Commonwealth v Byrnes and Hewitt [2018] VSCA 41

TRUSTS AND TRUSTEES - Insolvency - Insolvent corporate trustee - Right of indemnity in respect of trust assets - Nature of trustee's interest - Nature of trust creditors' rights of subrogation - In re Richardson; Ex parte The Governors of St Thomas's Hospital [1911] 2 KB 705 and Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 considered.

CORPORATIONS - External administration - Winding up and receivership - Distribution of surplus - Company operated as trading trust - Application of priority regime in Corporations Act 2001 (Cth) s 433 - Where property of company includes trustee's right of indemnity in respect of trust assets - Whether necessary for right of indemnity to be subject to circulating security interest - Whether right of indemnity subject to circulating security interest - Right of indemnity characterised by trust assets available to satisfy it - Trust assets subject to circulating security interest to be treated under priority regime - Corporations Act 2001 (Cth) ss 51C, 433(2)-(3), Personal Property Securities Act 2009 (Cth) ss 8(1), 340.

CORPORATIONS - External administration - Winding up and receivership - Distribution of surplus - Company operated as trading trust - Application of priority regime in Corporations Act 2001 (Cth) s 433 - Relevant date for ascertaining whether property subject to circulating security interest - Whether date of creation of security interest or date of receivers' appointment - Corporations Act 2001 (Cth) s 433 - Re Forge Group Ltd (recs and mgrs apptd) (in liq) (2017) 118 ACSR 434; Re CMI Industrial Pty Ltd (in liq) [2016] 1 Qd R 241 considered.

SECURITIES - 'Circulating asset' - Whether property circulating asset under Personal Property Securities Act 2009 (Cth) s 340 - Relationship between sub ss (1)(a) and (b) - Meaning of 'in any other case' in sub-s (1)(b) - Whether sub-s (1)(b) applicable if property excluded as circulating asset under sub-ss (1)(a) and (2) - Whether sub-s (1)(b) applies to assets covered in sub-s (5) - Corporations Act 2001 (Cth) s 51C; Personal Property Securities Act 2009 (Cth) ss 31, 340, 341, 341A.

WORDS AND PHRASES - 'property of the company' - 'circulating security interest' - 'circulating asset' - 'in any other case'.

For the Applicant in S APCI 2017 0051 and the First Respondent in S APCI 2017 0070

For the Third Respondent in S APCI 2017 0051 and the Applicant in S APCI 2017 0070

For the First Respondents in S APCI 2017 0051 and the Second Respondents in S APCI 2017 0070

1 This proceeding concerns the operation of s 433 of the Corporations Act 2001 (Cth). Relevantly, s 433 provides that a receiver appointed on behalf of a debenture holder that is secured by a 'circulating security interest' must pay out of the property coming into his, her or its hands debts in accordance with the statutory priorities provided for by s 556 of the Corporations Act.

2 The issues now before this Court fall into two parts. The first part concerns the issue of how a corporate trustee's right of indemnity from trust assets is to be dealt with in insolvency, and whether the insolvent corporate trustee's right of indemnity is property of the company within the meaning of s 433. The second part concerns the issue of whether relevant assets fall within the ambit of property which is secured by a 'circulating security interest'. The two parts are largely discrete.

Part 1: The insolvent corporate trustee's right of indemnity

3 The facts relevant to the issues raised in this part are not in dispute. 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'). Amerind had secured facilities with the Bendigo and Adelaide Bank ('the bank').

4 On 11 March 2014, following a notice from the bank on 6 March 2014 demanding repayment and terminating the facilities, Amerind's sole director appointed Brent Leigh Morgan, James Marc Imray and Geoffrey Philip Reidy of Rogers Reidy ('the administrators') as joint and several administrators to Amerind pursuant to s 436A of the Corporations Act. On 11 March 2014, the bank appointed Matthew James Byrnes and Andrew Stewart Reed Hewitt as receivers and managers ('the receivers').

5 The receivers continued to trade, operating Amerind's business while there was sufficient stock in order to sell it as a going concern. On 14 April 2014, the receivers ceased to trade as usual and went into a 'wind down mode', realising the remaining stock. Having realised most of the assets, the receivers were in a position to retire. The administrators, who had a limited indemnity from the bank for their remuneration, costs and expenses, were granted an extension of the convening period. On 13 August 2014, at the second meeting of Amerind's creditors, the creditors resolved that Amerind be wound up and that the administrators be appointed joint and several liquidators.

6 Amerind's liability to the bank was repaid through the bank's realisation of its securities.

7 The Commonwealth of Australia advanced accrued wages and entitlements totalling $3.8 million to Amerind's former employees pursuant to a statutory scheme known as the Fair Entitlements Guarantee Scheme. The Commonwealth payments did not meet employee claims in full. Employee claims have priority under s 556 of the Corporations Act. Pursuant to s 560 of the Corporations Act the Commonwealth has the same rights to priority in a winding up as the employees would have had.

8 After providing for their own estimated remuneration, the receivers held a net surplus of $1,619,018 ('the receivership surplus').

9 The receivers sought directions on a number of questions, and the parties formulated an agreed list of issues.

10 The primary judge articulated the issues relevant to this part of the proceeding as follows:

(1) Are the receivers justified in proceeding on the basis that the receivership surplus (or any part of it) is properly characterised as trust property, that is property held on trust?[1]

(2) If the receivership surplus (or any part of it) is trust property, are the receivers justified in proceeding on the basis that the priority regime in ss 433(3), 556 and 560 of the Corporations Act applies to the proceeds of the various assets constituting the receivership surplus, insofar as those assets were, as at the date of the receivers' appointment, also circulating assets of Amerind within the meaning of s 340 of the Personal Property Securities Act 2009 (Cth) ('the PPSA') and s 51C of the Corporations Act?[2]

11 The Commonwealth contended, in substance, that the receivership surplus was not trust property and that it should be applied in accordance with the priority regime provided for by ss 433, 556 and 560 of the Corporations Act. Before the primary judge, the receivers supported that position. On the application for leave to appeal, the receivers did not take a position on this issue, and only sought to be heard on any relief or orders to be made.

12 The Commonwealth's position was opposed by a creditor, Carter Holt Harvey Woodproducts Australia Pty Ltd ('CHH'), which contended that the Commonwealth was not entitled to priority because s 433 did not apply.

13 The primary judge held that s 433 did not apply to the receivership surplus. The Commonwealth now seeks leave to appeal. The leave application was heard on the basis that if leave were granted the consequent appeal would be determined forthwith.

14 Amerind as trustee of the trust is entitled to be indemnified out of the trust assets for the liabilities it incurred as trustee. In this case all of the liabilities incurred by Amerind were incurred in its capacity as trustee, and all the assets held were assets of the trust. As the liabilities exceed the assets, the beneficiaries' interest has been entirely supplanted by Amerind's right of indemnity.

15 The issue of how a corporate trustee's right of indemnity is to be dealt with upon a winding up, or where s 433 applies, is one of long standing controversy. Judgments of first instance and intermediate appellate courts have reached divergent conclusions. There have been High Court judgments on related issues which are significant.

16 In large part the relevant issue comes down to this: does the statutory insolvency regime apply to the distribution of assets which are subject to a right of indemnity held by an insolvent corporate trustee, and, if so, how, if at all, do trust principles apply in that situation?

17 Before attempting an analysis of the applicable authorities which are directly on point it is necessary to clarify the nature of trust liabilities, the nature of a trustee's right of indemnity and creditors' subrogation, to say something about the statutory insolvency regime, to address the nature of a preferential payment under the statutory insolvency regime (because that is critical to an understanding of a High Court judgment of significance in the context, Octavo Investments Pty Ltd v Knight[3]) and to then address Octavo and other relevant High Court authorities since Octavo in some detail.

18 We will then turn to the authorities prior to the primary judge's decision addressing the relevant issues more directly, the primary judge's decision, the submissions made on this application, and a further first instance judgment delivered since we heard argument on this application, being Lane (Trustee), Re Lee (Bankrupt) v Deputy Commissioner of Taxation.[4]

19 Thus, this Part 1 proceeds under the following headings:

• Nature of trust liabilities
• Nature of the trustee's right of indemnity and creditors' subrogation.
• The statutory insolvency regime.
• Nature of a preference.
• Octavo.
• High Court decisions since Octavo.
• Cases on indemnity and insolvency before the primary judgment.
• Decision of the primary judge.
• Submissions on the application for leave to appeal.
• Lane.
• Analysis - Part 1.
• Conclusions - Part 1.

20 A trustee who, in discharge of a trust, enters into business transactions is personally liable for any debts that are incurred in the course of those transactions.

21 Whilst reference is often made to 'trust creditors' and 'trust debts', there is no legal entity which is liable for any such debt other than the trustee, and such creditors have no debtor other than the trustee. They are not owed anything by 'the trust'.

22 Subject to the terms of any instrument creating the trust, the trustee is entitled to be indemnified from the trust assets against liabilities properly incurred. The trustee has a charge or lien over the trust assets for the purpose of enforcing that indemnity. In some circumstances creditors of the trustee whose debts were incurred in discharge of the trust may be subrogated to the trustee's rights.

