Trust assets in a winding up
47 In the end, this case primarily concerns the respective rights of the Commissioner and the liquidators to apply trust assets, namely the moneys held by Piper Alderman, in paying, in the one case, Bruton's tax liability, and, in the other, the liquidators' expenses, costs and remuneration. The extent to which trust assets may be applied in payment of the debts of an insolvent corporate trustee has been a matter of some dispute. In the course of argument considerable attention was given to the apparently conflicting decisions in, on the one hand, Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394, Re Byrne Australia Pty Ltd (No 2) [1981] 2 NSWLR 364 and Re Suco Gold Pty Ltd (1983) 33 SASR 99 and, on the other, Re Enhill Pty Ltd [1983] 1 VR 561. Re Byrne involved the winding up of a company which had carried on business as a trustee and no other business. Concerning the decision of the High Court in Octavo Needham J said at 398:
There is no suggestion in the case that there were any creditors other than creditors of the trust business and there was certainly no suggestion that the "proprietary interest" which the trustee had in the trust fund was property divisible among the creditors other than those who were subrogated to the trustee's right of indemnity. In other words, the case is not authority for the proposition that, where a trustee company carries on business with a trust fund that incurs liabilities and then is wound-up, the whole of the trust fund is property divisible amongst all the company's creditors, whether trust creditors or not. The right of indemnity arises only because the trustee is liable to creditors whose debts arose because of its activities as trustee of the fund. If there is no right of indemnity, there is no "proprietary interest". For example, if a company, having various powers including a power to act as trustee, carries on business on its own account as well as in its capacity as a trustee, it would have no right of indemnity out of the assets of the trust for liabilities it incurred in the business it carried on on its own account, and the creditors of that business would have no right to look to the trust assets for payment of their debts by subrogation to the company's rights.
48 Re Byrne was primarily concerned with whether or not the costs and expenses of the liquidator of the trustee company could be paid out of trust assets. Of this matter Needham J said at 399:
For the above reasons, I am of the opinion that the assets of the company should be utilized in the payment of those creditors who can properly be called trust creditors. If the liquidator wishes to submit that he is one of such creditors, then evidence should be filed to support such a claim and further argument can be had.
49 The next case in temporal sequence was the decision of the Full Court of the Supreme Court of Victoria in Re Enhill. The Court was again concerned with the winding up of a company which had not carried on business other than as trustee and had no assets other than trust assets. The case concerned the entitlement of the liquidator to recoup from trust assets his expenses, costs and remuneration and the costs of the petitioning creditor. Young CJ referred to Octavo and to the proposition that a trustee's right of indemnity is an asset of the trustee company in its winding up. His Honour observed:
No limitation was expressed upon the purposes for which the trustee in bankruptcy or the liquidator might apply the proceeds of the right. Moreover, the reasoning of the majority of the High Court and the authorities upon which their Honours rely suggest that no limitation was intended. In Jennings v Mather … which was one of those authorities, it was held that a trustee's right of indemnity or his lien over the assets of the trust passed to his trustee in bankruptcy … . In these circumstances to hold that a trustee in bankruptcy could only apply the proceeds of the right of indemnity towards some only of the bankrupt's creditors, viz creditors of the trust business, would deny the very purpose of the right to indemnity which is to exonerate the trustee's personal estate. In a case like the present therefore the proceeds of the trustee's lien are available for division among the bankrupt's creditors generally, not only among creditors of the trust business, and in the case of a company in liquidation are subject to the control of the liquidator … .
50 The decision in Jennings v Mather [1901] 1 QB 108 seems not to support that proposition. The case concerned an insolvent trustee, but all creditors appear to have been trust creditors. Young CJ's observation that to limit availability of the indemnity to trust creditors would deny the purpose of the right to indemnity might well be correct if the trustee has paid the relevant debt. In that case, any amount recovered by way of an indemnity would be an asset of the trustee in its own right and have nothing to do with the trust. However the position is not so clear where the trustee has not paid the debt. His Honour went on to observe that where the trustee's indemnity is derived from a party "who is concerned with the application of the money which he pays" the situation may be otherwise. His Honour then referred to In re Law Guarantee Trust and Accident Society Ltd: Liverpool Mortgage Insurance Company's Case [1914] 2 Ch 617 per Buckley LJ at 633. His Lordship there said:
The equitable doctrine is that the party to be indemnified can call upon the party bound to indemnify him specifically to perform his obligation, and to pay him the full amount which the creditor is entitled to receive, and that whether having received it he applies it in payment of that creditor or not is a matter with which the party giving the indemnity is not concerned. In such a case the party indemnified is entitled to receive 20s. in the pound, and, having got it, to deal with as he thinks proper. The case is otherwise where the party giving the indemnity is concerned with the application of the money which he pays. This was the case in In re Richardson. The wife who was bound to indemnify was there concerned in seeing that the money which she paid went to the lessor so as to relieve the property of which she was beneficial owner from the consequences of non-payment of rent and damages for breach of covenant.
