GORDON J. Amerind Pty Ltd (receivers and managers appointed) (in liquidation) ("Amerind") carried on a business solely in its capacity as trustee of the Panel Veneer Processes Trading Trust ("the trust"). As is not uncommon, Amerind had no assets of its own, other than perhaps a nominal sum settled to establish the trust, and a right in equity to be indemnified (a right of exoneration as opposed to a right of recoupment) from the trust assets in respect of liabilities incurred in the conduct of the trust.
Amerind had facilities with the Bendigo and Adelaide Bank ("the bank") secured against both fixed and circulating trust assets. On 11 March 2014, following a notice from the bank demanding repayment and terminating the facilities, Amerind's director appointed joint and several administrators to Amerind. On the same day, the bank appointed the second respondents as receivers and managers ("the receivers"). The receivers, exercising Amerind's right of exoneration, sold the fixed and circulating assets. After paying out the bank from the sale of fixed assets, and providing for their own estimated remuneration, the receivers held a net surplus of $1,619,018 ("the receivership surplus"). That surplus comprised, in part, proceeds from the sale of the circulating assets.
Determination of the issues in this appeal concerns the application of specific statutory provisions: in particular, how, if at all, s 433 of the Corporations Act 2001 (Cth), which prescribes a priority payments regime, interacts with the receivership surplus to the extent that it comprised circulating assets.
Section 433 is headed "[p]roperty subject to circulating security interest - payment of certain debts to have priority" (emphasis added). Section 433 relevantly applies to "property of the company" over which a receiver takes possession or assumes control, and requires that employees' claims (and the Commonwealth's claims, by operation of s 560 of the Corporations Act, where it has paid out the employees' claims) have priority in the distribution of "property of the company" to which the section applies. Employees of Amerind had their entitlements partially paid out by the Commonwealth. Thus, the Commonwealth submitted that s 433 applied to the receivership surplus as "property of [Amerind]" within the meaning of s 433(3), and that it had statutory priority to that surplus.
The appellant, a trade creditor, submitted that s 433 of the Corporations Act did not apply to the receivership surplus on two grounds. First, the appellant noted that, as is uncontroversial, the receivers could only access the receivership surplus through the exercise of Amerind's right of exoneration. That is, there was no free-standing right to the receivership surplus, which comprised the proceeds from the sale of the trust assets, separate from the right of exoneration. On this basis, the appellant submitted that the receivership surplus represented "trust property" and not "property of [Amerind]" to which s 433 applied.
Second, the appellant submitted that the receivership surplus fell outside the scope of s 433 because, among other things, s 433 only deals with circulating assets and the trustee's right of exoneration (the means through which the receivers could access the assets) was a fixed asset, rather than a circulating asset.
Both grounds should be rejected. I agree with what Bell, Gageler and Nettle JJ have written. I write separately to explain my reasons why, at a level of principle and practice, the appeal should be dismissed with costs.
In relation to the first ground, once the nature of the right of exoneration is properly understood, and regard had to the broad definition of "property" in the Corporations Act, Amerind's interest in the receivership surplus generated by its right of exoneration out of those assets was "property of [Amerind]" within the meaning of s 433.
In relation to the second ground, it was not in dispute that the receivers had been appointed by the bank under debentures that were secured, at least in part, by a circulating security interest as required by s 433(2)(a). At issue was the interaction of the right of exoneration (a fixed asset) with s 433(3) of the Corporations Act. Did the fact that a fixed asset - the right of exoneration - was the gateway to the sale of circulating assets preclude the application of s 433(3) to the circulating assets? The answer is "no". The only concern of s 433(3) is that in the distribution of circulating assets, certain claims are to have priority over other claims. To the extent that the receivership surplus represented the proceeds of the sale of circulating assets, s 433(3) applied to the receivership surplus. It is not right to say, and I do not accept, that the right of exoneration is itself a circulating asset.
It is convenient to deal with the appellant's two grounds separately. Before doing so, it is necessary to consider the relevant legislative provisions.
The Corporations Act
Employees have had priority over claims secured by a floating charge, now referred to as a circulating security interest, for more than a century. Granting employees priority over claims secured by a circulating security interest, as opposed to property secured by a fixed charge, has been criticised but no substantial change has been made.
The Corporations Act provides for employees' claims to have priority over the claims of secured creditors in relation to property secured by a circulating security interest both where a receiver is appointed to that property, and where a company is in liquidation. Although this appeal is concerned with the appointment of a receiver to such property, the conclusions apply with equal force to a liquidator dealing with that property, and will be relevant to other cases in which the statutory order of priority fixed by the Corporations Act intersects with assets realised through an insolvent corporate trustee's right of exoneration. For this reason, the questions raised in this appeal are significant. It is therefore necessary to set out the legislative provisions that mandate priority of employees' claims in respect of circulating security interests in relation to both receivers and liquidators.
