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    Trustees' right of indemnity to an insolvent corporate trustee

    Nov 14, 2019 8:00:00 PM

    There has been much debate as to how the trustees' right of indemnity would apply to an insolvent corporate trustee.

    The right of indemnity is commonly found in the trust deed which allows the trustee to be indemnified for costs and expenses arising out of the trust. This right of indemnity can be limited depending on the individual deed and is not available in circumstances where there has been a breach of trust.

    A recent High Court Case has given much needed clarity as to the effects of external administration on a Corporate Trustee.

    The case of Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (Amerind) involved the insolvency of a Corporate Trustee, Amerind Pty Ltd which acted as a trustee of a trading trust. The company was placed in voluntary administration and receivership. Assets were then realised which paid out the secured creditor leaving a surplus of $1.6 million for distribution.

    The core dispute arose as a result of the Commonwealth and Carter Holt disputing how the surplus should be distributed.

    The initial issue was whether the statutory priority regime applies.

    At first instance the Victorian Supreme Court held that the priority regime did not apply. This was overturned by the full bench of the Victorian Supreme Court of Appeal.

    Carter Holt then appealed to the High Court.

    The High Court was asked to clarify and answer:

    1. Whether the statutory priority regime applied; and
    2. Whether trust assets could be used only to pay creditors of the trust or could be applied to general creditors of the company (no matter the capacity).

    The matter was heard before seven judges of the High Court who unanimously agreed that:

    1. The statutory regime applies to trust assets and their proceeds (provided the company’s right of indemnity was still available);
    2. The right of the trustee company to trust assets through the right of indemnity is ‘property of the company’. This right however is limited by the indemnity;
    3. Affirmed the position in Re Suco Gold that trust property can only be used to pay for trust debts, if a company only acts as a trustee. Then costs and expenses of the insolvency should be treated as trust debts.

    Whilst the judgment was unanimous, three separate judgments were delivered. They are summarised as follows:

    Judgment 1 – Kiefel CJ, Keane and Edelman JJ

    This judgment confirmed that:

    1. Assets covered by the right of indemnity are property of the company because the exercise of the trustees right of indemnity meant that the company had a beneficial interest in property, therefore statutory priority rules should apply;
    2. The position as detailed in Re Enhill Pty Ltd [1983] that the right of indemnity was available to pay not trust debts was incorrect;
    3. Confirmed the position articulated in Re Suco Gold Pty Ltd (in liquidation) (1983) that trust assets could only be applied to trust debts;
    4. Trust assets can only be used to satisfy the trust debts and not any personal debts of the trustee company that were not properly incurred in the due admin of trust.

    Judgement 2 – Bell, Gageler and Nettle JJ

    This judgment focused on the issues surrounding the statutory priority regime and affirmed that the proceeds from selling trust assets were circulating assets and therefore the statutory regime applied.

    Judgment 3 – Gordon J

    Judgment 3 clarified that the rights of the trustee company to the trust property through the rights of indemnity are ‘as they find them,’ confirming that any limitations to their dealing remain. Furthermore, Justice Gordon confirmed that where a trustee company acts in multiple capacities, either as multiple trustee or as a trustee and an operating (non-trust) entity, then there will be a need for apportionment, so that trust property from each trust is utilised to pay the debts associated with the specific trust. This will require an analysis by the insolvency practitioner and a clear apportionment mechanism.

    Whilst the decision was unanimous the 3 judgements clearly articulate and result in some practical implications. These are:

    1. The position as articulated in Re Enhill Pty Ltd [1983] is affirmed as incorrect;
    2. Trust assets can only be used to pay for trust claims;
    3. The administration of a trust can be paid by trust assets but not the general costs outside of the administration of the trust.

    While Amerind provided much needed clarity and direction as to how corporate trustees would be dealt with in insolvency, some core issues remain such as:

    1. Whether the availability of the statutory power of sale under s477 applies, where there is no specific power of sale in the trust deed or in circumstances where the liquidator lacks power to deal with the trust assets as a result of the automatic ejection clause;
    2. How automatic ejection clauses in trust deeds interact with ipso facto reforms in the Corporations Act;
    3. How to deal with the trust assets and the right of indemnity where there has been a comingling of roles by the trustee company: that is as trustee and as operating entity (no trust);
    4. Whether s556 of the Corporations Act 2001 (Cth) applies to trust assets.

    As a result of Amerind, lower courts have adopted clear lines of reason in relation to questions of insolvent corporate trustees.

    In Staaz v Berry [2019] the Queensland division of the Federal Court of Australia, confirmed Gordon J’s judgment affirming the principle that non trust debts cannot be paid for by trust assets.

    In Cremin [2019] the Victorian division of the Federal Court of Australia, affirmed the preferred process of appointing a liquidator as a receiver in circumstances where there are questions around the scope of the liquidators power to deal with assets when appointed over a corporate trustee where automatic ejection clauses exist in the Trust Deeds.

    In Carrello [2019] the Western Australian division of the Federal Court of Australia affirmed that in circumstances where the trust deed was amended prior to liquidation to benefit the creditors rather than the beneficiaries, this conduct would be considered ‘fraud on the power’.

    In all three judgments the court affirmed the position that the preferred process in situations of uncertainty is for external administrators to approach the court and seek determinations and directions.

    Conclusion

    The case of Amerind has clarified how corporate trustees are dealt with in insolvency.

    We advise that you should:

    1. Consider the structure of the trust;
    2. Consider the utility of a trading trustee;
    3. Consider how the trust deed operates in the case of insolvency;
    4. Consider the exposure of the trust assets should the trustee become insolvent.