Federal Government loses out on corporate collapse: The case for legislative reform of the priority regime - Insolvency/Bankruptcy

A recent Victorian Supreme Court decision has resulted in the Commonwealth losing priority status for some $3.8m paid to the employees of a collapsed company, due to an unusual gap in the priority regime created under the Corporations Act.

The Federal Employment Minister, Senator the Hon. Michaelia Cash, has stated that the Federal Government is committed to strengthening measures to prevent employees and taxpayers being left out of pocket as a result of corporate failures.¹ Although no specific proposals have been announced, the case for reform is real and immediate.

In Re Amerind Pty Ltd (receivers and managers appointed) (in liquidation) [2017] VSC 127, the Victorian Supreme Court held that the statutory priority regime for insolvent companies does not apply to realisations from circulating trust assets.

This meant that receivers of Amerind Pty Ltd (receivers and managers appointed) (in liquidation) (Amerind) were not required to reimburse the Commonwealth for amounts paid by the Commonwealth to Amerind's employees for wages and entitlements.

This decision follows the recent New South Wales Supreme Court decision of Independent Contractor Services (Aust) Pty Limited (in liquidation) (No 2) [2016] NSWSC 106 ( see our article on this here) and confirms the move away from the thinking that the priority regime applies to all assets of a company, including trust property.

THE FACTS OF THE CASE

Amerind was the trustee of a trading trust, the sole business of which was to operate the trading trust.

On 11 March 2014, administrators were appointed to Amerind. Bendigo and Adelaide Bank (Bank), with which Amerind held a number of facilities, also appointed receivers and managers to Amerind on that day.

In August 2014, Amerind's creditors resolved that it be wound up and the administrators were appointed as liquidators.

The receivers traded on after their appointment and realised the assets Amerind held on trust. The Bank's debt was paid out and after the receivers' remuneration was paid, there was a surplus of approximately $1.6 million.

The Commonwealth had paid accrued wages and entitlements in the sum of approximately $3.8 million to Amerind's former employees under the Fair Entitlements Guarantee Scheme and sought to recover those monies as a priority under sections 433 and 560 of the Corporations Act.

Sections 433 and 560 incorporate section 556. Section 556(1)(e) gives priority to payments made in respect of wages and entitlements ahead of claims of ordinary unsecured creditors.

The receivers applied to the Court for directions on a number of issues concerning the distribution of the receivership surplus. One of those issues was the question of whether the receivers were justified in applying the priority regime in sections 433, 560 and 556 of the Corporations Act to the receivership surplus, in circumstances where the proceeds comprising the surplus were (at the date of the receivers' appointment) subject to a circulating security interest.

WAS THE RECEIVERSHIP SURPLUS TRUST PROPERTY?

The parties agreed that Amerind acted solely as trustee of the relevant trading trust.

Liabilities it incurred were incurred in its capacity as trustee and Amerind's creditors were therefore trust creditors. It had no assets of its own such that Amerind had a right to be indemnified in respect of liabilities incurred in carrying out the trust.

WAS THE RIGHT OF INDEMNITY AN ASSET OF AMERIND IN ITS PERSONAL CAPACITY?

The receivers and the Commonwealth both submitted that the priority regime should apply to all of Amerind's assets, including trust assets. In doing so, they contended that Amerind's right of indemnity in respect of the trust assets was 'property of the company' personally.

As the Court pointed out, the question of whether the priority regime applies to trust assets is subject to conflicting authorities. In Re Enhill Pty Ltd, a decision of the Full Court of Victoria, the Court was asked to interpret a provision similar to section 433 in the Companies Act 1961 (Vic). The Court held that the trustee's right of indemnity in respect of the trust assets was property of the company available to all creditors and therefore the priority regime applied to trust assets.

In Re Suco Gold Pty Ltd (in liq), the Full Court of South Australia was asked to consider a similar provision in the Companies Act 1962 (SA) (the predecessor to section 556). In that case, the Court also found that the priority regime applied to trust assets.

However, in Re Independent, the New South Wales Supreme Court departed from the earlier cases and found that the priority regime did not apply to trust property. The Court held that the trustee's right of indemnity is not property of the company because section 556 is concerned only with the distribution of assets beneficially owned by a company (and therefore not held on trust).

THE COURT'S FINDINGS

In Amerind, the Victorian Supreme Court held that the priority regime does not apply to trust assets. In doing so, the Court held that:

Section 433(2) refers to an equitable or legal interest belonging to the company, not to an interest belonging to someone else.
Re Enhill was not binding on the Court here as the authorities made it clear that the interpretation of the provisions of the Companies Act 1961 (Vic) is not binding on the interpretation of similar clauses in the Corporations Act. The Court had also not identified any decision of any other non-Victorian court which agreed with Re Enhill.
The interpretation of the SA predecessor provision to section 556 in Re Suco Gold is not binding precedent in interpreting a Commonwealth Act.
In line with the judgment in Re Independent. the better view was that the right of indemnity and the related lien over the trust assets do not become property of the company and are not available to meet other liabilities of the company which were not incurred on behalf of the trust.

WHAT ARE THE IMPLICATIONS OF THE DECISION?

As is the case with Re Independent, the Amerind decision contradicts long standing authority (and commercial wisdom) in relation to the application of the priority regime to trust assets. While there has been some criticism of that approach, it appears to reflect the law in Australia.

Until any legislative amendment to section 433 is made, secured creditors will be able to recover the entirety of the proceeds of trust assets over which they hold a circulating security interest. This does not appear to be the intention of the statutory priority regime, nor does it reflect what the market has long considered should take place.

Reform is required. And quickly.

Footnote

¹Landmark ruling on collapsed company a blow for taxpayers, Sarah Danckert, Sydney Morning Herald, 24 March 2017.

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