His Lordship also referred to Cruse v Paine (1868) 6 Eq 641 and In re Perkins [1898] 2 Ch 182. We do not understand the reasoning in any of those cases to support the proposition advanced by Buckley LJ. His Lordship seems only to have been suggesting a basis for explaining their apparent inconsistency with that proposition. The proposition is superficially surprising but flows from the fact that the trust assets will not otherwise be liable for the debt, it being the debt of the trustee.
51 We turn to the decision of the Full Court of the Supreme Court of South Australia in Re Suco Gold Pty. Once again the case concerned an insolvent corporate trustee, its debts being solely trust debts. The question was again the entitlement of the liquidator to recover his expenses, costs and remuneration from trust assets. King CJ summarized the decision in Re Enhill and observed that there was a conflict of judicial opinion evidenced by the decisions in In Re Richardson [1911] 2 KB 705 and Liverpool Mortgage Insurance Company's Case. His Honour understood the conflict to concern the entitlement of a trustee to appropriate trust funds in exercise of its claim to indemnity out of trust debts, without first paying such debts. King CJ referred to the basis adopted by Buckley LJ for distinguishing the former case, namely the beneficiary's interest in protecting a trust asset. His Honour pointed out that the relevant lease had, in fact, expired, so that it could not be said that the beneficiary had any interest in protecting it. King CJ continued at 105:
I cannot escape the conviction that if a trustee, or his trustee in bankruptcy, or liquidator in the case of a trustee company, is permitted to use trust property, not for the discharge exclusively of liabilities incurred in the performance of the trust, but in the discharge of other liabilities as well, the money is being used for an unauthorized purpose and is being used, moreover, for the benefit of the trustee, and of third parties, namely the non-trust creditors.
52 At 107-108 his Honour said:
The right of indemnity, it is true, exists for the trustee's own benefit and it passes to the trustee in bankruptcy or the liquidator. The proceeds of that right of indemnity are therefore part of the estate divisible among the creditors. It seems to me, however, that the right of indemnity can only produce proceeds for division among the creditors generally if the trustee has discharged the liabilities incurred in the performance of the trust and is therefore entitled to recoup himself out of the trust property. If he has not discharged the liabilities, the right of indemnity entitles him to resort to the trust property only for the purpose of discharging those liabilities. He may apply the trust moneys directly to the payment of the trust creditors or he may take it into his own possession for that purpose. If he takes trust property into his possession to satisfy his right to be indemnified in respect of unpaid trust liabilities, it seems to me that that property retains its character as trust property and may be used only for the purpose of discharging the liabilities incurred in the performance of the trust. The exercise of the right of indemnity is for the benefit of the trustee in that it relieves him of liability for the trust debts. If the trustee is bankrupt, or being a company is in liquidation, the trustee in bankruptcy or liquidator can exercise the right of indemnity which vests in him as part of the property of the bankrupt or insolvent company. If the trust liabilities have been discharged, the trustee in bankruptcy or liquidator is entitled to recoup the bankrupt estate out of the trust property and the proceeds of the right of indemnity become part of the property divisible among the creditors. If the liabilities have not been discharged, the trustee in bankruptcy or liquidator may, by reason of the right of indemnity which vests in him, apply the trust property to the payment of the trust liabilities, thereby exonerating the bankrupt estate to the extent of the value of the available trust assets. In the latter circumstances there cannot be proceeds of the right of indemnity which are available for distribution among the general body of creditors.