Nature of the trustee's right of indemnity and creditors' subrogation

23 A trustee's right of indemnity may take the form of recoupment or reimbursement for trust debts paid by the trustee, or exoneration in relation to trust debts not yet paid.

24 One classic statement articulating the trustee's right of indemnity for obligations incurred in performance of the trust is that of Stirling J in Re Blundell; Blundell v Blundell[5] Stirling J said:

What is the right of indemnity? I apprehend that in equity, at all events, it is not a right of the trustee to be indemnified only after he has made the necessary payments to his solicitor, or to the auctioneer, or to the stockbroker - but that he is entitled to be indemnified, not merely against the payments actually made, but against his liability.[6]

25 Section 36(2) of the Trustee Act 1958 provides:

A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers.

26 In Vacuum Oil Co Pty Ltd v Wiltshire,[7] Dixon J described the right of indemnity and creditors' rights of subrogation as follows:

The liabilities the executor incurs in carrying on the business are his personal debts and give the creditors to whom he has incurred them no direct right of recourse to the assets of the estate. But, if the executor has acted under some authority binding upon those who otherwise would be entitled to the assets, their claims are subject to his right to be indemnified out of the assets in respect of liabilities he has incurred in the proper performance of his duties or exercise of his powers. He has a lien over the assets which takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation. But the claims of creditors of the deceased, whose rights are, of course, independent of his will, cannot be postponed so as to rank behind this lien, except by their own act or conduct. Although the executor's creditors to whom he has become indebted in the course of carrying on the business have no direct claim upon the assets, because they deal with him on the footing of his personal liability, yet in equity they may be subrogated to his right of indemnity or lien. The principle is stated in a few words by Turner LJ in Ex parte Edmonds: - 'The executor or trustee directed to carry on the business having the right to resort for his indemnity to the assets directed to be employed in carrying it on, the creditors of the trade are entitled to the benefit of that right, and thus become creditors of the fund to which the executor or trustee has a right to resort'.

But the creditors of the trade carried on by the executor must, as in all other cases of subrogation, depend upon his rights, and in that sense their claims upon the assets of the estate are indirect. This is well shown by the example of an executor who, through his wrongful act, has lost his right of indemnity or has disentitled himself to an indemnity except on terms of making good a loss to the estate. In such a case the creditors of his trade can have no better right.[8]

27 In the ordinary case a trustee's right of indemnity does not require some particular authority 'binding upon those who otherwise would be entitled to the assets'. Dixon J added that element to his description because of the particular facts in Vacuum Oil which concerned a deceased estate and which are not of present relevance.

28 The idea that creditors who had dealt with a trustee might have recourse other than to the personal liability of the trustee, that is, that they might have recourse to the assets of the trust, only emerged during the early part of the 19th century. In 1802 in Worrall v Harford[9] Lord Eldon considered that a finding that creditors might have a claim upon the trust fund itself because the trustees were entitled to be indemnified for charges and expenses would be 'a most mischievous determination'.[10] Then, two years later, in Ex parte Garland[11] Lord Eldon was prepared to accept that creditors of an executor who had used estate assets to trade had, in addition to the personal responsibility of the individual, 'something very like a lien upon the estate embarked in the trade'.[12]

29 By the time Re Johnson; Shearman v Robinson[13] was decided in 1880 the capacity of trust creditors to be subrogated to the trustee's right of indemnity was established, but it is important to note the basis upon which that right had evolved. Jessel MR referred to the trust creditor's 'first right', which was the personal liability of the trustee, and his 'second right' which was a right to be put in the trustee's place against the trust assets. Jessel MR said:

The second right is a mere corollary to those numerous cases in Equity in which persons are allowed to follow trust assets. The trust assets having been devoted to carrying on the trade, it would not be right that the cestui que trust should get the benefit of the trade without paying the liabilities ...[14]

30 A little later, explaining the rule that the creditors could not have any better right than the trustee, Jessel MR said:

[T]he injustice to be avoided is the injustice of the cestui que trust walking off with the assets which have been earned by the use of the property of the creditor: but where the cestui que trust does not get that benefit, there is no injustice as between him and the creditors, and there is no reason for the Court interfering at the instance of the creditors to give them a larger right than that they bargained for, namely, their personal right against the trustee.[15]

31 The circumstance of the beneficiary not getting the benefit, to which Jessel MR was referring, was a circumstance where the trustee had for some reason lost or compromised the right of indemnity. If the trustee had no right of indemnity because of a breach of trust or for some other reason, subrogation was not appropriate because the beneficiaries were not taking the benefit yielded to the trust estate by the obligations undertaken by the trustee without that trust estate appropriately bearing those obligations.

32 In Jennings v Mather[16] Kennedy J held that a trustee's lien passed to his trustee in bankruptcy, so that the trustee in bankruptcy would defeat the claim of an execution creditor in relation to trust property on an interpleader. Kennedy J said:

Now, it seems to me that the carrying on of a business of this kind gave an equitable lien, and I cannot see why that lien should not have passed to the trustee in bankruptcy of the person carrying on such a business. No doubt the property of the trust estate cannot be said to be property divisible among the creditors, yet it is property over which the bankrupt had a lien. Every trade creditor who has a personal right in this case against Mather, and has the right to prove against Mather's estate in the bankruptcy in respect of debts incurred by Mather in the course of carrying on this business, has also a right through Mather to a satisfaction of that lien which Mather had over what is in one sense, no doubt, trust property. It seems to me that the lien has passed to the trustee in bankruptcy, and I think that judgment should be given in his favour.[17]

33 On appeal, the English Court of Appeal affirmed the judgment of Kennedy J.[18]

34 In Re Frith; Newton v Rolfe[19] Kekewich J described the unpaid trust creditor's rights as follows:

The [unpaid trust creditor] has no right whatever against the estate, but he has a right to sue the trustee who has incurred the debt. If the trustee on his part has a clear account, and has a right of indemnity against the estate, the creditor is subrogated to that right, and for that purpose the creditor is allowed to intervene. He may sue the trustee, and he may claim the benefit of the indemnity to which the trustee is entitled out of the estate.[20]

35 In Savage v Union Bank of Australia Ltd[21] the High Court (Griffith CJ, Barton and O'Connor JJ) expressly endorsed Kennedy J's judgment in Jennings v Mather. The High Court held that the trustee's lien vested, on the trustee's insolvency, in the trustee's trustee in bankruptcy and augmented the trustee's insolvent estate. Griffith CJ explained that '[t]he goods themselves did not pass because they are trust assets, but the right of indemnity was a right which would pass...' and become available to the trustee in bankruptcy.[22]

36 In The Governors of St Thomas's Hospital v Richardson,[23] the English Court of Appeal essentially adopted the same analysis as Kennedy J in Jennings v Mather. The Court of Appeal held that where a trustee held the legal estate to a lease that legal estate and the right to possession would vest in the insolvent trustee's trustee in bankruptcy to secure the insolvent trustee's right of indemnity.

37 In Governors of St Thomas Fletcher Moulton LJ pointed out that (in that case) the cestui que trust was bound to indemnify the trustee for the sums that he had to pay and that the trustee was entitled to retain and deduct those sums from the rents and profits of the trust property. He referred to the provision of the bankruptcy legislation which excluded from property divisible amongst creditors property held on trust for any other person. Fletcher Moulton LJ then said:

The meaning of the provision is therefore evident; it is that property held by the bankrupt does not go to form part of his divisible estate, if and so far as he holds it in trust for another person. But as far as the bankrupt has a beneficial interest in property it passes to his trustee to form part of his divisible estate, and this none the less because the balance of the property is held by the bankrupt in trust for others. The trustee in bankruptcy will take the same position in respect to the property as the bankrupt; he will hold it on the same trusts and be entitled to the same beneficial interest and no more.[24]

38 The same estate was subject to another decision of the English Court of Appeal in In re Richardson; Ex parte The Governors of St Thomas's Hospital.[25] In that case the Court of Appeal held, in relation to the same lease, that the only use to which the trustee could put the right of indemnity, when he had not already paid the relevant debt, was 'to pass the money on to the head creditor'. Fletcher Moulton LJ said:

That is exactly consistent with justice. It would not be right for a trustee to obtain money from this right to be indemnified against payments made to the head creditor when he not only has not made those payments but comes here to say that he does not intend so to do. Therefore I come to the conclusion that, as a general principle, an indemnity like this can be used by the trustee only for the purpose of bringing about payment to the head creditor of the claim against which he is indemnified.[26]

39 Couzens-Hardy MR and Buckley LJ reached similar conclusions for different reasons. Couzens-Hardy MR said:

The trustee cannot be allowed to say 'I will take the money recovered under my right of indemnity against the claim of St. Thomas's Hospital and will apply it, not towards satisfying the claim of the hospital in the way which the indemnity implies, but as part of the general assets, and I will give no effect whatever to the indemnity except so far as the hospital come in and prove for their claim in the bankruptcy'. To allow that would be to allow a trustee to make a profit out of his position as trustee.[27]

Buckley LJ considered that if the money was not paid to the hospital 'effect' will not have been given to the indemnity obligation.[28]

40 Subsequently, in Re Law Guarantee Trust and Accident Society Ltd, Liverpool Mortgage Insurance Co's Case[29] the Court of Appeal gave an explanation for its decision in In re Richardson.

