The High Court in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth
 HCA 20 has clarified and confirmed that in the winding up of an insolvent corporate trustee, trust assets to which the company is entitled (via its right of indemnity) are property of the company, and the statutory priority regime under the Corporations Act 2001
) applies in terms of the distribution of the trust assets.
Amerind Pty Ltd was the sole trustee of a single trading trust. It held assets and owed liabilities only as a trustee.
Amerind, as trustee, owed money to a secured creditor, unsecured creditors and employees.
Amerind had a right to be indemnified for trust liabilities from trust assets.
The secured creditor was a Bank, which held a registered PPSA security interest over all assets of Amerind.
Amerind suffered financial difficulties and the Bank appointed Receivers to it.
The employees of Amerind were paid their entitlements by the Commonwealth under FEG.
The Receivers realised assets. The Bank was paid in full from proceeds of fixed assets of the trust.
After payment of the secured debts, there was a surplus to be distributed amongst the unsecured creditors and a dispute arose in relation to competing claims to the surplus.
What was the dispute?
The Commonwealth claimed that it and employees should be paid in priority to other creditors under the statutory priority regime under sections 433 and 556 of the Act.
The other unsecured creditors argued that the priority regime under the Act did not apply because the surplus was not property of Amerind but rather trust property, and that the relevant asset was not a circulating asset.
What was found?
The High Court ultimately found that:
What can I take away?
- A corporate trustee has a proprietary interest in the trust assets. This is created by the trustee’s right of indemnity. Therefore, trust assets are property of the company.
- Section 433 of the Act requires receivers to pay, out of trust assets, the debts of the corporate trustee in accordance with the statutory priority regime under the Act, so priority claims of trust employees get preference.
- In a corporate trustee’s liquidation, trust assets can generally only be applied in paying trust creditors, not other creditors of the company.
The key points to take away and consider are as follows:
- In the liquidation of a corporate trustee, trust assets are the property of the company, and the priority regime under the Act applies to trust assets.
- Trust employees enjoy preference over other unsecured creditors.
- Liquidators can pay trust-related fees and expenses from trust assets.
- Insolvency practitioners still need to approach trust assets and the statutory priority regime with care and caution, particularly when dealing with complex corporate trust structures, which may include multiple trusts and/or partial trustee situations.
Post by Marc Rossi