In relation to receivers, the key legislative provision is s 433 of the Corporations Act, which requires that a receiver pay out of the "property of the company" certain debts or amounts in priority to any claim for principal or interest in respect of the debentures secured by a circulating security interest. There are relevantly two interlocking provisions - s 433(2) and (3).
Section 433(2) provides that the section applies where:
"(a) a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by a circulating security interest, or possession is taken or control is assumed, by or on behalf of the holders of any debentures of a company or registered body, of any property comprised in or subject to a circulating security interest; and
(b) at the date of the appointment or of the taking of possession or assumption of control (in this section called the relevant date):
(i) the company or registered body has not commenced to be wound up voluntarily; and
(ii) the company or registered body has not been ordered to be wound up by the Court." (emphasis added)
As is apparent, s 433(2) must be satisfied before the balance of the section is engaged. And in this appeal there was no dispute that the receivers had been appointed by the bank under debentures that were secured, at least in part, by a circulating security interest, as required by s 433(2)(a).
When s 433(2) is satisfied, then s 433(3) provides that:
"In the case of a company, the receiver or other person taking possession or assuming control of property of the company must pay, out of the property coming into his, her or its hands, the following debts or amounts in priority to any claim for principal or interest in respect of the debentures:
(a) first, any amount that in a winding up is payable in priority to unsecured debts pursuant to section 562;
(b) next, if an auditor of the company had applied to ASIC under subsection 329(6) for consent to his, her or its resignation as auditor and ASIC had refused that consent before the relevant date − the reasonable fees and expenses of the auditor incurred during the period beginning on the day of the refusal and ending on the relevant date;
(c) subject to subsections (6) and (7), next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h) or section 560." (emphasis added)
In short, where s 433(2) has been satisfied, s 433(3) is enlivened if the receiver takes possession of property of the company. The word "property" is relevantly defined in s 9 of the Corporations Act to mean:
"any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action …"
That definition is wide. Where a receiver takes possession of property of the company, the receiver must pay out of the property coming into his, her or its hands certain debts or amounts in priority to any claim for principal or interest in respect of the debentures. The reference to "the debentures" in s 433(3) is not unimportant; they are the same debentures referred to in s 433(2) and provide the basis for the application of the section. Moreover, the debentures are debentures of a company that are secured by a circulating security interest. Section 433(3) is concerned with the distribution of circulating assets, not any other property of the company, and requires payment of three categories of claims in priority to all other claims when distributing those circulating assets.
This appeal is concerned with the third priority category, that in s 433(3)(c), which concerns employee entitlements and directs attention to s 556(1)(e), (g) or (h) of the Corporations Act. Those provisions of s 556 provide:
"(1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
…
(e) subject to subsection (1A) − next:
(i) wages, superannuation contributions and superannuation guarantee charge payable by the company in respect of services rendered to the company by employees before the relevant date; or
(ii) liabilities to pay the amounts of estimates under Division 268 in Schedule 1 to the Taxation Administration Act 1953 of superannuation guarantee charge mentioned in subparagraph (i);
…
(g) subject to subsection (1B) − next, all amounts due:
(i) on or before the relevant date; and
(ii) because of an industrial instrument; and
(iii) to, or in respect of, employees of the company; and
(iv) in respect of leave of absence;
(h) subject to subsection (1C) − next, retrenchment payments payable to employees of the company."
Section 560 of the Corporations Act, also referred to in s 433(3)(c), grants the Commonwealth the same rights to priority in a winding up as the employees would have had, as follows:
"If:
(a) a payment has been made by a company:
(i) on account of wages; or
(ii) on account of superannuation contributions (within the meaning of section 556); or
(iii) in respect of leave of absence, or termination of employment, under an industrial instrument; and
(b) the payment was made as a result of an advance of money by a person (whether before, on or after the relevant date) for the purpose of making the payment;
then:
(c) the person by whom the money was advanced has the same rights under this Chapter as a creditor of the company; and
(d) subject to paragraph (e), the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid as the person who received the payment would have had if the payment had not been made; and
(e) the right of priority conferred by paragraph (d) is not to exceed the amount by which the sum in respect of which the person who received the payment would have been entitled to priority in the winding up has been diminished by reason of the payment." (emphasis added)
A parallel scheme applies in respect of liquidators by s 561(a) of the Corporations Act. That section provides for employee priority over claims of a secured party in relation to a circulating security interest, as follows:
"So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of:
(a) any debt referred to in paragraph 556(1)(e), (g) or (h) [being the employee entitlements set out above]; …
payment of that debt or amount must be made in priority over the claims of a secured party in relation to a circulating security interest created by the company and may be made accordingly out of any property comprised in or subject to the circulating security interest." (emphasis added)
The intended effect of ss 433(3)(c) and 561(a) is that where a company is in receivership or in liquidation, employees' claims will enjoy priority over the claim of a party secured by a circulating security interest, and will be paid out of the property comprised in or subject to the circulating security interest in priority to the secured creditor. The intention of ss 433(3)(c) and 561(a) is to ensure that, as has been the case historically, employees rank before creditors secured by a circulating security interest in relation to property subject to the circulating security interest, whether a company is in receivership, or is being wound up.