41 In Liverpool, a guarantee society in liquidation had guaranteed payment of debentures issued by a company and had contracted with a mortgage insurer to guarantee a portion of the risk. There was default on the debentures prior to the liquidation. The insurer sought to limit its obligation to a proportion of the amount the insolvent society would pay as a dividend to creditors rather than the same proportion of the actual amount owing. In that context Buckley and Kennedy LJJ addressed the concept of indemnity. Buckley LJ 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 it 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.[30]

42 Kennedy LJ distinguished the case before him from In re Richardson on the ground that In re Richardson had not involved an insurer and a debenture holder, and because '[t]he company [the insurer] has no sort of interest in seeing how the money due from the company to the society is applied by the society'.[31]

43 In Official Assignee v Jarvis[32] in the Court of Appeal of New Zealand, Salmond J addressed what Buckley LJ had said in Liverpool (without referring to In re Richardson itself). He said:

With respect to this question, contracts of indemnity are divisible into two classes. In one class of case the indemnifying party has an interest in the extinction of the liability to which the indemnity relates, and therefore in the application for that purpose of any money paid by him to the other party under the contract of indemnity. In the other class of case he has no such interest, and he is not concerned with the manner in which the indemnified party disposes of such money. This distinction is adverted to and illustrated by Buckley LJ, in the case of [Liverpool].[33]

44 The trust creditors' right of subrogation, initially recognised in the early 19th century, is relevant when addressing the proper treatment on insolvency of the trustee's right of indemnity by way of exoneration. But there is little detailed guidance in the early authorities on the practical operation of this right of subrogation, particularly where there are multiple trust creditors. If, as the High Court authorities to which we will turn indicate, the trustee's right of indemnity is a proprietary interest, and if upon insolvency trust creditors are subrogated to that proprietary interest, their position could plausibly be characterised as akin to that of a secured creditor and be treated accordingly on insolvency. However, such treatment might not be seen as consistent with the genesis of the right of subrogation (to prevent the unjust enrichment of beneficiaries rather than to protect the creditors), and the recognition that the trust creditors' right of subrogation is more akin to a remedy than a proprietary right.

45 The Court of Appeal of New South Wales considered the nature of subrogation in this context in Agusta Pty Ltd v Provident Capital Ltd.[34]

46 In Agusta, a corporate trustee entered an agreement with a company in the course of its activity as a trustee, and incurred a debt, for which the creditor subsequently obtained judgment. At the time of the agreement the trustee did not have title to certain land which later became trust property. The trustee acquired the land two months later. When the judgment creditor obtained a writ of execution to sell the land, beneficiaries resisted this and the sheriff did not proceed with the sale. Subsequently, the trustee transferred title to the relevant land to another corporate trustee. The primary judge held that this transfer was made with intent to defraud creditors in contravention of s 37A of the Conveyancing Act 1919 (NSW). He considered it relevant that the old trustee had failed to make any arrangement with the new trustee for indemnification out of trust assets to pay the judgment debt, or for the new trustee to pay the judgment debt.

47 On appeal, Barrett JA addressed the nature of the trustee's interest in the land. He said:

The right of a trustee to be indemnified out of trust property is often described as a charge or lien: see, for example, [Vacuum Oil]; [Octavo]. In Chief Commissioner of Stamp Duties v Buckle, the High Court preferred to regard it as a proprietary right constituting a beneficial interest enjoying priority over the beneficial interests of the beneficiaries. It is anomalous to refer to a person having a charge or lien over property of which the person is the owner. And as was emphasised by the High Court subsequently in CPT Custodian Pty Ltd v Commissioner of State Revenue, the 'trust fund' enjoyed by the beneficiaries cannot be identified or quantified until the trustee's superior beneficial interest has been quantified and satisfied. The trustee's right is inseparable from and co-extensive with the trustee's obligations, both those already discharged but not yet reimbursed and those incurred but not yet discharged.[35]

48 We will address the High Court authorities cited by Barrett JA in detail below.

49 Barrett JA stated that after the transfer of trust property to a new trustee, the original trustee's preferred beneficial interest continues to subsist in the new trustee's hands.[36]

50 Barrett JA discussed Jennings v Mather, Savage, Octavo, and other authorities.

51 His Honour explained that generally equity will intervene to prevent a sale of trust property pursuant to a writ of execution. This was said to be because the trustee's right of indemnity out of that property is in respect of all trust debts, and it would be destroyed if individual trust creditors were able to levy execution against the trust property.[37]

When execution against trust property is in contemplation, the preoccupation of equity is thus with preservation of the beneficial interest of the trustee referable to all debts the trustee has incurred and for which the trustee is entitled to be indemnified out of the trust assets. Because of the existence of that equitable interest in trust assets and the fact that seizure and sale of trust property under a writ of execution will destroy it, equity will not countenance such seizure and sale.[38]

53 Barrett JA held that it was not established that the judgment creditor in the case before him was the sole creditor of the trustee.[39]

54 His Honour considered that the judgment creditor and other trust creditors were entitled, by subrogation, to the benefit of the trustee's preferred beneficial interest. Equitable execution by way of the appointment of a receiver and sale of trust assets held by the trustee would have been available for the benefit of trust creditors.[40] After the trust assets had passed into the hands of the new trustee, the former trustee's preferred beneficial interest (and the rights accruing to its creditors by subrogation) continued to exist in those assets and the same remedy could have been obtained in relation to the trust property in the new trustee's hands.[41]

55 Barrett JA concluded (Agusta was the old trustee, Riva the new, and Provident the judgment creditor):

In summary, the alienation by Agusta to Riva did not alter the steps that Provident could effectively have taken to enforce against the Kings Park land the money judgment it had obtained against Agusta. Both before and after the alienation, execution at law was not open to trust creditors but they were entitled to assert Agusta's preferred beneficial interest and thereby to obtain equitable execution through the sale of trust property by a receiver appointed by the court. The fact that Agusta's preferred beneficial interest and the creditors' rights of subrogation in relation to it subsisted in the trust assets after they became vested in the new trustee meant that it was not incumbent upon Agusta to obtain from Riva any particular undertaking to protect those creditors. The trust assets, when received by the new trustee, continued to have imposed upon them the entitlements derived by creditors from the former trustee's preferred beneficial interest and this was so whether or not any such undertaking was sought from or given by the new trustee.[42]

56 As to the nature of subrogation, Barrett JA said:

The 'right' of subrogation might perhaps be better viewed as a 'remedy' of subrogation (P W Young, C Croft and M L Smith, On Equity (2009) at 868). That characterisation seems appropriate in a case such as the present where equity would allow creditors with an unsatisfied money judgment at law to bring proceedings in which the creditors, for their own benefit, asserted in respect of the trust property in the trustee's hands, the beneficial interest enjoyed by the trustee by virtue of the right of indemnity.

In Boscawen v Bajwa, in a passage approved by the High Court in Bofinger v Kingsway Group Ltd, Millett LJ described the foundation of subrogation as an equity that arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. In the situation under discussion, it is unconscionable for the trustee to retain for itself the preferred beneficial interest in trust assets when it is the unsatisfied debts of the trustee to the creditors that gives rise to that interest of the trustee. The trustee therefore cannot deny the right of the creditors to the benefit of preferred beneficial interest.

The trustee will be compelled to deal with the preferred beneficial interest for the benefit of the unpaid creditors and, in order to give a particular creditor the fruits of that beneficial interest, equity will appoint a receiver, thereby facilitating a sale of trust property and ensuring that the proceeds, having been brought under the control of the court, are, to the appropriate extent, put into the hands of the creditors entitled by subrogation rather than the hands of the trustee: see, for example, Levasseur v Mason & Barry; Re Potts; Re Marquis of Anglesey. The creditor thereby obtains equitable execution of the judgment.[43]

57 The conclusions to be drawn from this brief review of the trustee's right of indemnity and creditors' subrogation, which are significant to the issues we must decide, are these:

(1) There has been long standing, if not uniform, acceptance of the proposition that upon insolvency the trustee's right of indemnity passes to the insolvent trustee's insolvency administrator: Jennings v Mather; Savage; Governors of St Thomas.

(2) 'Trust creditors' deal with the trustee on the footing of the trustee's personal liability. They may be subrogated to the trustee's right of indemnity, but any such subrogation cannot yield greater rights than the trustee itself has: Vacuum Oil.

(3) The right of subrogation is better characterised as a remedy: Agusta. It is based upon the unconscionability of liabilities incurred to augment trust assets not being met out of those assets: Agusta. Its goal, as revealed by the early cases, was not the protection of trust creditors, but rather the prevention of the unjust enrichment of beneficiaries: Re Johnson.

(4) In re Richardson suggests that the right of indemnity cannot be exercised so as to meet the claims of non-trust creditors. Liverpool, and the New Zealand decision in Jarvis would confine In re Richardson to circumstances where the indemnifying party (the beneficiaries, in effect) is 'concerned' as to the application of the money.

58 Before turning to the relevant High Court authorities, it is necessary to say something about the statutory insolvency regime generally and about the nature of a preference.

