Employees’ priority in the insolvency of a trading trust: the Amerind case in the High Court

In the Amerind case, the High Court has unanimously held that the former staff of an insolvent trustee company have the same rights to priority payments as the employees of an insolvent non-trustee company. In doing so, the Court settled a long-standing debate about the nature of a trustee’s right to indemnify itself from trust property for trust debts, ruling that the proceeds of that right are property to which the Corporations Act priority regime applies.

For many years there has been doubt about whether assets held on trust by a corporation are subject to the priority regime of the Corporations Act 2001 (Cth) (the Act). That regime establishes that employees have priority over most other unsecured creditors as well as over secured creditors whose security is over “circulating assets”. The High Court has unanimously held that they are.

Background

Amerind Pty Ltd (Amerind) carried on business as a trustee. It therefore possessed a “right of indemnity” out of the trust assets to recoup trust debts it had already paid from its own funds, and to use trust assets to discharge other debts of the trust, including employee entitlements.

Receivers appointed to Amerind by a bank exercised Amerind’s right of indemnity to sell all its assets. They paid out the bank, leaving a surplus of $1.62 million, all proceeds of the sale of inventory, which were “circulating assets” under the Act.

The Commonwealth had paid Amerind’s former employees $3.8 million under the Fair Entitlement Scheme. This gave it the same priority of payment as the employees. It therefore claimed the surplus under section 433 of the Act, which relevantly gives priority to employees over other creditors in regard to “property of the company” that is proceeds of “circulating assets” over which a security has been given.

Carter Holt, a trade creditor, objected on the basis that the Commonwealth had any priority over it (or any other creditor).

Application of the Corporations Act priority regime to the proceeds of the right of indemnity

Courts have long struggled with whether assets held on trust by a corporation which becomes insolvent are subject to the priority regime under the Act. This is because Courts have consistently held that the assets available to pay an insolvent corporation’s debts do not include assets held on trust. Where an insolvent company carried on business as trustee, there was doubt whether the Act’s priority regime applied.

Courts finding that assets held on trust were not available for distribution to employees would have the anomalous result in employees of a trust receiving no priority, whereas employees of non-trustee companies would receive priority. To avoid this, some Courts had sought to deal with this problem by finding that the assets held on trust were available to pay non-trust creditors. This approach had the disadvantage of being contrary to basic trust law.

Here the Court first dealt with this issue, holding unanimously that assets held on trust can be used to pay debts of the trust, but not debts of any other trust the trustee might also manage, or any debts of the trustee in its own right.

The Court then held that Amerind, as a trustee, was personally liable for debts incurred by the trading trust it operated (including employee entitlement debts), but was entitled to use those assets to satisfy trust debts. To that extent, Amerind had a beneficial interest in the trust assets. Because it held that beneficial interest, the trust assets were “property of Amerind” to the extent of Amerind’s right of indemnity. Further, because all of the surplus was the proceeds of the sale of inventory, which were “circulating assets” under the Act, all of the surplus came under section 433. The surplus was to be paid to the Commonwealth in priority to Carter Holt or any other unsecured creditor.

Multiple Trusts

There is an additional complication where an insolvent company has operated multiple trusts. Although Amerind only operated as a trading trust, the Court gave some thought to these circumstances. The Court suggested that the correct approach is to deal with each trust separately to the extent there are funds to do so.

However, the court did not provide significant guidance as to the correct approach where there is a deficit of funds or this approach otherwise causes difficulties, beyond saying that equity would assist and that the liquidator, receiver or administrator could apply to the Court for directions. This issue therefore awaits resolution in a further decision.

Take-home messages

A trustee’s right of indemnity can be used to generate proceeds to pay creditors of that trust, but not creditors of other trusts operated by the trustee or creditors of the trustee in their own right.

Section 433 of the Act applies to the proceeds of a corporate trustee’s right of indemnity, which can be used to pay priority creditors of the relevant trust in accordance with the priority rules of the Act.

Where there are multiple trusts, each is to be treated separately, but the approach where there is a deficit of funds has not been settled, and it is likely external administrators will need to apply to the Court for directions.

[1] That is, Carter Holt Woodproducts Pty Ltd v The Commonwealth [2019] HCA 20.

Authored by:

Scott Couper, Partner

Craig Melrose, Solicitor