First ground: whether Amerind's right of exoneration, and proceeds from the exercise of that right, are "property of the company" within the meaning of s 433
The question raised by this appeal ground is whether the fact that Amerind operated as trustee of a trading trust, and could only access trust assets through its right of exoneration, took those assets (the receivership surplus) outside the scope of "property of the company" for the purposes of s 433. Put a different way, if Amerind had been conducting the business in its own right, Amerind's employees would be priority creditors under s 433(3)(c). Is the position different because Amerind conducted the business as a trustee and had a right of indemnity out of the assets of the trust to pay the employees?
The question arises in the following way. The receivers, who were appointed by the bank, discharged the bank's secured debt out of Amerind's fixed assets. What remained was, relevantly, "circulating assets" over which the bank was also secured (holding a "circulating security interest" within the meaning of s 433), namely the receivership surplus. Because the bank's debt had already been discharged out of Amerind's fixed assets, there was no need to prioritise the employees' claims over the claim for principal or interest made by the bank in respect of its debt. The question remained, however, whether s 433(3) operated on the receivership surplus such that the employees' claims took priority in respect of the receivership surplus over the claims of other creditors. Here, the appellant claimed to be a secured creditor, ranking behind the bank. Did the receivers have to pay the priority creditors specified in s 433(3) out of the relevant part of the receivership surplus before the appellant?
In relation to the first ground, the appellant and the Commonwealth each focused on the nature of the trustee's right of exoneration. They were right to do so. Its interaction with s 433 of the Corporations Act is key to the resolution of this appeal ground.
The appellant contended that s 433(3) did not mandate the payment of priority creditors out of the receivership surplus. This was because, the appellant argued, the exoneration arm of a trustee's right of indemnity, properly understood, was "no more than a right to have trust assets applied to meet trust debts" and "confers upon the trustee no interest in the trust assets themselves, or the proceeds thereof". The appellant further contended that what came into the receivers' hands when they were appointed to Amerind - the relevant "property of the company" within the meaning of s 433(3) - was the power to apply the receivership surplus to meet trust debts (in other words, a right of exoneration), rather than any proprietary interest in the receivership surplus. The appellant argued that the trustee's right or power to apply the trust fund pursuant to its right of exoneration, and the trustee's corresponding interest in the fund, could and should be separated. It followed that the receivership surplus, according to the appellant, was not "property of [Amerind]" within the meaning of s 433(3); Amerind's only "property" was its right of exoneration. That is, Amerind had no "property" in the receivership surplus and thus the receivership surplus fell outside the scope of s 433(3).
The Commonwealth argued that Amerind had a proprietary interest in the receivership surplus, and that s 433 applied to Amerind's proprietary interest in the receivership surplus as "property of the company". By implication, this argument meant that ss 556 and 561 would have applied to Amerind's proprietary interest in the receivership surplus, had the question been posed by the liquidator of Amerind.
These reasons will show that the Commonwealth's argument should be accepted.
Trustee's right of indemnity - principles
In order to show why the Commonwealth's argument should be accepted, it is necessary to first consider the origins and nature of the trustee's right of exoneration by reference to some basic principles.
A trust has no legal personality, subject, of course, to statute. It is an institution developed and recognised by equity. It is an equitable obligation binding on the trustee to deal with property for the benefit of the beneficiaries (or, in limited circumstances, a particular purpose or purposes). The trustee is personally liable for debts or liabilities incurred in the course of transactions concerning the trust. The liability of a trustee remains "emphatically personal", rather than being confined by the office of trustee. That liability arises in accordance with ordinary principles of law.
Where a trustee acting within its powers incurs a debt in the course of the administration of the trust, although the trustee is ordinarily personally liable in relation to the debt, it is entitled to indemnity out of the trust estate. If the trustee has discharged the liability out of its individual property, it is entitled to reimbursement; if it has not discharged the liability, it is entitled to apply the trust property in discharging it. That is, the trustee is entitled to exoneration. This appeal is only concerned with the right of exoneration.
The sources of the trustee's indemnity (whether in the form of exoneration or recoupment) are threefold: equity, the terms of the trust instrument and statute. In relation to the first source, even before statute empowered a trustee to be reimbursed out of trust property for expenses properly incurred, equity implied into every trust deed the same right. In relation to the other sources, all States and Territories have legislatively provided for a trustee's reimbursement and exoneration.