59 It has consistently been a primary objective of both individual and corporate insolvency legislation to promote the equitable treatment of unsecured creditors. The statutory regimes for achieving that goal have, throughout successive enactments, comprised a number of essential features. In general terms, the insolvent's property is to be made available for the equal satisfaction of the creditors' claims. This principle is now embodied in s 555 of the Corporations Act, which provides:

Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.[44]

60 Immediately following s 555 is s 556, which provides that specified 'debts and claims must be paid in priority to all other unsecured debts and claims'. Employee claims have long been accorded priority under this and previous equivalent provisions.

61 Secured creditors may recover their claims in full provided that the value of the security is adequate.

62 Property held by the insolvent on trust for beneficiaries is excluded from distribution to the creditors, expressly under bankruptcy legislation, and by undisputed analogy in the case of corporations. It is not property of the company.

63 The property for distribution to creditors of an insolvent individual vests in the trustee in bankruptcy (with specified exclusions). In the case of a corporation, ordinarily the property remains vested in the company, albeit under the liquidator's control. Exceptionally, the Court may order that the property vest in the liquidator.

64 Existing proceedings, actions, attachments and executions against the insolvent, or in relation to the property available for distribution to creditors, are stayed and may be commenced or proceed only with the Court's leave. The proceeds of executions, attachments etc, issued within a specified period prior to the commencement of insolvency, are recoverable by the trustee in bankruptcy or the liquidator. Antecedent transactions which unfairly prefer or advantage a particular creditor, or constitute a voluntary, uncommercial or fraudulent disposition made within a specified period prior to the commencement of insolvency, are voidable.

65 While the company's unsecured creditors may participate in the rateable distribution of the insolvent's property, amplified where relevant by the avoidance of particular antecedent transactions, and subject to the specified priorities, the creditor's pre-existing rights to full satisfaction of their claims are transmuted on insolvency to a right to due administration in accordance with the statute. Subject to the specified priorities, equality is fundamental. As Owen J stated in Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd:

The property of an insolvent company is to be applied in satisfaction of liabilities equally, and the courts look askance at mechanisms which seek to reserve specific assets to settle particular liabilities.[45]

66 In corporate insolvency, a longstanding provision has conferred priority on the claims of employees over the claims of the holder of a floating charge or circulating security. This provision now appears in s 433 of the Corporations Act.

67 Section 433 provides that a receiver who takes possession or assumes control of property of the company secured by a 'circulating security interest' must pay, out of the property coming into his, her or its hands, specified debts, in priority to any claim for principal and interest under the debentures. The specified debts include debts or amounts that have priority to other unsecured debts under s 556(1)(e), (g) or (h) or s 560 of the Corporations Act. These are the provisions which give priority to employee claims and to those who advance funds to meet them.

68 One manifestation of the general policy of insolvency law to treat all unsecured creditors equally is the statutory provisions which enable payments validly made to creditors in the period shortly before insolvency, which have the effect of giving that creditor a preference over other creditors, to be recovered.

69 Prior to the Corporate Law Reform Act 1992 (Cth) corporations legislation dealt with preferences by the incorporation of provisions governing preferences in bankruptcy legislation. In 1959 in Burns v Stapleton[46] the High Court described the effect of the then provision in bankruptcy legislation (s 95 of the Bankruptcy Act 1924-1955 (Cth)) as follows:

What the sub-section clearly intends to make void, where it applies, is the change which, if allowed to be effectual, would dislocate the statutory order of priorities amongst creditors.[47]

70 In 1977 (when the applicable provision was s 122 of the Bankruptcy Act 1966 (Cth) incorporated into companies legislation by s 293 of the Companies Act 1961) the Full Court of the Supreme Court of Victoria quoted what had been said by the High Court in Burns v Stapleton and explained that if, upon analysis of the entire relevant transaction, there was no preferential effect, that is, the recipient was not better off, or the general body of creditors were not worse off, in the liquidation than they would have been if the impugned transaction had not been carried out, there can be no voidable preference.[48]

71 The High Court returned to the issue of the nature of a preference in 1997 in Sheahan v Carrier Air Conditioning Pty Ltd.[49] The relevant preference provision was still s 122(1) of the Bankruptcy Act 1966, incorporated into companies legislation by s 565(1) of the Corporations Law. The relevant issue in that case concerned payments made by a receiver out of funds realised from secured assets to two unsecured creditors of the insolvent company. The payments were made so as to procure the agreement of the unsecured creditors to continue working on a construction site. In relation to the nature of a preferential payment Brennan CJ said:

The purpose of s 122(1) is to recoup moneys of a bankrupt that have been paid preferentially in order to replenish the pool of assets which the creditors - that is, the general creditors - are entitled to share rateably. The language of s 122(1) - 'preference, priority or advantage' - shows that the section is concerned with the effect of payments made to a creditor payee who is in competition with other creditors for a share in the bankrupt's estate. The only preference with which s 122(1) is concerned is a preference as between the payee and other general creditors who would otherwise be entitled to a share in the money paid.[50]

72 Brennan CJ explained that if a general creditor received, with the consent of a chargee, a payment from a fund charged with the payment of a secured debt that would exhaust the fund, so that the fund would not have been available anyway for distribution to general creditors, there could be 'no preference at the expense of other general creditors'.[51] That was the position in Sheahan v Carrier Air Conditioning.

73 His Honour cited with approval observations of Young J in James v Commonwealth Bank of Australia[52] which were as follows:

Although there appears to be a dearth of authority on the point, section 122(1) is directed at a situation of the pool of assets being available to creditors generally, being detrimentally affected by a transaction in favour of one creditor. Accordingly, in my view, what one has to do is to consider the situation of the creditors generally before the transaction, and then look at the situation afterwards and see whether the other creditors, that is the general creditors, have been disadvantaged.

To my mind, cases such as Richardson v Commercial Banking Company of Sydney Ltd do focus consideration on the ultimate effect of the transaction with respect to the general creditors over and against the relevant creditor. Accordingly, in my view, if one can see that the position of the general creditors after the transaction was no worse than it was before the transaction then the transaction does not have the effect of giving a preference to one creditor over the others.[53]

74 Brennan CJ found that there was no preferential effect because the relevant payments had been made from a fund which would never have been available for distribution to general creditors, as it was the proceeds of the realisation of secured assets. Thus, the effect of the payments made was not to prefer the payees to the general creditors but rather to prefer them to the secured creditor who would otherwise have been entitled to the funds that were paid.

75 Other members of the Court in Sheahan v Carrier Air Conditioning (Dawson, Gaudron and Gummow JJ, Kirby dissenting) decided that the relevant payments could not be preferences because the funds employed were in no sense the money of the company or money held to the order or disposition of the company.[54]

76 When Brennan CJ said that the purpose of the subsection was to recoup monies for the 'general creditors' he cited in support of that statement an earlier decision of the High Court in NA Kratzmann Pty Ltd (in liq) v Tucker [No 2].[55] At the time Kratzmann v Tucker was decided the relevant provision was s 95 of the Bankruptcy Act, incorporated into corporations legislation by s 293 of the Companies Act 1961. In that case the High Court (McTiernan, Taylor and Menzies JJ) endorsed a conclusion reached by Bennett J in Re Yagerphone Ltd[56] to the effect that money recovered by a liquidator as a preference is to be distributed amongst the unsecured creditors of the company notwithstanding the existence of security over all of the company's assets. The High Court explained that this was the case whether the charge had crystallised or not at the time the payment was made. The High Court said:

The position of a secured creditor who has a charge on specific property is, of course, not in question; such property in the hands of the trustee will still remain subject to the charge. But where security has been given by a bankrupt over all of his assets and a payment to a creditor is made by him out of moneys subject to the charge and the payment is, as against the trustee, subsequently declared void as a preference the moneys paid, when recovered, will not be subject to the charge. In such a case it may be said that although the moneys paid as a preference were at the time of payment subject to the charge, the moneys recovered by the trustee are not the same moneys and that they do not, by virtue of payment to the trustee, become moneys of the bankrupt or in any way subject to the charge; when recovered they become the moneys of the trustee and his title to them does not depend upon his succession to any title which the bankrupt had.[57]

77 The characteristics of a preferential payment are important when one addresses the significance of the High Court decision in Octavo, to which we now turn. In Octavo the High Court held that payments by a trustee to a trust creditor in exercise of the right of exoneration were recoverable by the trustee's liquidators as preferences. On the basis of the authorities discussed this must mean that the impugned payments:

(a) had dislocated the statutory order of priorities amongst creditors; and

(b) had had a preferential effect by a comparison between the position as a result of the impugned payments and the position under the statutory regime.

78 The authorities cited also state that preferences:

(a) are recoverable to enable rateable sharing amongst 'general creditors', who 'would otherwise be entitled to a share in the money paid';[58] and

(b) if recovered, are to be distributed amongst unsecured creditors.

Those authorities do not address the position of an insolvent corporate trustee. Octavo, to which we now turn, did concern alleged preferential payments by an insolvent corporate trustee.

