Federal Court leaves priority regime hanging by a string

July, 2017

By Ariel Borland, Partner, Dean Brayley, Associate and Natalie Court, Graduate

The decision of Kite v Mooney, in the matter of Mooney’s Contractors Pty Ltd (in liq) (No 2) [2017] FCA 653 (Kite) is adding to a growing body of authorities that assets held by an insolvent corporate trustee in its capacity as trustee are not “property of the company” subject to the priority regimes in the Corporations Act 2001 (Cth) (Act).

Background

In June 2010, Mooney’s Contractors Pty Ltd (Company) was incorporated for the sole purpose of acting as the trustee of the Mooney Family Trust (Trust). In April 2015, Robert Kite (Kite) and Mark Hutchins (Hutchins) were appointed as voluntary administrators of the Company. Kite and Hutchins were later appointed as deed administrators, and ultimately as liquidators of the Company.

Kite and Hutchins approached the Court for directions that, inter alia, they would be justified in paying employee entitlements out of the assets of the Trust in accordance with the priorities set out in s 556(1) of the Act. This application arose in light of the uncertainty that has arisen in this area due to:

  1. the longstanding decisions in Re Enhill Pty Ltd [1983] 1 VR 561 (Re Enhill) and Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 (Re Suco Gold) which held that the statutory priority regime, at the time found in s 292 of the relevant Companies Acts, applied to distributions of trust property; and
  2. the recent decision of Brereton J in Re Independent Contractor Services (Aust) Pty Limited (in liq) (No 2) [2016] NSWSC 106 (Re Independent) in which His Honour held that the priority regime in s 556 of the Corporations Act did not so apply.

Kite and Hutchins submitted that they would be justified in paying employee entitlements out of the assets of the Trust in accordance with the priorities in s 556(1) of the Act. They submitted that the reasoning in Re Suco Gold was correct as the trustee’s lien confers a sufficient beneficial interest over the property to make it “property of the company” within the meaning of s 555 of the Act, and that the view expressed by Brereton J in Re Independent overlooked the beneficial interest created by the trustee’s lien.

Findings

Following the hearing, two further decisions were handed down that applied the reasoning in Re Independent:

  1. Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583 (Woodgate); and
  2. Re Amerind Pty Ltd (receivers and managers appointed) (in liq) [2017] VSC 127 (Re Amerind)

Even though Re Amerind was handed down after the hearing of Kite, Her Honour considered it in detail given the similarities in issues. Her Honour referred to [362] of Robson J’s judgement where he found that he was not bound by Re Suco Gold or Re Enhill as those decisions were “anomalous” and “not a proper expression of the common law of Australia”.

Markovic J ultimately agreed with Robson J in Re Amerind, and followed the decisions in Re Independent and Woodgate, affirming the view that the trustee’s right of indemnity or related lien did not become “property of the company” and therefore was not available to meet other liabilities of the company. Accordingly, Her Honour directed that Kite and Hutchins would be justified in not paying employee entitlements out of the assets of the Trust in accordance with the priorities set out in s 556(1) of the Act.

Watch this space

In light of the decision in Kite, there is an ever growing body of authorities that assets held by an insolvent corporate trustee are not “property of the company”, and are therefore not subject to the statutory priorities set out in the Act. Whilst controversial, this appears to now reflect the current law in Australia.

However this position is now being challenged in a number of appellate courts. We act for the receivers of Amerind, and the Commonwealth of Australia’s (who operate the Fair Entitlements Guarantee scheme) appeal of the finding in Re Amerind is listed for 19 July 2017 in the Victorian Court of Appeal. The Western Australian division of the Full Court of the Federal Court will also be considering the issue later in July 2017. The Court of Appeal and the Full Court’s decisions on this issue will be closely watched. Should this line of authorities be upheld by the Court of Appeal or the Full Court, it can be expected that the chorus of voices calling for reform in this area will increase exponentially.

Contact Mills Oakley

For further information, please do not hesitate to contact:

 

ariel-borland-mills-oakley

Ariel Borland | Partner
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

Dean Brayley | Associate
T: +61 3 9605 0081
E: dbrayley@millsoakley.com.au

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