could be applied to pay preferential creditors (such as employees) ahead of unsecured creditors.
Amerind Pty Ltd (Amerind) carried on a business solely as the trustee for a trading trust and became insolvent. After paying secured creditors, there were surplus assets of $1.6m.
The Commonwealth of Australia (the Commonwealth) claimed that it had priority to the surplus assets (ahead of unsecured creditors), because it had paid $3.8m of accrued wages and entitlements to the former employees of Amerind in accordance with the Fair Entitlements Guarantee Scheme (FEGS). Section 560 of the Corporations Act allows the Commonwealth to “step into the shoes” of former employees in the sense that it gives the Commonwealth the same right of priority of payment as former employees in order for the Commonwealth to be reimbursed for the amounts paid out by it to those employees.
As set out in our previous article, when a company goes into liquidation, debts owed to employees of a company enjoy a preference and stand ahead of the unsecured creditors. In the Amerind appeal, the situation is further complicated by the fact that the company in liquidation is a trustee company trading for the benefit of the trust’s beneficiaries. It is settled law that a corporate trustee is entitled to be indemnified, from trust assets, for any debts incurred by the trustee when carrying out its duties as trustee.
When a liquidator is appointed to a company, all property of the company vests with the liquidator and is applied towards payment of creditors in a particular order of preference depending on the type of debt (and after the liquidator’s fees have been satisfied).
Thus, the High Court was required to determine whether a corporate trustee’s right of indemnity from trust assets was ‘property of the company’. If so, the usual rules would apply and the Commonwealth would receive a priority over unsecured creditors.
At first instance, Justice Robson in the Supreme Court of Victoria effectively held that employees do not have a statutory priority, on the basis that assets held on trust are not the property of the company, thus rejecting the Commonwealth’s claim. His Honour considered that Amerind had no assets of its own to pay the trust creditors, only a right of indemnity in respect of trust liabilities. The result being that the Commonwealth would rank equally with unsecured creditors. The Commonwealth appealed.
The Court of Appeal of the Supreme Court of Victoria overturned Justice Robson’s decision and held that employees do have a statutory priority, on the basis that the trustee’s right of indemnity was a proprietary interest in the trust assets themselves and that this interest passes to the liquidator when the trustee company becomes insolvent. The result being that the Commonwealth would rank ahead of unsecured creditors. One of those unsecured creditors appealed.
The High Court agreed with the Court of Appeal’s decision and upheld the priority enjoyed by employees. Whilst there is divergence as to the reasons for its decision, the High Court unanimously dismissed the appeal and found 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.
This is a significant decision in context of the situation wherein the trustee entity might not hold any assets itself (other than the right of indemnity). The High Court’s decision removes the uncertainty as to how different classes of creditors would be treated when a corporate trustee becomes insolvent.
The High Court’s decision is relevant for anyone who engages in transactions with corporate trustees and anyone thinking of adopting the corporate trustee business model as an asset protection mechanism. If you find yourself dealing with a corporate trustee, we recommend that you seek legal advice beforehand.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.