79 In Octavo, Coastline Distributors Pty Ltd ('Coastline'), a corporate trustee for five corporate beneficiaries, had traded in its capacity as a trustee. Its operations were financed by bankers; by advances from Octavo Investments Pty Ltd ('Octavo'), a related company with common directors; and advances from the five corporate beneficiaries. Its enterprise was ultimately unsuccessful and Coastline was wound up in insolvency pursuant to a creditor's petition. Coastline's liquidators brought proceedings in the Supreme Court of Queensland pursuant to s 293 of the Companies Act 1961-1975 (Qld), incorporating s 122 of the Bankruptcy Act 1966, to recover payments totalling $49,750, which Coastline had made to Octavo within six months prior to the commencement of winding up.

80 At first instance, Connolly J declared that the payments Coastline made to Octavo were void against the liquidators as a preference. His Honour ordered Octavo to repay the moneys. The Full Court of the Supreme Court of Queensland subsequently dismissed Octavo's appeal from those orders.

81 Octavo appealed to the High Court. It contended that the payments would not have been void or voidable against Coastline's trustee in bankruptcy, had the company been an individual, because all of Coastline's property was trust property. It was therefore not property divisible among the creditors of the bankrupt, nor would legal title to the property have vested in the trustee in bankruptcy.

82 Octavo submitted, in the alternative, that s 122 did not apply because the payments made to it were from Coastline's trust funds and hence were not made 'from its own money', as required by s 122(1); and that the liquidator's substantive complaint was Coastline's loss of its indemnity which was not 'property' within the meaning of s 122.

83 In the High Court the plurality (Stephen, Mason, Aickin and Wilson JJ) affirmed general principles relating to 'the bankruptcy of a trading trustee', including the trustee's personal liability for debts incurred in business transactions, and the indemnity for enforcement of which the trustee possesses a lien or charge over the trust assets.[59]

84 The plurality noted that the trustee's charge applied to the whole range of assets in the trustee's possession, save for those assets which the trustee was not authorised to use in carrying on the business.

85 The plurality stated that where a trustee had such an indemnity two classes of person had a beneficial interest in the trust assets. They were:

[F]irst, the cestuis que trust, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied.[60]

86 The plurality described the interest of the trustee's creditors as follows:

The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution but in the event of the trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee.[61]

These principles lead naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of the bankrupt divisible amongst his creditors. The definitions of both 'property' and 'property of the bankrupt' in s 5 of the Bankruptcy Act are apt to include such a beneficial interest.[62]

88 Their Honours then considered s 293 of the Companies Act and s 122 of the Bankruptcy Act within 'the framework of principle' they had outlined.

89 In that context, they rejected Octavo's contention that s 122 of the Bankruptcy Act applied only to payments made 'from [the debtor's] own money', holding that the phrase merely formed part of the description of the person making the payment, rather than qualifying the transaction. Moreover, the plurality stated:

Even if we are mistaken in this conclusion, the words 'from his own money' may well be satisfied if a trustee makes payments to a creditor out of trust assets in respect of which he has not only the legal estate but also a beneficial interest to secure his right to an indemnity.[63]

90 The plurality rejected Octavo's submission that what the liquidators were really seeking to have declared void was the surrender of Coastline's charge over the money paid to Octavo. Their Honours stated:

In reality the truth is otherwise. Section 122 applies, amongst other transactions, to a payment made by a prospective bankrupt to a creditor which has the effect of giving that creditor a preference, priority or advantage over other creditors. If the present payments had not been made by Coastline to Octavo then the liquidator of Coastline would have had access to the charge over those moneys for the benefit of all its creditors. The payments therefore were to the prejudice of the creditors generally and it is those payments which attract s 122. [64]

91 The plurality also rejected Octavo's central argument that the money Coastline had paid to Octavo was trust property and hence would not have been property divisible amongst Coastline's creditors. Their Honours stated that:

Property which is an asset of a trading estate carried on by a trustee is properly described as trust property_._ However, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee's interest in the trust property amounts to a proprietary interest, and is sufficient to render the bald description of the property as 'trust property' inadequate. It is no longer property held solely in the interests of the beneficiaries of the trust and the trustee's interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors of the trust trading operation should the trustee become bankrupt.

The fact that the trust property itself cannot be taken in execution by the creditors of the trustee is not to the point. Those creditors are nevertheless subrogated to the rights of the trustee in relation to that property, and in the event of the trustee becoming bankrupt, it is those rights which are to be realized in their favour.[65]

92 Their Honours found it unnecessary to determine whether legal title to the trust property charged in favour of a bankrupt trustee would have vested in the trustee in bankruptcy. They stated:

We take the view that the passing to the trustee in bankruptcy of the trustee's beneficial interest in the trust estate, even if that is all that passes, is sufficient to attract the operation of s 122 of the Bankruptcy Act. Once it is recognized that a trustee may enjoy a right of indemnity over trust property in respect of liabilities incurred by him in the administration of the trust, it follows that the creditors of a trust business may have resort to the assets of the trust to the extent of the liabilities incurred by the trustee. Section 122 is apt in the case of an individual trading trustee to render void as against the trustee in bankruptcy a payment out of the trust property in circumstances which have the effect of giving the payee a preference, priority or advantage over other creditors.[66]

93 The plurality acknowledged that, in contrast to the effect of individual bankruptcy, when a company was wound up the liquidator did not acquire title to its property in the absence of a specific order.

94 In Octavo, the corporate trustee's right of indemnity for liabilities incurred in performance of the trading trust took the form of the right of exoneration, rather than recoupment. It was not disputed that Coastline held no property in its own right and that, subject to any effect of the right of indemnity, 'all the property in the hands of Coastline was trust property'.[67]

95 The plurality in Octavo did not refer to In re Richardson, or to the distinction between rights of recoupment and exoneration, at any point in their extensive analysis of the nature of the trustee's right, and the charge or right of lien securing it, whether generally or upon the trustee's insolvency.

96 Octavo establishes that an insolvent 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. That proprietary interest passes on insolvency to the trustee in bankruptcy under the Bankruptcy Act, and, where the insolvent trustee is a company, it is an asset to which the company's liquidator has access for the benefit of the trustee's creditors.

97 The question then arises, which creditors? On this issue the judgment gives conflicting guidance.

98 First, the plurality made apparently inconsistent statements on the question whether the proceeds of a trustee's right of indemnity would, on insolvency, be confined to trust creditors or whether the trustee's non-trust creditors (if any) could share in the distribution. At some points in their reasons, the plurality's observations suggest that only trust creditors could share in the distribution of the proceeds of the right of indemnity against trust assets. At other points, the plurality's observations suggest that the proceeds would be available 'for all of [Coastline's] creditors' and for 'the creditors generally'. The fact that Coastline appeared to have only trust creditors may suggest that the reference to 'all creditors' or 'creditors generally' were, in context, also a reference to trust creditors.

99 Secondly, the High Court was directly concerned with the avoidance of a preference rather than with the distribution of property of the company to creditors. The Court did not state the basis on which the property would be distributed, or refer to the statutory order of priorities. However, as already seen, the avoidance of preferences and the division of the property of the company among creditors are not unrelated issues. Given the nature of preferences as earlier described, it is difficult to identify the basis on which the company's property constituted by the money recovered as voidable preferences could properly be distributed on insolvency other than in accordance with the statutory scheme.

100 It seems to us that Octavo not only establishes that the right of exoneration is property which passes to the trustee in bankruptcy or the liquidator, but also that the respective statutory regimes must apply to the disposition of that property. The decision does not, however, provide clear guidance on whether distribution is confined to trust creditors. It was not an issue which arose for determination.

101 The decision in Octavo attracted early academic criticism from the most eminent of sources. Professor HAJ Ford[68] considered that In re Richardson had correctly held that the rights of exoneration and recoupment required a fundamentally different treatment on insolvency. Professor Ford stated that '[t]he decision [in Octavo] is based on the proposition that a trustee who has a right to exoneration has a proprietary interest', which, Professor Ford considered, was questionable or unsound, because '[w]ith respect, [the trustee] has no more than a power over the trust property which, as argued earlier, is a fiduciary power, at least in cases where the beneficiary has an interest in seeing that the trust creditor is paid'.[69] Ford pointed out that although the right to exercise a power itself could fall within the definition of 'property' in s 116(1)(b) of the Bankruptcy Act, a power which the trustee was to exercise for the benefit of beneficiaries as well as himself would not do so. Ford concluded that Octavo 'seems to be a hard case making bad law', probably to avoid the unsatisfactory prospect that a particular trust creditor could otherwise have been preferred.

102 Robin Brett writing in the Australian Tax Review in March 1982 expressed the opinion that Professor Ford's criticisms were largely valid. As to the issue of for whose benefit the preference had been recovered, Brett said:

It should be said at the outset that in the case of a trustee who has carried on business on his own account as well as in his capacity as trustee it is beyond question that his right of exoneration cannot be used by his trustee in bankruptcy for the benefit of the creditors to whom he incurred liabilities on his own account.[70]

103 Brett cited In re Richardson for that proposition and then observed that in his view this had been 'accepted' by the High Court in Octavo. As already seen, In re Richardson may not be as clear an authority as is suggested. The High Court did not refer to In re Richardson nor to the distinction between rights of exoneration and recoupment. Any 'acceptance' of the proposition for which In re Richardson is said to stand was not explicit.

