Marino Law | Gold Coast Law Firm

Priority Employee Entitlements and Liquidations of Corporate Trustees – Position Clarified but Legislative Reform is Required

A recent decision of the Victorian Supreme Court has highlighted the need for legislative reform with regards to the Corporations Act 2001 (Cth) (the “Act”).

Pursuant to section 561 of the Corporations Act 2001 (Cth), a liquidator is obliged to pay from property that is the subject of a circulating security interest, any amounts that are payable to priority creditors such as employees before payment is made to the holder of the circulating security interest.

However, until recently, there has been conflicting authority with respect to whether the order of priorities contained in the Act are applicable to distributions to be made by a liquidator appointed to a corporate trustee that operates a business through a trust.

In Re Amerind Pty Ltd (receivers and managers appointed) (in liquidation) [2017] VSC 127 (“Re Amerind”), the Victorian Supreme Court has potentially clarified the position by holding that the order of priorities set out in the Act do not apply to distributions of trust property.

Decisions before Re Amerind

In Re Enhill Pty Ltd [1983] I VR 561 (“Re Enhill”), a decision of the Full Court of Victoria, the Court held that, in interpreting the priority provisions of the Companies Act 1961 (Vic), the moneys received by the liquidator of a corporate trustee company are company funds that it has received as a consequence of its right to be indemnified out of trust property.

There is also long standing authority in Re Suco Gold Pty Ltd (1993) 33 SASR 99 that the statutory priority provisions are applicable to distributions of trust assets. We also note that a subsequent decision of the Victorian Supreme Court in Freelance Global Ltd (in liq) v Bensted & Ors [2016] VSC 181 held that the priority provisions of the Act apply to distributions of trust property.

However, Brereton J in Re Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) [2016] NSWSC 106 (“Independent Contractor Services”) held that the order of priorities set out in the Act do not apply in respect of trust assets. In Independent Contractor Services, Brereton J held that the priority provisions of the Act are concerned only with the distribution of assets beneficially owned by a company and available for division between its general creditors and therefore those provisions do not apply to the rights of trust creditors in respect of trust assets. Accordingly, secured creditors would be paid from all circulating assets under their securities.

Re Amerind

In Re Amerind, Robson J declined to follow the decision in Re Enhill Pty Ltd and elected to follow the decision in Independent Contractor Services.

Amerind Pty Ltd (receivers and managers appointed) (in liquidation) (“Amerind”) was the trustee of a trading trust, the sole business of which was to operate the trading trust.

On 11 March 2014, administrators were appointed to Amerind. Receivers and managers were appointed at the same time by Amerind’s bank Bendigo and Adelaide Bank. The administrators were subsequently appointed as liquidators after Amerind’s creditors resolved that Amerind be wound up.

After their appointment, the receivers continued to trade Amerind’s business and in doing so, realised assets that Amerind held on trust. After repayment of the Bank’s debt and the receiver’s remuneration, there was a surplus of $1.6 million.

Pursuant to the Fair Entitlements Guarantee Scheme, the Commonwealth had paid the sum of $1.8 million to employees for accrued wages and entitlements. The Commonwealth subsequently sought to recover that sum from the receivers as a priority pursuant to section 433 of the Act. Section 433 largely reflects the terms of section 561 of the Act.

The receivers applied to the Court for directions as to whether the receivers were justified, in circumstances where the proceeds comprising the receivership surplus were subject to a circulating security interest, in applying the order of priorities in the Act to that surplus.

Sections 433 and 561 of the Act are enlivened when ‘property of the company’ is insufficient to meet payment of various employee entitlements set out at section 556(1)(e), (g) or (h) of the Act. In Re Amerind, Robson J determined that the proceeds of the sale of trust assets were not ‘property of the company’ nor was the trustee’s right of indemnity and lien ‘property of the company’. Accordingly, Robson J determined that distributions of trust property are not subject to the priority regime in the Act.

In reaching the above conclusions, Robson J considered that he was not bound to follow Re Enhill as it concerned the construction of a Victorian Act and that Independent Contractor Services correctly states the law of Australia with respect to the construction of the Act.

Impact of the decision in Re Amerind

While there has been some criticism of the decisions in Re Amerind and Independent Contractor Services, it would appear that these decisions reflect the law in Australia with respect to this matter.

Given the Commonwealth is likely to be the big loser as a consequence of the decision in Re Amerind, we would expect that it will be motivated to amend the priority regime in the Act so that it applies equally to corporate trustees and normal companies.

Accordingly, unless and until the decision in Re Amerind is appealed, or sections 433 and 561 are legislatively amended, secured creditors of corporate trustees appointed to trading trusts will be entitled to recover in a liquidation of the corporate trustee, in priority to employees, all of the proceeds realised upon the sale of trust assets over which they hold a circulating security interest.

As a consequence of the decision in Re Amerind, we would expect that banks may now be more inclined to lend to a trustee company as opposed to a normal company in circumstances where the bank’s security position is stronger with respect to securities held over a corporate trustee. Accordingly, business owners looking for funding should consider operating their business through a trading trust. Directors of such businesses would also reduce their liability pursuant to personal guarantees given by them to their banks in circumstances where in a liquidation of the corporate trustee, the return to secured creditors will not be decreased as a consequence of a liquidator not having to pay employee entitlements before secured creditors are paid.

Marino Law has extensive experience acting for insolvency practitioners, lenders, financiers, directors and trustees in the administration of all corporate insolvency appointments. Our highly experienced lawyers regularly advise clients in the following areas of corporate insolvency:

  • voluntary administrations;
  • liquidations;
  • enforcement of securities; and
  • statutory demands.

We also regularly provide advice to liquidators, lenders and financiers regarding the registration of security interests on the PPSR, the validity of those registrations and their enforceability.

Should you require assistance in any of the above areas, please contact one of our highly experienced lawyers.

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