By Ariel Borland, Partner and Dean Brayley, Associate

The eagerly anticipated judgment in Amerind (Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20) was handed down by the High Court yesterday after the High Court heard the matter in early February of this year. Mills Oakley acts for the Receivers who sought the directions given by the Court.

In three separate judgments, the High Court dismissed the appeal by Carter Holt Harvey, with the key findings as follows:

1. That a trustee’s beneficial interest in trust property derived from its right of indemnity was ‘property of the company’ within the meaning of the Corporations Act 2001 (Cth) (Act);
2. That assets held on trust can only be used to pay debts that have been properly incurred by the trustee in discharge of their duties, and cannot be distributed among creditors generally; and
3. That the statutory priority regime in sections 433 and 561 of the Act would apply to trust asset realised to satisfy that indemnity to the extent that those assets were also circulating assets and the other criteria of sections 433 and 561 applied.

Practically speaking, the key impact of the decision is that where a company has traded in multiple capacities, insolvency practitioners will to need administer separate funds and prepare separate distributions for each capacity the company traded in. The Court also made it clear that should practitioners have issues in the allocation and creditors’ claims in these circumstances, they should approach the Court for directions.

Case history

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 the realisations from trust property were not subject to the obligations in section 433 of the Act.

The Court of Appeal overturned the first instance decision, and found it could not seriously be doubted that a trustee’s right of indemnity was property of the insolvent trustee company. Once it was accepted that a trustee’s 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.

The Court of Appeal 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, noting that there was a diverging view on the authorities on point as follows:

1. Re Enhill Pty Ltd (In Liq) [1983] VR 561, finding that the proceeds of trust property were distributable among creditors generally;
2. Re Suco Gold Pty Ltd [1983] 33 SASR 99 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 of Appeal did not decide this point, but rather noted that the law in Victoria was articulated in Re Enhill, setting Victoria apart from other states on how it treats the assets of an insolvent trustee.

High Court judgment

All three judgments found that a trustee who has properly incurred liabilities has a proprietary interest in the trust assets, this interest is “property of the company” and section 433 applied to circulating assets realised by a receiver to the extent that the company had a proprietary interest in them. Though they all reach the same ultimate finding, the judgments appear to diverge on their formulation of the trustee’s interest in the trust property.[1]

With respect to findings that the assets held on trust can be only used to pay debts that have been properly incurred and the application of the statutory priority regime:

1. The joint judgment of Kiefel CJ, Keane and Edelman JJ rejected the Re Enhill approach that trust assets available under a right of indemnity could be distributed among creditors generally. Their Honours restricted their findings to the application of section 433 and 561 and noted that questions may arise about the order of priority between trust creditors after payment of priority debts, but that this appeal did not concern these issues.
2. The joint judgment of Bell, Gageler and Nettle JJ found that in a winding up “the ‘property of the company’ that is available for the payment of creditors includes so much of the trust assets as the company is entitled, in exercise of the company’s right of indemnity as trustee, to apply in satisfaction of the claims of trust creditors”[2] and that the priorities in sections 556 and 433 applies to payments made to trust creditors from this property (following Suco Gold).[3]
3. Gordon J in her separate judgment agreed with Bell, Gageler and Nettle JJ, and stated that trust asset can only be applied to satisfy trust debts, but “that limitation does not preclude the application of the relevant statutory priority rules”.[4]

Both Gordon J and Bell, Gageler and Nettle JJ judgments’ acknowledged that the practical effect of their findings that only trust creditors can be paid out of trust assets may cause difficulties and extra expense, especially where corporate trustees have carried on a business of more than one trust, or as a trustee of a trust and on its own account. However, their Honours posited that the external administrator should create separate funds for different groups of creditors to overcome these difficulties. Gordon J in particular noted that it may lead to practical difficulties and expenses, but found that it was available, and appropriate, for a receiver/administrator/provisional liquidator/liquidator to apply to the Court for directions to resolve any issues with respect to allocation and creditors’ claims in these circumstances.

Takeaways

After a period of uncertainty, the position 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, this property can only be distributed to trust creditors and the provisions of the Act dealing with priority will apply to this distribution.

In practice, it appears that, where a company has traded in multiple capacities insolvency practitioners will to need administer separate funds and prepare separate distributions for each capacity the company traded in. Should the practitioner have issues in the allocation and creditors’ claims in these circumstances, they should approach the Court for directions.

[1] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20 at paragraphs paragraph [28], [82] and [140].

[2] At paragraph [90].

[3] At paragraph [96].

[4] At paragraph [156].