53 Notwithstanding this rejection of the reasoning in Re Enhill, King CJ concluded that the liquidator could recover the costs and expenses of the liquidation. After referring to the fact that in Re Enhill the Court had ordered that the liquidator's costs, expenses and remuneration be paid out of trust property, his Honour continued at 110:
There are clearly strong practical considerations in favour of such a course. Unless that course can be followed, the liquidation of a trustee company without assets of its own cannot proceed. It seems to me that that course can be justified by reference to the obligations of the trustee company arising out of the carrying on of the business authorized by the trusts. It is part of the duty of the trustee company to incur debts for the purpose of the trust businesses and, of course, to pay those debts. Upon winding up those debts can only be paid in accordance with the provisions of the Companies Act. This requires necessarily that there be a liquidator and that he incur costs and expenses and be paid remuneration. Section 292 provides that there be paid the costs and expenses of winding up, the taxed costs of the petitioner and the remuneration of the liquidator "in priority to other unsecured debts" (emphasis mine). The expression "other unsecured debts" appears to imply that the costs and expenses of winding up, the petitioner's costs and the liquidator's remuneration 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. If that reasoning is wrong, I would, like Lush J in Re Enhill Pty Ltd, be prepared to rely on the principle enunciated by Dixon J in In Re Universal Distributing Co Ltd (1933) 48 CLR 171 at 174-175.
[original emphasis]
54 The "principle" enunciated by Dixon J seems to have been that if a liquidator has gone to the trouble and expense of getting in assets, those who benefit from such conduct should pay for it as they would have done had they, themselves, performed it.
55 In Ramsay v National Australia Bank Ltd [1989] VR 59 the Full Court noted that the decision in Enhill had been criticized but found it unnecessary to consider its correctness. See also Nolan v Collie (2003) 7 VR 287 at 313. Enhill was followed by McLelland J in Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 but not followed by his Honour in the subsequent decision of Re ADM Franchise Pty Ltd (1983) 7 ACLR 987. In that case his Honour followed Suco. In Re Matheson (1994) 49 FCR 454 a single Judge of this Court applied Suco. The Honourable BH McPherson, speaking extra-curially, favoured the approach in Suco to that in Enhill. See Finn (ed), Essays in Equity (1985), p 153, 154. In the same volume (at 249-50) Sir Anthony Mason observed that the decision in Enhill looked "distinctly fragile". In his essay Unsecured Borrowings by Trustees of Commercial Trusts (10 Australian Bar Review 248 at 249-50), JD Merralls QC observed, concerning the question presently under review "Upon this point Re Enhill Pty Ltd has few supporters: The present Chief Justice of the High Court has written extra-judicially that its reasons 'look distinctly fragile'."
56 The text book writers have taken similar views. See Gronow MGR, McPherson's Law of Company Liquidation at [11.120]. See also Heydon JD and Leeming MJ, Jacobs' Law of Trusts in Australia (7th ed) at [2114]. The learned author of McPherson submits that:
Assets held by the company on trust, although not available for the purposes of winding up, are nevertheless subject to the control of the liquidator acting through the company in the place of the directors. Moreover, the creditors of a trustee company the debts of which were incurred in the administration of the trust are entitled to be subrogated to the trustee company's claim to an indemnity out of the assets of the trust. The assets that are available in this way to the creditors by subrogation are not assets available for distribution among the general creditors of the company.
In the absence of any statutory provision regulating the administration of trusts of which the company is the trustee, the liquidator is expected to act in a responsible way in the administration of the trust in the name of the company. This duty does not necessarily require the liquidator in all cases to apply to the court for the appointment of a new trustee. Indeed, it is this involvement in the administration of the trust and the winding up of the trustee company that forms the basis of the liquidator's claim to be subrogated to the trustee company's right of indemnity from the trust assets in respect of remuneration, costs and expenses. Only where the liquidator's costs and expenses are necessarily incurred in performing the company's duties as trustee will it be possible for the liquidator's costs and expenses to be recouped from the trust assets.
57 The learned authors of Jacobs submit that Byrne and Suco are correct and that Enhill is incorrect. However, as to the liquidator's costs, expenses and remuneration, they say, relying on Suco and other cases:
Where the trustee of a trading trust is in liquidation, the liquidator's costs, expenses and remuneration may be paid out of trust assets, because the trustee's obligation to pay debts can only be performed, after the liquidation has commenced, through the liquidator, whose right of remuneration is to be regarded as a debt incurred in performing the duties of the trustee.
58 This view differs from that expressed in McPherson. Note also the treatment of the matter in the 6th edition of Jacobs (RP Meagher and WMC Gummow), at [2114].