Assets held by an insolvent corporate trustee in its capacity as trustee may not be “property of the company”
– Re Amerind Pty Ltd (receivers and managers appointed)(in liq)  VSC 127.
Amerind’s sole function was to act as trustee of the Panel Veneer Processes Trading Trust which carried on business manufacturing and distributing decorative and architectural finishes. It had no assets of its own and incurred liabilities only as a trustee.
In March 2014, Amerind passed into administration, and receivers and managers were appointed to Amerind by the company’s principal financier, Bendigo and Adelaide Bank.
The receivers traded on after their appointment and generated a net surplus, with the bank’s debt being paid out by the amounts generated by the receivers and other recoveries by the bank. At the appointment date, Amerind had 174 staff.
Key issues examined were whether the receivership surplus could be classified as trust or company property and whether the priority regimes for payment of creditors set out in the Corporations Act required the receivers to pay preferential debts from the surplus before paying it into Court to be the subject of various competing claims.
Was the receivership surplus trust property and if so, was the surplus subject to the Corporations Act priority regime?
His Honour accepted that Amerind had operated as a corporate trustee and thus the assets comprising the surplus were properly characterised as trust property.
It being the case that the surplus was trust property, the question then became whether it was susceptible to the statutory priority regime in the Corporations Act (“the Act”). The Commonwealth, the liquidator and the receivers argued that even if the surplus was trust property, the trustee’s right to be indemnified for trust debts from that trust property was a personal asset of the corporate trustee and was thus “property of the company” rather than trust property.
The Commonwealth Department of Employment had paid out some $3.8m of accrued employee entitlements under their Fair Entitlement Guarantee Scheme to the employees of the business. The Commonwealth sought to recover these payments as a priority creditor because under s 560 of the Act, the Commonwealth has the same priority rights as the employees who received payments from the Commonwealth. The Commonwealth submitted that, under s 433 of the Act, it was entitled to be paid accrued employee entitlements, as a preference, out of property of the company secured by a circulating security interest.
The Commonwealth, supported by the receivers but opposed by Carter Holt (a creditor of Amerind), therefore contended that the funds held by the receivers were ‘property of the company’ or that the company’s right of indemnity and lien over the trust assets, were ‘property of the company’ for the purposes of s 433, and accordingly, the Commonwealth should be reimbursed from those funds.
Does the priority regime apply?
The Court held that the receivers should not pay the Commonwealth, as a priority creditor, accrued employee entitlements, under s 433 of the Corporations Act 2001 (Cth).
Justice Robson found that the proceeds of the sale of the trust assets were not ‘property of the company’ nor was the trustee’s right of indemnity and lien ‘property of the company’ and thus, were not subject to the priority regime in s 433.
Furthermore, the trustee’s right of indemnity was not a current asset of the kind listed in s 340(5) of the Personal Property Securities Act 2009 (“PPSA”) and therefore was not a circulating asset. In particular, it was not an ‘account’ arising from the provision of trustee services.
Justice Robson concluded that the section 433 priority regime only applied to ‘property of the company’ and that trust assets and the trustee’s right of indemnity against trust assets are not itself ‘property of the company’.
In reaching this decision, the Court declined to follow the decision of the Full Court of this Court in Re Enhill Pty Ltd  I VR 561 and followed Independent Contractor Services (Aust) Pty Ltd (in Liq) (No 2)  305 FLR 222, a decision of the Supreme Court of NSW. The Court held that it is not bound to follow Re Enhill as it concerned the construction of a Victorian Act, the Companies Act 1961 (Vic) and that Re Independent correctly states the law in Australia with respect to the construction of the Commonwealth Act.
A bank account, on the other hand, into which the bank paid drawdown proceeds that Amerind was then free to spend, was a circulating asset, as Amerind had retained effective control over it, with the bank’s consent, in the ordinary course of business. In so finding, the court seemed to say that even if an asset, such as an ADI account, was subject to s340(1)(a)(‘current assets’), it was also necessary to consider whether it might be a circulating asset under s340(1)(b)(‘in any other case’).
Drawdown proceeds provided by the bank after appointment of receivers were circulating assets. The time to consider characterisation was the date of appointment of the receivers and these drawdown proceeds were the proceeds of stock, and were given the same circulating characterisation as the stock.
Amerind had also granted a retention of title security interest to Alpine MDF Industries Pty Ltd. The terms of Alpine’s security interest were set out in a master trading agreement. Alpine registered a financing statement before the administration, but more than 20 business days after execution of the master trading agreement. The court held the security interest came into force when the master agreement was signed, not at the later times when orders were placed, and so it vested under section 588FL.
If you want a security deed that really works, or if you want to know whether you have priority when dealing with a trustee company, call Leigh Adams, Special Counsel at Owen Hodge Lawyers.