By Ariel Borland, Partner and Dean Brayley, Associate

The eagerly anticipated judgment in Commonwealth v Byrnes and Hewitt [2018] VSCA 41 was handed down by the Court of Appeal earlier today (Mills Oakley acts for the Receivers who sought the directions given by the Court).

In a joint judgment the five judges of the Court of Appeal found that a trustee’s right of indemnity was ‘property of the company’ within the meaning of the Corporations Act 2001 (Cth) (Act), and that the statutory priority regime in the Act would apply to trust assets realised to satisfy that indemnity.

Although the Court stated that it was unnecessary to determine if the distribution of trust assets should be limited to ‘trust creditors’, the judgment makes it very clear that the law as it currently stands in Victoria is that trust assets should be available to all creditors generally (and not just trust creditors).

Trust property is property of the company

In the decision at first instance, the trial judge found that the trustee’s right of indemnity was not “property of the company” within the meaning of the Act, and therefore not subject to section 433 of the Act.

The Court of Appeal undertook a detailed and wide ranging review of the authorities in relation to the nature of trust liabilities, nature of the trustee’s right of indemnity and creditor subrogation, and the statutory insolvency regime. Ultimately the Court found that in light of the High Court decisions on point, it could not seriously be doubted that a trustee’s right of indemnity was property of the insolvent trustee company.[1]

Once it was accepted that a trustees right of indemnity was property of the company within the meaning of the Act, the Court held that the provisions of the Act (and in particular sections 433, 555 and 556) must apply, and that any other conclusion was inconsistent with prior High Court decisions.[2]

Is that distribution confined to trust creditors?

As Amerind traded solely in its capacity as trustee of a trust and only had ‘trust creditors’, the Court found that it was ultimately unnecessary to deal with the question of whether proceeds of trust property were to be shared among all creditors of a company or ‘trust creditors’ only.

The two competing decisions on this point, Re Enhill Pty Ltd (In Liq) [1983] VR 561 and Re Suco Gold Pty Ltd [1983] 33 SASR 99 differed, with Re Enhill finding that the proceeds of trust property were distributable amount creditors generally, while in Re Suco the Court held that trust assets were only available to ‘trust creditors’ (though still subject to the priorities set out in the statute).

The Court noted that was some doubt regarding which of Re Suco or Re Enhill was correct, but that until a subsequent appellate decision decides otherwise, the law as it stands in Victoria as articulated in Re Enhill should continue to be followed in this state.[3] This would once again seem to set Victoria apart from other states on how it treats the assets of an insolvent trustee. We note the Western Australian division of the Full Court of the Federal Court decision in Re Killarnee Civil & Concrete Contractors Pty Ltd ACN 085 230 486 (In Liquidation) on the above issues was heard in July 2017 and is awaiting judgment. This may provide further clarity on this issue.

Other notable findings

In a judgment of 122 pages, the Court made a number of other relevant findings, which we will consider in more detail in a subsequent alert. However, we note that:

1. The Court gave some consideration to whether the right of indemnity over trust property that the trustee holds is a circulating asset or a non-circulating asset, but ultimately determined that there was no real purpose by characterising that right one way or another. Rather, the right of indemnity is not fixed, and it takes its character from the nature of the underlying assets i.e. if trust property is a circulating asset, it will remain a circulating asset despite any right of the indemnity that the trustee may hold over that property (and likewise for a non-circulating asset).[4]
2. The Court of Appeal also agreed with the trial judge (and earlier authorities) that the time for determining whether property of which a receiver has taken possession is a ‘circulating asset’ is the time when the receiver takes such possession.[5]
3. The Court also gave some guidance on section 340(1) of the Personal Property Securities Act 2009 (Cth) (PPSA). Circulating assets are those that fall within section 340(1) of the PPSA. It was argued that an asset would only be a circulating asset if it fell within 340(1)(a), and not 340(1)(b). The Court held that section 340(1)(a) and (1)(b) are alternatives, either of which may be satisfied in order to bring property within the definition.[6]
4. The Court of Appeal upheld the primary judge’s finding that certain assets were circulating assets, including funds in the Company’s trading account, and pre appointment tax refunds and general receipts. With respect to the tax refunds and receipts, the Court found that the critical question is what property was in the possession of the receivers upon appointment, not whether the property is “on hand”. In circumstances where all receipts were derived from circumstances and transaction prior to the appointment date, they were appropriately characterised as circulating assets.

Conclusion

After a period of uncertainly, the position (in Victoria at least) appears to be settled for now: a trustee’s right of indemnity against trust property is property of the company for the purposes of the Act, it is subject to the statutory regime set out in the Act, and it is available for all creditors, and not just trust creditors.

In essence this is a return to the not so distant past, prior to the decisions of Brereton J in Re Independent Contractor Services (Aust) Pty Limited (in liq) (No 2) [2016] NSWSC 106 and the decision at trial in this case.

Given the wide use of ‘property of the company’ in the Act, this decision may also temper the need for urgent legislative reform, as it is clear that the insolvency regime set out in Chapter 5 of the Act is (once again) applicable to trust property to the extent that a trustee enjoys a right of indemnity over that trust property.

As noted above, the Western Australian division of the Full Court of the Federal Court judgment in Re Killarnee Civil & Concrete Contractors Pty Ltd ACN 085 230 486 (In Liquidation) is pending. If this decision differs to the one handed down in Re Amerind, we may once again be left in a position of conflicting appellate authorities on this issue. Accordingly, that decision will be eagerly awaited.

[1] At [273].

[2] At [281].

[3] At [286].

[4] At [328] to [329].

[5] At [367].

[6] At [376].