The trustee has an equitable charge or lien on trust property, which gives the trustee a right to retain trust property until the right of indemnity is satisfied and, if necessary, to sell that property. The scope of the trustee's indemnity (whether exoneration or recoupment) is confined to expenses which are "properly" or "reasonably" incurred. In equity, there is no direct access by the creditors to the assets of the trust. However, creditors may be subrogated to the rights of the trustee against the trust assets.
Allsop CJ, in Jones v Matrix Partners Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (In liq), addressed the right of indemnity in the form of exoneration. Allsop CJ's description was rightly accepted by the appellant. His Honour confirmed that the right of exoneration generates a proprietary interest on the part of the trustee in the trust fund as follows:
"[T]he right (in a sense personal in that it was distinct from and superior to the interests of cestuis que trust) of the trustee to use trust assets to exonerate itself arises to meet a trust liability, and can be exercised only for that purpose. The property in the hands of the trustee remains trust property, but subject to the trustee's proprietary interest that exists for the purpose of paying the creditors. The property is not held on trust for the beneficiaries alone; the proprietary interest of the trustee is preferential to the interests of the beneficiaries, but that interest of the trustee is shaped by its purpose and origins in the trust relationship - to pay trust creditors in order to exonerate itself from those debts. The character and limits of the interest are shaped by its purpose and origins. The obligation of the trustee to use the trust assets to pay trust creditors is reflected by, and provides the foundation for, the creditors' right of subrogation." (emphasis added)
The principle that the right of exoneration generates an equitable interest in the trust fund that is proprietary in nature was subsequently restated by Allsop CJ in the same decision as follows:
"Thus, in one sense, what exists can be seen to be an equitable proprietary interest or charge or lien in or over trust assets; but any enforcement by a Court of Equity is not of a security interest or a right created over the interests of the beneficiaries, but rather the enforcement by a Court of Equity of a prior proprietary interest in the trust fund to support the right of indemnity". (emphasis added)
The approach of Allsop CJ to the right of exoneration, and, in particular, his explanation that the right of exoneration generates a proprietary interest in the trust fund, was consistent with a number of decisions of this Court.
First, Octavo Investments Pty Ltd v Knight established that a trustee's right of indemnity against trust property, whether for exoneration or recoupment, for liabilities properly incurred in the performance of the trust, confers on the trustee a proprietary interest in the trust property.
Second, that principle was affirmed in Chief Commissioner of Stamp Duties (NSW) v Buckle, where the Court held that the trustee's right of indemnity (whether in the form of exoneration or recoupment) confers on the trustee a beneficial proprietary interest in the trust assets and that that interest takes priority over the interests of beneficiaries. There the Court said:
"Until the right to reimbursement or exoneration has been satisfied, 'it is impossible to say what the trust fund is'. The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the 'property' to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not 'trust assets' or 'trust property' in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries.
The entitlement to reimbursement and exoneration was identified by Lindley LJ as 'the price paid by cestuis que trust for the gratuitous and onerous services of trustees'. The right of the trustee has been described as a first charge upon the assets vested in the trustee, as one upon the 'trust assets', and as conferring upon the trustee an 'interest in the trust property [which] amounts to a proprietary interest'.
However, the starting point in the class of case under consideration is that the assets held by the trustee are 'no longer property held solely in the interests of the beneficiaries of the trust'. The term 'trust assets' may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not 'encumbered' by the trustee's right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment 'takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation'. A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the 'trust assets' which may be enforced in the same way as any other equitable charge. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee …
Accordingly, we agree with the following treatment of the matter by Sheller JA:
'… the trustee has a beneficial interest in the trust assets to the extent of its right to be indemnified out of those assets against personal liabilities incurred in the performance of the trust and that interest will be preferred to the beneficial interests of the cestuis que trust …'" (emphasis added)
Third, in the later decision of Bruton Holdings Pty Ltd (In liq) v Federal Commissioner of Taxation, this Court confirmed that a trustee's right of recoupment or exoneration is supported by a lien over trust assets which amounts to a proprietary interest therein; and in CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic), it held that (as was held in Buckle) it is not possible to identify the trust fund until account is taken of the right of exoneration.
Accepting that the trustee's right of exoneration generates a proprietary interest in the trust fund not only is consistent with the above decisions, but is consistent with the nature of the trustee's interest in the fund as a security interest in the form of an equitable lien. The general concept of a security involves a transaction where one person (the creditor), to whom an obligation is owed by another person (the debtor), is afforded, in addition to the personal promise of the debtor to discharge the obligation, rights exercisable against some property of the debtor in order to enforce discharge of the obligation. The concept involves a transaction, but the security is not the transaction, rather, it is the interest or aggregation of rights which arises from such a transaction. Such an interest is of a "proprietary" character: not necessarily in the sense of rights amounting to full ownership, but in the sense of rights available against a thing, and not merely against a person.
