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Tackling trusts

Tackling trusts

Speak with any well-informed insolvency practitioner and, aside from the sweeping law reform being foisted upon the industry, a major issue occupying the minds of many is the tricky task of winding up trust-related enterprises.

Why tricky? It all came about as a result of some recent case law that has effectively inverted the commonly-understood regime of dealing with the property managed by an insolvent trustee. Since 1983 at least, most if not all liquidators winding up a corporate trustee would simply go about realising that property subject to the control of the trustee (subject to any provision that might automatically evict that trustee company from its role – a hairy subject for another day). They would then rely on equitable principles to assert a trustee’s lien over property of the trust, allowing the Liquidator to claim that property as being ‘property of the company’.

In addition, most modern trust deeds provide an indemnity out of trust assets against liability for the trustee acting reasonably on behalf of the trust. In so doing, a Liquidator could feel comfortable dealing with trust assets as property of the company and applying the well-worn provisions of section 556 of the Corporations Act 2001 in distributing that property.

That all changed with the judgement handed down by NSW Supreme Court Justice Paul Brereton in Re Independent Contractor Services (Aust) Pty Limited (in liq) (No 2)1 That decision has been followed by the Federal Court (in Woodgate2) and Victorian Supreme Court (in Re Amerind3 ), with the effect being that trust property is not considered to be property of the Company and so the provisions of the Corporations Act simply do not apply. Ordinary principles of equity will see each and every claimant against trust property rank pari passu.

Why is this of concern? Under the Corporations Act regime, employees are provided with preferential status and, in receivership and liquidation alike, are entitled to be paid in priority (in some cases even before the insolvency practitioner!). However, by rejecting the applicability of section 556 and its regime of rights to receive distributions from insolvent companies, those employed by a corporate trustee will, in a winding up (and also in receivership), be denied any priority and will rank with all other ordinary unsecured creditors.

Lawyers, practitioners and creditors must be alert to these issues and risk of Court interference should they be found in error.

1 [2016] NSWSC 106
2 Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583
3 Re Amerind Pty Ltd (receivers and managers appointed) (in liq) [2017] VSC 127

Tony Lane is a Registered Liquidator at Vincents.
For more information, contact Vincents on (02) 6274 3402
www.vincents.com.au

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