By Ariel Borland, Partner and Dean Brayley, Associate
The eagerly anticipated judgment in Commonwealth v Byrnes and Hewitt  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).
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.
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.
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)  VR 561 and Re Suco Gold Pty Ltd  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. 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.
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:
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)  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.
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