By Ariel Borland, Partner, Ivana Griggs, Senior Associate and Georgina Overend, Lawyer

The recent Supreme Court of New South Wales decision in Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) [2016] NSWSC 106 (Independent Contractor) highlights two common issues arising for insolvency practitioners:

1. The approach for the assessment of remuneration and expenses to be paid out of trust assets; and
2. The priority to be afforded to creditors in the distribution of trust assets.

In Independent Contractor, Brereton J held that the waterfall of priority payments of debts and claims set out in section 556 of the Corporations Act 2001 (Cth) (the Act) does not apply to the distribution of trust assets and that in the event that the trust assets are insufficient to pay all trust creditors in full, they will share pari passu.

Further, Brereton J’s approval of the Liquidator’s remuneration as a percentage of the assets realised, deviates from the time based approach adopted by the Victorian courts.

Facts

The case involved Independent Contractor Services (Aust) Pty Limited (ICS), an entity whose sole activity was to act as trustee of the Independent Contractor Services Trust. The Court was asked to direct the Liquidator as to the distribution of trust assets, after the approval and payment of his remuneration and expenses, towards the Australian Tax Office’s liability that related to an unpaid superannuation guarantee charge and ‘ordinary’ unsecured creditors.

Findings on approval of the Liquidator’s remuneration

In determining the Liquidator’s remuneration, Brereton J accepted that courts treat the work done in administering trusts as incidental to the liquidation, such that it is appropriate to approach the application for remuneration as analogous to one by an official liquidator for approval of remuneration.

His Honour’s preference was not to approve remuneration based on the Liquidator’s hourly rates, but rather (in the interests of ensuring proportionality and incentivising the creation of value) to fix an amount of remuneration by way of commission on assets realised and distributed.

Having regard to the circumstances of the liquidation, his Honour considered that limited work was undertaken by the Liquidator in respect of the realisation of assets, however his Honour recognised the complicating features of the directions application and accordingly allowed remuneration of $30,000 (which equated to about 14% of gross realisation). The Liquidator had sought a determination that he was entitled to remuneration in the amount of $49,510.50 (having already written off $64,635 for the purposes of the application).

Findings on distribution of trust assets

Brereton J was also asked to consider whether in the distribution of trust assets a superannuation guarantee charge liability, incurred in the context of a trading trust, was entitled to priority under section 556(1)(e) of the Act.

Brereton J held that, as the creditors were contractors not employees of ICS, section 556(1)(e) was not enlivened. As his Honour also held that section 556 is concerned only with the distribution of assets beneficially owned by a company and available for division between its general creditors, and therefore section 556 does not apply to the rights of trust creditors in respect of trust assets.

As to the correct approach for distribution of trust assets, his Honour’s starting point was that a trustee is entitled to apply trust assets to discharge the liabilities incurred under the trust. Such right of indemnity is secured by an equitable lien over the trust assets. The creditors do not acquire any direct interest in trust assets, but a right to be subrogated to the trustee’s equitable lien. In the event that the trust assets are insufficient, all trust creditors will share pari passu in the trust assets without the benefit of priority under section 556.

Discussion

The approach by the New South Wales Supreme Court regarding the assessment of an insolvency practitioner’s remuneration can be contrasted with the position preferred by the Victorian Supreme Court.

The Victoria Supreme Court will ordinarily approve a liquidator’s remuneration where the amount claimed has a sufficient nexus between the expenditure and remuneration, and that the remuneration claimed is reasonable. As to whether the amount is reasonable, sections 504(2) and 473(10) of the Act and the principles summarised in Conlan v Adams [2008] WASCA 61 have been adopted by the Victorian Supreme Court. If these requirements are satisfied, the liquidator will be entitled to his or her remuneration in full. While proportionality is a consideration, the Victorian Supreme Court has not approved the approach of assessing remuneration based on a percentage of realisations.

The issue of whether or not section 556 of the Act applies in the distribution of trust assets remains unclear. In Lerinda Pty Ltd v Laertes Investments Pty Ltd (2009) 74 ACSR 65, the Supreme Court of Queensland appeared to favour the view that trust creditors would be paid pari passu, but subject to the priority given to some creditors under section 556 of the Act, however the Court did not express a final view on this point.

Whilst Brereton J’s reasoning on the application of section 556 may be sound, it does seem that this approach will lead to inequitable outcomes for employee creditors. Importantly, the policy reason behind giving employee creditors priority status applies equally for a company trading through a trust and for a company trading in its own right. Ultimately the issue of priority creditors’ rights to distributions from trust assets may require legislative reform to resolve.

Take away points

When appointed over a company whose sole activity is to act as trustee of a trading trust, or who acts as trustee of a trading trust and trades in its own right, it is prudent to apply to the Court for approval of:

1. Both the quantum of your remuneration and expenses and (where relevant) apportionment of remuneration and expenses across company and trust assets, as early in the appointment as possible; and
2. The distribution of trust assets as between trust creditors, particularly where some of those creditors would otherwise enjoy a priority under section 556 of the Act.