On 28 February 2018 the Victorian Supreme Court of Appeal handed down its judgment in the highly anticipated Amerind Appeal Decision1 (click here to read the full case).
The Amerind Appeal Decision has provided long awaited clarification of whether or not trust assets held by an insolvent corporate trustee should be distributed pursuant to the priority regime for unsecured creditors in the Corporations Act.2
Amerind Pty Ltd (receivers and managers appointed) (in liquidation) (Amerind) was a corporate trustee of a trading trust. Amerind had no assets in its own right and as trustee, was entitled to be indemnified out of trust assets for liabilities incurred as trustee of the trading trust.
Under the Fair Entitlements Guarantee scheme (FEG), the Commonwealth paid advances to Amerind employees towards their outstanding employee entitlements totaling $3.8 million.
The realisations made by the receivers and managers produced a surplus of $1.6 million. In essence, the question was whether or not the surplus was property of Amerind in its own right or property of the trust (that is, property of Amerind in its capacity as trustee of the trust).
If it was property of Amerind in its own right, it would be distributed pursuant to the priority regime in the Act; if it was property of the trust, the priority regime would not apply and all creditors, including employees, would rank equally.
The Commonwealth, subrogated to the rights of employee creditors to the extent of the advances paid by it under the FEG regime, was essentially seeking to recover the amounts advanced to Amerind employees in priority to other unsecured creditors.
The Victorian Supreme Court of Appeal (the Court) unanimously overturned Robson J’s finding that employees of an insolvent corporate trustee were not entitled to prove as priority creditors in the winding up of that insolvent corporate trustee. In reaching its decision, the Court recognised the conflicting authorities regarding the nature of a corporate trustee’s right of indemnity.
The Court found that Amerind’s right of indemnity from trust assets for liabilities it incurred as trustee was property of the company, not property of the trust. Therefore the priority regime for distributions to unsecured creditors under the Act applied to proceeds realised from assets of the trust in accordance with the corporate trustee’s right to be indemnified (exonerated) out of trust assets.
The Court, at [269] said:
"It is inconsistent, in our opinion, with High Court authority to hold that the right of indemnity is not property of the corporate trust because the assets are trust assets".
And at [271]:
"It is inconsistent, in our opinion, with High Court authority to hold that the right of indemnity is not property of the corporate trust because the assets are trust assets".
The Amerind Appeal Decision means the Commonwealth (as a subrogated creditor) was entitled to be paid in priority to other creditors because the priority regime in section 556 of the Act applied to the surplus realised from trust assets.
For employees of corporate trustees, the Amerind Appeal Decision means that any outstanding employee entitlements owed to them will be recoverable in accordance with the priority afforded by the Act.
Given that Amerind only had trust creditors, the Court considered it unnecessary to answer the question whether proceeds of the right of indemnity are to be shared among all creditors or trust creditors only.
The Amerind Appeal Decision provides much needed clarification for insolvency practitioners, confirming that trust assets (as assets subject to a right of indemnity) are subject to the statutory insolvency regime and that, in a liquidation (or where s 433 applies), those assets are to be distributed in accordance with the priority regime set out in s 556 of the Act.
The Amerind Appeal Decision is only binding on Victorian Courts. This means that the decision is not binding authority in Western Australian courts or the Federal Court, although it is highly persuasive.
There is a similar question pending determination in the Full Court of the Federal Court in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016), which we await.
[1] Commonwealth of Australia v Matthew James Byrnes and Andrew Stewart Reed Hewitt in their capacity as joint and several Receivers and Managers of Amerind Pty Ltd (Receivers and Managers appointed) (in liquidation) & Ors [2018] VSCA 41.
[2] 2001 (Cth).