104 More recently, Ong,[71] frankly designates the High Court's decision 'inaccurate'. He concludes that due to its 'disappointing' and fundamentally mistaken omission to acknowledge and apply the established distinction between exoneration and recoupment, the plurality made inaccurately wide statements, which unduly restricted the respective entitlements of both trust and non-trust creditors. Ong acknowledges, that, at one point at least, the plurality seem to suggest that the trustee's charge securing the right of indemnity enures for the benefit of all its creditors. Ong considers that to be contrary to the fundamental, purpose-restricted nature of that right. Ong states that on the basis of the established principles articulated in In re Richardson, the High Court should have clearly endorsed the trust creditors' unique access to the right of indemnity in its exoneration aspect.

105 Despite the academic criticism of Octavo's omission to acknowledge or apply the distinction between rights of reimbursement and exoneration, and other suggested deficiencies in its analysis, the High Court has not, in subsequent decisions, expressed disagreement with, or doubted the correctness of, the decision or reasoning in Octavo. Rather, it has cited Octavo's analysis of the character of the trustee's right with approval.

106 In Chief Commissioner of Stamp Duties (NSW) v Buckle[72] the High Court, in contrast to Octavo, expressly recognised the traditional distinction between rights of exoneration and recoupment. The Court nevertheless affirmed that the trustee's right of indemnity in either manifestation conferred on the trustee a beneficial proprietary right in the trust assets.

107 Buckle concerned the operation of s 66 of the Stamp Duties Act 1920 (NSW). Section 66 provided, in its relevant part, that a conveyance of property made without consideration in money or money's worth was to be charged with ad valorem duty on the greater of 'the unencumbered value of the property' or the amount or value of all encumbrances subject to which the property was conveyed.

108 In Buckle, a supplemental deed varied a deed of settlement under a discretionary trust so as to vest trust property in nominated beneficiaries as tenants in common on a specified date, if a power of appointment had not been exercised beforehand. Prior to the variation, the interests of the relevant beneficiaries were contingent on their being alive on the specified date (failing the exercise of the power of appointment). The trust property included land which had been developed and purchased by the trustee with two loans, one of which was unsecured, while the other was secured by the trust property. The Chief Commissioner of Stamp Duties assessed the supplemental deed for duty as a conveyance (within the definition in the Act) on the basis that the unencumbered value of the property conveyed was the unencumbered value of the assets comprising the trust fund at the date of execution of the supplemental deed.

109 The High Court held that the supplemental deed did constitute a conveyance within the meaning of the Act which vested interests in the beneficiaries. It held, however, that those interests were not the entire beneficial interests of the trust fund, but lesser interests, the value of which reflected the vicissitudes inherent in the structure established by the deed of settlement. The stamp duty chargeable was accordingly minimal.

110 In the above context, the High Court considered the nature of the trustee's right of indemnity and whether it constituted an 'encumbrance' on the beneficiaries' interest.

111 The Court (Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ) cited and affirmed traditional statements of the circumstances in which the trustee's right to indemnity, whether of reimbursement or exoneration, arose. They adopted the following statement from Scott on Trusts:

Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration.[73]

112 The Court then analysed the way the right to indemnity operated in the case before it, citing a number of authorities, most notably Octavo. The Court said (where Octavo is cited the relevant passage is underlined):

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. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by s 66(1) of the Act. In valuing the interests of beneficiaries which are conveyed by an instrument, there is no encumbrance which the Act requires to be disregarded.

Accordingly, we agree with the following treatment of the matter by Sheller JA [in Buckle (1995) 38 NSWLR 574, 586]:

'If it be right, as in my opinion it is, that 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, the consequence is that the interest conveyed has no value. This does not depend in any way upon treating the interest as encumbered. It flows from the fact that the trustee has a preferred beneficial interest in the trust fund'.[74]

113 In CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic),[75] the High Court (Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ) stated that the classic nineteenth century formulation of the rule in Saunders v Vautier[76] did not consider the significance of the right of the trustee under general law to reimbursement or exoneration for the discharge of liabilities incurred in the administration of the trust.[77] In CPT, trustees of certain unit trusts had an unsatisfied right of indemnity, so the unit holders were entitled only to an undetermined and uncertain surplus (if any) in the fund, thus excluding the rule in Saunders v Vautier. The High Court adopted the analysis in Buckle, holding that '[u]ntil satisfaction of rights of reimbursement or exoneration, it was impossible to say what the trust fund in question was'.[78]

114 Subsequently, in Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation,[79] the High Court (French CJ, Gummow, Hayne, Heydon and Bell JJ) again affirmed that, as stated in Buckle, a trustee, independently of any provisions in the trust deed, 'has rights of recoupment or exoneration in respect of all obligations incurred by it in that administration'.[80] Consistently with Octavo, Buckle and CPT, the High Court in Bruton characterised the trustee's right of indemnity as a proprietary interest in the trust assets, irrespective of whether it took the form of recoupment or exoneration, stating: 'These rights were supported by a lien over the whole of the trust assets which amounted to a proprietary interest therein [Buckle cited] and they survived the appellant's loss of office as trustee'.[81]

115 In Bruton, prior to the commencement of a winding up by a creditors' resolution under s 439C of the Corporations Act, Bruton, a trustee company, deposited money with a law firm to provide for litigation services. The Commissioner of Taxation had issued a tax assessment to the trustee company. After the passing of the resolution for winding up, the Commissioner of Taxation lodged a proof of debt in the winding up. The Commissioner also issued a notice under s 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the 'Administration Act') requiring the law firm to pay to the Commissioner the money Bruton had deposited.

116 The 'ultimate question' on appeal to the High Court was whether the law firm was obliged to pay the Commissioner the amount demanded by the s 260-5 notice from the sum standing to the credit of the company in the firm's trust bank account. The High Court held that the Commissioner's notice did not constitute a valid attachment.

117 The High Court identified the critical issue on appeal as being whether, after the resolution for the winding up of Bruton was passed:

the property of that company, which, subject to 'preferential payments' must be applied in the manner prescribed by ss 501 and 555 of the Corporations Act, could be diminished by the subsequent engagement of s 260-5 in Schedule 1 to the Administration Act.[82]

118 The High Court held that the Commissioner's general power to issue a notice under s 260-5 was not available if a liquidator had been appointed to the company, as, in that circumstance, only more particular provisions of s 260-45 of the Administration Act were engaged. The High Court held, on analysis of the relevant provisions of Schedule 1 to the Administration Act, that the provisions of s 260-45 (dealing with the collection and recovery of tax liabilities of companies from liquidators) disclosed a specific regime which, in cases where it applied, excluded the more general provisions (of which s 260-5 was an example) which might otherwise be engaged.[83] But the High Court also dealt with another issue which is relevant to the issues raised before us.

119 Section 500(1) of the Corporations Act provided:

Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void.

120 The Commissioner submitted that s 500(1) of the Corporations Act could not apply to render void any attachment represented by the s 260-5 notice because the company had no 'property' within the meaning of the subsection, as the Commissioner was likely to be the only creditor and Bruton's right of indemnity was only for exoneration. The Commissioner claimed to be subrogated to the exercise of that right.

It is unnecessary to rule upon those submissions. This is for several reasons. The first is that for the reasons given above which concern the construction of the Administration Act, the remedy available to the Commissioner on the facts of this case was that under the regime for liquidations (s 260-45), not the garnishee regime provided by s 260-5. Secondly, the Commissioner takes inconsistent positions in making the above submissions. The garnishee regime, in its terms, only applies if the third party owes money to the taxpayer (s 260-5(2), (3)), yet the Commissioner denies that the third party, the appellant, had any 'property' within the broad meaning of 'property' for the operation of s 500(1) of the Corporations Act. [84]

122 The High Court, at an earlier point had accepted that Bruton had a proprietary interest by reason of its trustee's lien. The High Court stated, referring to the trustee's lien:

This proprietary interest would appear to be property of the appellant protected by s 500(1) of the Corporations Act against any attachment put in force against it during the winding up. Both the primary judge and the Full Court so held.[85]

123 The passage cited, and apparently approved, from the Full Court decision had set out the Commissioner's submission in relation to s 500 and then continued:

That approach is inconsistent with the decision in Octavo [1979] HCA 61; 144 CLR 360 which expressly describes the trustee's interest as being 'property' (at 367-368). See also Buckle [1998] HCA 4; 192 CLR 226 at [49].[86]

124 It seems to us that, academic criticism notwithstanding, the High Court has made it clear that the trustee's right of indemnity, both in relation to recoupment and exoneration, constitutes a proprietary interest in the trust assets which is, in the corporate insolvency context, 'property of the company'. The statutory provisions governing corporate insolvency have changed over time, but none of those changes have relevantly altered or affected this position.

Cases on indemnity and insolvency before the primary judgment

125 In Re Doyle[87] Clyne J held that where a beneficiary had no continuing interest in the trust and was thus no longer concerned with the application of the money (although still obliged to indemnify the trustee for trade liabilities incurred in operating the trust business) the proceeds of the indemnity were divisible amongst the general creditors of the bankrupt trustee.