A number of cases have adopted imprecise language in describing the nature of the proprietary interest generated in the trust assets by the trustee's right of exoneration, referring to the right of exoneration as the proprietary interest. This imprecision generates confusion: what the Commonwealth described as a "category error". The proprietary interest generated by the trustee's right of exoneration is not the right of exoneration itself. Rather, the right of exoneration generates a proprietary interest in the trust assets. To label the right of exoneration a proprietary interest is to confuse the source of the proprietary interest with the interest itself.
As has been seen, "property" is relevantly defined in s 9 of the Corporations Act as "any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action". The trustee's proprietary interest in the trust assets, generated by the right of exoneration, clearly falls within that broad definition of "property" and thus the phrase "property of the company" used in s 433(3) of the Corporations Act.
There is, however, a further reason to reject the appellant's contentions. As stated earlier, the appellant sought to sever the right of exoneration from the trustee's corresponding interest in the trust fund. The basis for this approach was unclear, except to seek to escape the application of s 433(3). The approach should be rejected. The trustee's right of exoneration confers a proprietary interest in the trust fund which takes priority over competing interests of beneficiaries. The right of exoneration and the trustee's proprietary interest in the trust fund are inextricably linked; the trustee's interest in the fund rises and falls as debts are incurred on behalf of the trust, and satisfied out of the fund, and, of course, the right of exoneration is the basis for the existence of the trustee's fluctuating proprietary interest in the trust fund. So much is consistent with the holding of this Court in CPT that "[u]ntil satisfaction of rights of reimbursement or exoneration, it was impossible to say what the trust fund in question was".
Where a corporate trustee becomes insolvent, those principles do not change. Where s 433 applies, it operates, in its terms, on the trustee's interest in the trust fund to the extent that that interest is in circulating assets. Section 433 takes the property of the company as it finds it. Section 433 does not and cannot operate only on the source of the trustee's interest in the trust fund, namely the right of exoneration.
In addition to ignoring the breadth of the definition of "property" in s 9 and the nature of the trustee's right of exoneration as generating a proprietary interest in the fund, the appellant's first ground of appeal also ignores that historically employees have been given priority in the event of a corporate insolvency in relation to circulating assets (formerly floating assets) as set out above. This Court should be slow to attribute an intention to Parliament to create two classes of employees in insolvency: those employed by a company and those employed by a corporate trustee. The appellant put forward no principled basis for such a differentiation.
Thus, the Court of Appeal correctly held that s 433 operated on the trustee's proprietary interest in the trust fund and required the application of the statutory priority rules in s 433 to the receivership surplus.
Appellant's other arguments
The appellant identified three further matters which it contended supported its construction of s 433, and tended against the construction now adopted of that provision. None of these matters fell for determination in this appeal. However, these additional matters explain why, contrary to the submissions of the appellant, the construction adopted of s 433 (considered in light of the implications of the construction for ss 556 and 561) is a practical and sensible reading of the provision that does not generate absurd or unworkable outcomes. The answer to the issues in this appeal must recognise the wider, and different, circumstances that may and will arise in other insolvencies, particularly given the importance of trading trusts to Australia's economy.
The matters raised by the appellant were, first, the uncertainty about whether creditors generally could be paid out of the trustee's interest in the fund (the primary position of the Commonwealth) or whether only trust creditors could be paid out (the alternative position of the Commonwealth), and whether this uncertainty provided a reason to reject the Commonwealth's construction of s 433. Second, if the Commonwealth's construction of s 433 was adopted, the appellant identified two issues: how s 433 would operate on a trustee of multiple trusts; and an alleged inconsistency between the approach adopted in relation to an insolvent corporate trustee, and the position of a bankrupt trustee.
A further matter raised at the hearing must also be addressed: how costs of administration, which have priority in a winding up pursuant to s 556(1)(a) of the Corporations Act, should be distributed where there is a corporate trustee of multiple trusts. Each of the additional matters is addressed below.
Trust creditors or general creditors to be paid?
Whether general creditors are to be paid was not in issue in the appeal as Amerind only had trust creditors. However, the question was important because it spoke to the interaction between the provisions of the Corporations Act mandating that employees' claims have priority in relation to property subject to a circulating security interest, and equitable principles governing the right of exoneration.
The appellant contended that the nature of the right of exoneration mandated that only trust creditors could be paid out of the fund pursuant to the right of exoneration, and that this limitation on the nature of the trustee's interest in the fund was incompatible with the operation of s 433.
The Commonwealth adopted two positions - what it described as its primary and alternative contentions.