126 Clyne J stated that the proper destination of moneys paid by an indemnifying beneficiary was 'an interesting question of law'.[88] His Honour noted that despite various interpretations and judicial criticism of In re Richardson, including in Liverpool, the decision had never been overruled and appeared to have been accepted in Jarvis. However, Clyne J accepted that, '[p]robably the true explanation of the case is that given by Buckley LJ in Liverpool.'[89]

127 His Honour also referred to the trust creditor's right to be subrogated to the trustee's right of indemnity and to enforce it directly as against the trust estate, in addition to their contractual right against the trustee. Clyne J accepted as 'obvious' that '[i]f the trustee's creditors have a right to resort to the [trust estate] ... the cestui que trust has an interest in seeing that moneys paid to a trustee under the trustee's right of indemnity are used for the protection of the trust estate'.[90] But his Honour nevertheless concluded that this would not apply where the relationship of trustee and cestui que trust had ended by the cestui que trust making an absolute assignment of the beneficial interest. The trustee's right of indemnity would continue against the original cestui que trust, but the creditors' right against the trust estate would come to an end.[91]

128 Clyne J stated that the effect of In re Richardson and Jarvis was as follows:

The cestui que trust is under a duty to indemnify the trustee against liabilities properly incurred by him in the execution of the trust, and, during the existence of the trust relationship, is entitled to require that the moneys paid to the trustee, pursuant to that duty, should be applied in or towards the discharge of the liabilities so incurred in order to protect or preserve intact the estate of the beneficial owner and the trustee is under a corresponding duty to apply such moneys when received by him in or towards the discharge of such liabilities so as to protect or preserve intact this estate.[92]

129 Clyne J's approach potentially reconciles the broad statements in In re Richardson with the restricted explanation given for them suggested in Liverpool. Clyne J considered that usually it would be 'obvious' that beneficiaries would have an interest in the application of funds called upon in exercise of the right of exoneration, and, where that was so, In re Richardson applies. But where that is not so, In re Richardson would not apply, as explained in Liverpool.

130 His Honour concluded that, as the beneficiary in the case before him had absolutely assigned her entire beneficial interest, there was no longer a need for protection of the trust estate. It thus followed that the beneficiary was no longer concerned with or interested in the application of the moneys paid to the trustee in bankruptcy, which consequently formed part of the general assets of the estate of the bankrupt to be distributed amongst all his creditors.[93]

131 In Re Byrne Australia Pty Ltd and the Companies Act [No 2],[94] Needham J held that the costs and expenses of a liquidator of an insolvent trustee could not be met from the assets which had been held by the trustee as part of the trust estate.

132 His Honour rejected a submission that Octavo had held that the company had property which was to be applied in accordance with the rules of priority in s 292(1) of the Companies Act 1961, the then equivalent provision to what is now s 556. He stated that Octavo 'is important in this case not only for what it decides but also for what it does not'.[95] His Honour stated that there was no suggestion in Octavo that there were any creditors in that case 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'.[96]

133 Needham J observed that if there were no right of indemnity there was no property and '[t]he right of indemnity arises only because the trustee is liable to creditors whose debts arose because of its activities as trustee of the fund'.[97]

134 He referred to Professor Ford's criticism of Octavo but stated that he was bound to follow the decision in so far as it was applicable to the case before him.

135 His Honour concluded that Octavo did not suggest that s 292 operated on trust assets, which he held should be divided rateably among the trust creditors.[98] The liquidator had not adduced evidence that he was a trust creditor.[99]

136 In Re Enhill Pty Ltd,[100] a liquidator, in the winding up of a trustee company that had incurred liabilities in the course of carrying on a family trust business, sought to apply the proceeds of sale of trust assets, again pursuant to s 292(1) of the Companies Act 1961, in payment of his remuneration, costs and expenses, the costs of the petitioning creditor and the company's liabilities incurred in carrying on the business. Due to the quantum of the assets and liabilities the only substantive issue concerned the liquidator's remuneration, costs and expenses. The company held only trust assets. Its liabilities to unsecured creditors greatly exceeded the value of its assets and unless the liquidator's remuneration, costs and expenses could be paid from the assets, the liquidator would receive nothing.

137 Young CJ observed that s 292(1)(a) of the Companies Act 'must be understood as authorising the payment of the costs, expenses and remuneration with which it deals out of the assets of the company coming into the hands of the liquidator'.[101]

138 His Honour referred to Professor Ford's criticisms of Octavo, but observed that the Full Court had to treat the decision 'as authority for the proposition that the right of a trustee to be indemnified out of the assets of the trust, or the proceeds of the exercise of that right, are assets of the trustee in a winding up'.[102]

139 Young CJ discussed Octavo, including the High Court's conclusion that the trustee's substantial payment to Octavo should be set aside as a preference. His Honour stated:

In so holding the High Court clearly proceeded upon the basis that a trustee's right of indemnity out of the assets of the trust gave him a proprietary interest in the trust assets.[103]

140 His Honour quoted the plurality's observation in Octavo that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets of a bankrupt trustee form part of the property of the bankrupt divisible among the creditors.[104] His Honour referred to Savage and to Jennings v Mather, which the High Court in Octavo had cited as authority for that conclusion.

141 Young CJ observed that, but for Needham J's contrary decision in Re Byrne, he would have thought that the trustee's proprietary interests in the trust assets was 'clearly' property of the company under the control of the liquidator and liable, as such, to the payment of the items in s 292(1)(a).[105]

142 Young CJ acknowledged that Octavo did not decide the question that arose before him, and he agreed with Needham J that there could be no proprietary right without the indemnity. He nevertheless disagreed with Needham J's imposition of a limitation on the purposes for which the trustee in bankruptcy or the liquidator might apply the proceeds of the right. His Honour stated that not only was no such limitation expressed in Octavo, but also 'the reasoning of the majority of the High Court and the authorities upon which their Honours rely suggest that no limitation was intended'.[106]

143 His Honour referred, in that context, to Kennedy J's holding in Jennings v Mather that the trustee's right of indemnity or his lien over the assets of the trust passed to his trustee in bankruptcy, which, Young CJ observed, had been expressly approved by the Court of Appeal.[107]

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 amongst 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 under s 292_._[108]

145 Young CJ then postulated an exception to that principle '[w]here, however, the trustee's indemnity derives from a party who is concerned with the application of the money which he pays ...'.[109] In that respect he cited Liverpool.

146 His Honour acknowledged that creditors of the trust business may be subrogated to the right of indemnity but concluded that '[w]hen the trustee's estate is separated from the trust estate by bankruptcy they rank with the general creditors of the bankrupt'.[110]

147 Young CJ did not accept that if the proceeds of the trustee's right of indemnity were subject to s 292, the trustee would derive a benefit from the trust. Rather, his Honour said, it was a right to be indemnified so that his personal estate may be exonerated.[111]

148 Lush J (with whose reasons Young CJ also agreed), having rehearsed the competing views, stated that resolution of the main issue in the case:

depends on an analysis in terms of basic principle of a trustee's right of indemnity or lien in respect of the trust assets. I have used the word lien as a shorthand expression covering the trustee's right as against the beneficiaries to retain the trust assets until he is put in funds to discharge the liabilities resulting from trust trading and his related right to raise himself, out of the trust assets, the necessary funds for that purpose.[112]

149 Addressing Professor Ford's characterisation of the right as 'not a right of property but a power', his Honour stated:

It is, however, a power which can be, and is designed to be, used for the trustee's own benefit, and is, I respectfully think, properly to be classed as a chose in action, and therefore as property of the trustee.[113]

(1) Property is a bundle of rights, which may be held by different persons.[114]

(2) A trading trustee is personally liable for debts incurred in trading. The beneficiaries are not so liable and trust property cannot be taken by creditors either in execution or pursuant to the statutory processes of bankruptcy or liquidation. It is the trustee's 'personal property' which is 'primarily' liable for the trust trading debts.[115]

(3) The trustee's right of indemnity out of the trust property and the 'overlapping' right of lien exist as 'protection or restoration' of his 'personal property'.[116]

(4) When the trustee's rights come into existence, the trustee then has a beneficial interest in the trust assets, and the interests of the beneficiaries are reduced.[117]

(5) A trust creditor may be subrogated to the trustee's right of indemnity. But the authorities (amongst others, Dixon J's judgment in Vacuum Oil quoting Turner LJ in Ex parte Edmonds[118]) supported the proposition that if the trustee, having exercised his lien, failed to pay the proceeds to the creditor, the creditor would be left unpaid with no available right of subrogation.[119]

(6) The trustee's right of lien is a chose in action capable of passing to a trustee in bankruptcy or liquidator of the trustee.[120]

151 Lush J stated that, based on the first five above propositions, 'the trustee's right of indemnity or lien is part of his "personal property". It exists to enable him to recoup himself for, or to provide for, the debts which he must bear personally'.[121]

152 Lush J rejected the submission that the trustee held the right of lien on trust for creditors. His Honour stated that it would be curious if the right of subrogation which in some measure compensates the trust creditor for the inability to levy execution on trust assets should operate to make the trust creditor entitled to the benefit of the trustee's particular asset (the indemnity) to the exclusion of non-trust creditors, and 'so make him a secured creditor'.[122]