The Commonwealth's primary contention was that s 433 applied to Amerind's proprietary interest in the receivership surplus; but then, s 433 "swept away" the attributes of the property to which it applied, namely the limited nature of Amerind's interest in the receivership surplus. On that basis, the Commonwealth argued that Amerind's proprietary interest in the receivership surplus became "property of [Amerind]" in the hands of the receivers; and that that interest theoretically became available for distribution to creditors generally, but only in accordance with the priority rules mandated by s 433 (and in relation to liquidators, s 561). This approach was consistent with the decision in Re Enhill Pty Ltd.
The Commonwealth's alternative contention was that s 433 operated on Amerind's interest in the receivership surplus, but did not alter the limitations of that interest. Thus, the assets were only available to be applied by the receivers to meet trust debts, but only in accordance with the priority rules mandated by s 433 (and in relation to liquidators, s 561). This approach was consistent with the decisions in In re Suco Gold Pty Ltd (In liq) and of Allsop CJ in Jones.
The Commonwealth's alternative contention should be accepted.
The position is straightforward where a right of reimbursement is exercised. The trust assets that are the subject of the right of reimbursement are the trustee's personal assets, which fall into the trustee's general estate, and will be divisible among creditors of the trustee generally according to the statutory rules of priority fixed by the Corporations Act, without constraint or limitation. Relevantly to this appeal, as set out above, where a receiver is appointed to property of a corporate trustee, s 433 of the Corporations Act requires that employees' claims rank before a secured creditor in relation to the distribution of assets subject to a circulating security interest. And, as has been noted, parallel provision is made under the Corporations Act for liquidators to apply the same priority rules.
In the case of a right of exoneration, the proprietary interest of the trustee in the trust fund is shaped by its purpose and origins in the trust relationship - to pay trust creditors in order for the trustee to exonerate itself from those debts. Circulating assets which are the subject of the right of exoneration can only be applied to satisfy trust debts and are not available for distribution to creditors generally. However, that limitation does not preclude the application of the relevant statutory priority rules − here, s 433.
First, and fundamentally, s 433 of the Corporations Act does not purport to change the nature and character of property that falls under control of the receiver as property of the company. Legal restrictions inherent in property must be respected where there is no clear statutory mandate to adopt any other approach. Having regard to the breadth of the definition of "property" in s 9, if the Commonwealth's primary position were accepted (and it should not be), property held on bare trust would be property of the corporate trustee and theoretically available for distribution to all creditors.
Second, to come to a different conclusion would require the priority regime in s 433 of the Corporations Act to be interpreted as intending to alter the relationship between a trustee and beneficiaries such that the proceeds of a trustee's right of exoneration could be used to satisfy the personal liabilities of the trustee, potentially leaving trust debts unsatisfied. There is nothing in the text of s 433, or the other provisions of the priority regime in the Corporations Act, to support such an intention. Further, to find otherwise would ignore that, in equity, creditors cannot directly get at trust assets, but instead have to be subrogated to the trustee's right of exoneration.
Multiple trusts
The appellant contended that difficulties that could arise in the case of an insolvent corporate trustee of multiple trusts constituted a "powerful indication" as to why the construction of s 433 which has been adopted was not consistent with the statutory scheme, given that s 555 mandates equal treatment of debts and claims unless otherwise provided. That contention is rejected.
In accordance with the earlier legal principles, a receiver or liquidator of an insolvent corporate trustee of multiple trusts should be viewed as holding multiple funds, each directed to different groups of creditors. If Amerind had been a trustee of multiple trusts, s 433 (or s 561) would then have applied, in its terms, to each fund separately, to the extent that the fund constituted circulating assets.
That approach follows from the fact that, as has been seen, there is an inherent limitation on the proprietary rights of the trustee in a trust fund. The funds can only be applied to satisfy debts incurred to creditors of the relevant trust. As just seen, there is nothing in the text of s 433 (read with s 9) that suggests that s 433 intends to sweep away the limitations and attributes of each proprietary interest of the trustee in each trust fund.
Put in different terms, where the trustee is a trustee of multiple trusts, the attributes of the trustee's proprietary interests require that s 433 be applied separately to each fund because s 433 does not alter the nature of the assets such that the funds can be mixed and applied to meet the claims of non-trust creditors.
Of course, it must be accepted that that approach may lead to practical difficulties and expense. In such a case, equity may need to fill the vacuum left by the failure of the statute to deal expressly with multiple trust funds. An available mechanism is for a receiver to apply under s 424 of the Corporations Act, or a liquidator to apply under s 90-15 of Sch 2 to the Corporations Act ("the Insolvency Practice Schedule"), for directions from the court to seek to resolve any issues in relation to allocation between multiple trusts. What will be appropriate will vary from case to case. Hotchpot (like marshalling) is one possibility; an illustration of the maxim that equity is equality.
Indeed, Allsop CJ referred to the possibility of a liquidator or receiver applying the principles of hotchpot to multiple funds in Jones, by reference to the approach of King CJ in In re Suco Gold, which is discussed shortly. In Jones, Allsop CJ stated that:
"Complexities may arise in circumstances of multiple trusts or of trusts and activity on the corporation's own account. Considerations of, or akin to, marshalling or hotchpot may be relevant as to the payment of debts dealt with in the statutory order. But these complexities will be resolved by application of principle and the text of the legislation, in a manner reflected by the approach of King CJ in Re Suco Gold." (emphasis added)
His Honour's suggestion should be adopted in the context of the application of s 433 to a trustee of multiple trusts - the trust funds should be kept separate and, where this causes practical difficulties or expense, the receiver or liquidator can apply to the court for directions. That is, equity can fill the vacuum.
Notably, the statutory framework for a liquidator to apply for directions has changed. Prior to its repeal and the enactment of the Insolvency Practice Schedule, s 479(3) of the Corporations Act allowed a liquidator to apply to the court for directions in relation to a matter arising under a winding up. Section 90-15(1) of the Insolvency Practice Schedule now provides a source of power for the court to provide directions to liquidators, and relevantly provides that the court may make "such orders as it thinks fit" in relation to the "external administration" of a company.
Administration costs where multiple trusts or trust and non‑trust activities
A similar issue to that of multiple trusts, how costs of an administration given priority under s 556(1)(a) should be allocated where there is a trustee of multiple funds, was the subject of argument. Counsel for the appellant submitted that whatever decision the Court made had to be capable of applying in a principled way to "all scenarios that might arise in relation to a [corporate] trustee". Further, counsel for the appellant contended that there was no relevant distinction between the operation of ss 433 and 556 but argued that neither applied to a trustee's right of exoneration. Given this Court has rejected the appellant's argument that s 433 (or by implication, ss 556 and 561) cannot apply where a trustee has exercised its right of exoneration, it is necessary to address this further issue.
Section 556(1)(a) of the Corporations Act provides that in the winding up of a company "expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business" must be paid in priority to all other unsecured debts and claims. Two issues may arise. First, on what basis can the relevant authority (relevantly defined as a liquidator, provisional liquidator or administrator) be paid out of the assets of the trust fund where that relevant authority has been appointed to a trustee of a trading trust? Second, how should costs of that relevant authority, properly incurred, be distributed against assets of the trust where there is a corporate trustee of multiple funds?
In relation to the first question, the relevant authority can be treated as a trust creditor on the same basis as King CJ dealt with a liquidator's expenses in In re Suco Gold. In re Suco Gold considered s 292(1)(a) of the Companies Act 1962 (SA), which provided that costs and expenses of winding up be paid "in priority to all other unsecured debts", a provision relevantly similar to s 556(1)(a) of the Corporations Act. King CJ there stated:
"The expression 'other unsecured debts' appears to imply that the costs and expenses of winding up ... are regarded by the statute as debts of the company. As the company's obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity." (emphasis added)
King CJ went on to state:
"On these principles which I have discussed, the liquidator is entitled to have recourse to the property of each trust for the purpose of meeting the costs and expenses of winding up, the petitioner's costs and the liquidator's remuneration, so far as they are incurred in relation to each trust. As there are no non-trust assets or liabilities, all the expenses are attributable to one or other of the trusts and must be apportioned between them. The liquidator will be able to make an estimate of the work and expense involved in the liquidation so far as it relates to each trust. Where no apportionment is possible, the maxim that equality is equity should provide the solution to the problem of apportionment." (emphasis added)
There is no reason why the approach of King CJ should not be extended to apply to an administrator or provisional liquidator of a trustee of a trading trust: their expenses should be regarded as debts of the corporate trustee which would have priority under s 556(1)(a) of the Corporations Act as expenses incurred in preserving, realising or getting in property of the company.
Further, distribution of those expenses between multiple trusts with a single trustee should adopt the approach of King CJ set out above. The expenses of the winding up could be apportioned across each trust on the basis of the extent to which the work of the relevant authority related to each trust. However, if apportioning the expenses across the multiple trusts created practical difficulties, the relevant authority (namely, the liquidator, provisional liquidator or administrator) should apply to the court for directions in relation to their costs. The statutory basis for the liquidator to apply to the court for directions has been set out above. Administrators, of course, have a further option under s 447A in Pt 5.3A of the Corporations Act to apply to the court for directions. Adopting and adapting what Allsop CJ said in Jones, these complexities, as well as others, can and will be resolved by application of principle and the text of the legislation, in a manner reflected by the approach of King CJ in In re Suco Gold.
Bankruptcy
At the hearing of the appeal, the appellant submitted that if s 433 of the Corporations Act were found to apply to proceeds of the trustee's right of exoneration, this would create a distinction between the treatment of a corporate trustee in insolvency and a trustee in bankruptcy. The appellant contended that, given trust property could not be applied to meet the debts of a bankrupt, then the same approach should apply in relation to a corporate trustee. That contention should not be accepted. The right of exoneration and the proprietary interest generated in the fund means that the "trust property" in which the trustee has an interest ceases to be aptly described as property "held on trust" but instead is property of the trustee subject to limitations as to use. So much was made clear in Buckle.
It follows that there is no apparent inconsistency between the corporate insolvency priority regime and s 116(2)(a) of the Bankruptcy Act 1966 (Cth), which provides that property held by a bankrupt in trust for another person is not property divisible amongst the creditors of the bankrupt. In Lane v Deputy Commissioner of Taxation, Derrington J held that money to be paid from trust assets to trust creditors could not be characterised as "proceeds" within the scope of the phrase "proceeds of the property of the bankrupt" as that phrase is used in ss 108 and 109(1) of the Bankruptcy Act. That conclusion is wrong.
Conclusion
The first appeal ground must fail.
Second ground: whether an insolvent corporate trustee's right of indemnity is comprised in or subject to a "circulating security interest" within the meaning of s 433
The appellant's contention in relation to this ground was that an insolvent corporate trustee's right of indemnity falls outside the ambit of property secured by a "circulating security interest" or "comprised in or subject to a circulating security interest" under s 433(2)(a). The second appeal ground fails because it proceeds on a misconstruction of s 433(3).
Section 433(2) relevantly states that the provision applies where a receiver is appointed on behalf of the holder of a debenture secured by a circulating security interest. That condition was satisfied in this appeal. It is then necessary to consider s 433(3). Section 433(3) only applies to circulating assets. The only concern of s 433(3) was and remains the application of the priority rules to those circulating assets. There is no requirement that the right of indemnity constitute a circulating asset.
Again, it is necessary to start with the statute.
In addition to s 433(3) of the Corporations Act, which has been extracted earlier, two further legislative provisions must be considered.
Section 51C of the Corporations Act provides that a "circulating security interest" means a security interest that is:
"(a) a PPSA security interest, if:
(i) the security interest has attached to a circulating asset within the meaning of the Personal Property Securities Act 2009; and
(ii) the grantor (within the meaning of that Act) has title to the asset; or
(b) a floating charge." (emphasis added)
The definition of "circulating asset" is to be found in the Personal Property Securities Act 2009 (Cth). Section 340 of that Act relevantly provides that "if a grantor grants a security interest in personal property to a secured party, the personal property is a circulating asset if ... the personal property is covered by subsection (5) (unless subsection (2) or (3) applies)" (second emphasis added). Among the personal property listed in s 340(5) are an account that is the proceeds of inventory and an authorised deposit-taking institution (bank) account.
As has been observed, the Court of Appeal held that the first requirement of s 433(2)(a), that a receiver be appointed by a holder of a debenture secured by a circulating security interest (as defined in s 51C), was satisfied and this conclusion was not challenged by the appellant.
However, the Court of Appeal also held that s 433(2) contained a second requirement before the section could apply, namely, the property to be distributed had to be subject to a circulating security interest. The Court accepted an argument put forward by the Commonwealth, for the first time in that Court, that the second requirement was satisfied on the basis that, because the right of indemnity gives the trustee a proprietary interest in the trust assets, the relevant question was which, if any, of those assets were circulating assets and therefore subject to the priority rules in s 433(3). It was not necessary that the means by which the property was available to pay the company's creditors was itself subject to a circulating security interest. The Court of Appeal said that if it was wrong in relation to that finding, then to the extent that the trust assets were circulating assets, that description befitted the right of indemnity, which was a means of recourse to those same assets.
On appeal to this Court, the appellant argued, consistently with its argument in relation to the first ground, that the relevant property in issue (the "property of the company") was the right of indemnity itself, not any underlying interest in the receivership surplus. The appellant maintained that the right of indemnity itself had to be comprised in or subject to a circulating security interest as defined by s 51C for s 433 to apply.
The Commonwealth submitted that where the requirements of s 433(2)(a) are met, as they had been, s 433 did not contain any further relevant provisions restricting its application. During the course of oral argument, counsel for the Commonwealth correctly accepted that s 433 only applies to property subject to a circulating security interest but submitted that it was not necessary for the right of indemnity to constitute property subject to a circulating security interest. That submission should be accepted.
There is no provision requiring the trustee's right of exoneration itself to constitute a circulating asset and, of course, the right is not a circulating asset. It is a fixed asset. Moreover, the text of s 433 does not require, and provides no basis to find, that the "gateway" to reach the circulating assets - the right of exoneration - must itself be a circulating asset. There were only two questions: did s 433(2) apply and, if so, did the receivers hold circulating assets to which s 433(3) required the application of certain priority rules. Here, of course, s 433(2)(a) was satisfied and the receivers held circulating assets in the form of the receivership surplus.
It follows that the second ground of appeal must also fail.
Conclusion and orders
The appeal should be dismissed with costs.