153 Nor did Lush J accept that the availability of the proceeds of the right to creditors generally would enable the trustee to derive an unauthorised personal advantage from the trust. He considered that this contention overlooked the fact that the right of lien was the trustee's beneficial right which reduced those of the beneficiaries, whose rights could not be further diminished by the exercise of the right.[123]

154 His Honour reasoned that the beneficiaries' interests were unaffected, in the ordinary case, by whether the proceeds of the trustee's right of indemnity were confined to trust creditors or available to creditors generally. He noted that although the case before him did not concern a competition between trust and non-trust creditors, they should stand on the same footing.[124]

155 Observing that a former trustee's trustee in bankruptcy would be entitled to the right of lien as a beneficial right and property of the bankrupt, separate from the trust assets vested in a new trustee, Lush J stated:

There is no reason of general application why this property should not, in the hands of the trustee in bankruptcy, be available to all creditors, both personal and trust.[125]

156 Acknowledging that a personal creditor of the trustee did not enjoy a right of subrogation, Lush J thought that this did not lead to the conclusion that on bankruptcy or liquidation, the trustee's right of lien was available for the benefit of trust creditors only. He said that this was subject to the qualification that the position might be different in circumstances where failure to discharge a specific debt would destroy the rights which depend on its payment or leave the indemnifying party still liable for the debt.[126]

157 Lush J then considered whether Octavo had modified the above conclusions and held that it had not. He said that some observations in Octavo appeared to imply that although the trustee's right passed to the trustee in bankruptcy, its proceeds were available only to trust creditors. He observed that that issue had not arisen in Octavo where there were only trust creditors and no question as to the liquidator's costs and expenses.[127]

158 Acknowledging that trust property was not available to a trust creditor on liquidation and that a trustee could not indemnify himself out of trust property for private debts, his Honour said:

[B]ut to say this does not explain the position in a liquidation of trustee's right to indemnity or lien; nor does it indicate an appreciation of the fact that there can never be exacted from the trust property, by the trustee or by the trust creditors, an amount which is greater than the trust debts.[128]

159 Lush J regarded In re Richardson and Jarvis as qualifications to, rather than refutations of, the general thesis. That is, the outcome of In re Richardson was said to be explicable by reason of the fact that the lease would be subject to forfeiture, and the trust property lost, if the money received as indemnity were not applied to payment of rent, thus adopting the (perhaps factually erroneous) explanation suggested in Liverpool. Similarly, his Honour thought that in Jarvis (which was not a trust case) the New Zealand Court of Appeal had taken the view that if non-payment of the mortgage debt could have resulted in loss of the equity of redemption, or exposure of the indemnifying party to liability for the debt, the trustee in bankruptcy would have been obliged to discharge the debt, but as that had not been the case the indemnity money was available to creditors generally.[129]

160 Lush J stated that authority did not oblige him to depart from the conclusion he derived from principle. His Honour referred to Jennings v Mather, approved in Octavo, in which it was held that the trustee's indemnity or lien was property in the trustee's bankruptcy and that the trustee in bankruptcy had the right to control the trust property for the purposes of the bankruptcy.[130]

161 His Honour concluded: 'Being property of the trustee, it is liable for payment of the items in s 292(1)(a) ... '[131]

162 His Honour held that if he was wrong about that, the liquidator would be entitled to his costs under the principles in Re Universal Distributing Co Ltd (in liq).[132]

164 Very shortly after Re Enhill, a relevantly similar issue came before the Full Court of the Supreme Court of South Australia in Re Suco Gold Pty Ltd (in liq).[133]

165 In Re Suco Gold, the Full Court of the Supreme Court of South Australia followed Re Enhill in holding that Octavo had made it clear that 'the trustee company's right of indemnity is a right of property which passes to the liquidator'.[134] The Full Court differed from Re Enhill in concluding that, where the indemnity was a right of exoneration, the trustee in bankruptcy or liquidator could apply the proceeds only to the payment of the trust liabilities.[135]

166 In Re Suco Gold, the liquidator of a corporate trustee of two unit trusts sought directions permitting him to apply the proceeds of sale of trust assets to the costs and expenses of winding up, the liquidator's remuneration, and the costs of the petitioning creditor. The company's only liabilities were incurred for the purposes of the trust business. The company had no assets save for its right of indemnity. The trust assets were not sufficient to meet the liabilities the company had incurred in carrying out the trusts. As in Re Enhill, the practical problem exposed in Re Suco Gold was that the winding up could not proceed unless the liquidator could have recourse to the trust funds to meet the costs and expenses of liquidation.

167 King CJ (with whom Jacobs and Matheson JJ agreed, Jacobs J writing a separate judgment) acknowledged Octavo as an 'authoritative exposition of the general principles concerning the bankruptcy of a trading trustee'.[136]

168 His Honour quoted at length from the plurality judgment in Octavo and noted that following that decision, Re Enhill and Re Byrne had taken different approaches to whether the trustee's right of indemnity permitted the payment of a liquidator's costs, expenses and remuneration out of trust funds.[137]

169 King CJ said that Octavo made it clear that the trustee company's right of indemnity is a right of property that passes to the liquidator.[138] He said it was important to distinguish between: (a) the trustee company's interest that passed to the liquidator and was property divisible among the creditors; and (b) the residual beneficial interest which remained trust property, subject only to the trustee's beneficial interest.[139]

170 In analysing the trustee's right of indemnity, King CJ emphasised the 'twofold' aspects of recoupment and exoneration. He referred to the 'valuable article' by Professor Ford.[140]

171 King CJ rejected the liquidator's submission, based on Re Enhill, that the right of exoneration entitled the trustee to transfer trust property to himself to meet unpaid trust debts, which property then ceased to be trust property and was, on insolvency, divisible amongst the general body of creditors. King CJ found this argument to be 'in conflict with fundamental principles of the law of trusts'.[141]

172 Acknowledging the conflict of judicial opinion on the enforceability of a contractual indemnity before payment (referring to In re Richardson, Liverpool and Jarvis), King CJ thought that the situation was clear when a trust was involved.[142]

A trustee, however, has no legal right to use or apply the trust property other than for the authorized purposes of the trust. In particular he has no legal right to apply the trust property for his own benefit or for the benefit of third parties: Keech v Sandford. 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 nontrust creditors.[143]

174 King CJ considered that this analysis was supported by all three judgments in In re Richardson. His Honour rejected Buckley LJ's subsequent restrictive explanation of In re Richardson in Liverpool.[144] King CJ observed the reasoning in In re Richardson was 'based upon the rights and duties of a trustee with respect to the trust property' and stated that Buckley LJ's explanation was 'difficult to understand' as the lease had already expired when the landlord obtained judgment and the trustee recovered under the indemnity.[145]

175 His Honour then stated that in his view Octavo did not lead to the conclusion that the trust assets (to the extent of the trust liabilities) pass to the trustee in bankruptcy or the liquidator for the benefit of the general body of creditors.[146]

176 His Honour acknowledged that the indemnity 'exists for the trustee's own benefit and it passes to the trustee in bankruptcy or the liquidator', and that the 'proceeds of that right of indemnity are therefore part of the estate divisible among the creditors'.[147] However, King CJ then drew a crucial distinction between the right of recoupment and the right of exoneration. In conformity with Professor Ford's opinion, King CJ stated that although the right of indemnity can 'produce proceeds for division among the creditors generally' in cases of recoupment, cases of exoneration were different.[148] He said:

If [the trustee] 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.[149]

177 King CJ noted that the trustee in bankruptcy or the liquidator could exercise the right of indemnity which vested in him to apply the trust property to the payment of the trust liabilities, thereby exonerating the insolvent estate to the value of the available trust assets.[150]

178 Agreeing with Needham J in Re Byrne (contrary to the Full Court in Re Enhill) that, in cases of exoneration, Octavo did not authorise a division of the property amongst the trustee's non-trust creditors, King CJ pointed to the High Court's recognition of the unpaid trust creditors' right to be subrogated to the trustee's right of indemnity. The right of unpaid trust creditors on bankruptcy or liquidation to 'stand in the shoes of the trustee and to obtain payment from the trust property', was, King CJ said, 'inconsistent with the notion that the trust property is ... property of the bankrupt divisible among the general body of creditors'.[151]

179 King CJ considered that the plurality in Octavo had made it 'explicit' that the right of indemnity in respect of unpaid trust liabilities must be applied in payment of the trust creditors.[152] Nor did the trustee company's lien provide support for the view that the proceeds of the right of indemnity in relation to undischarged trust debts could be applied to pay general creditors of the trustee.[153]

180 When applying these principles to the case before him, King CJ concluded that the liquidator was bound by s 292 of the Companies Act to pay the debts (which were all trust debts) in the specified statutory order of priority, having recourse to the property of each trust to pay the debts incurred in performing it, and, if there was a surplus after the priority payments, paying other trust debts pari passu if there were not enough assets for payment in full.[154]

181 King CJ concluded that in Re Enhill, the liquidator's costs, expenses and remuneration were payable as a priority because the company was obliged as trustee to pay the trust debts on winding up, for which the liquidator was necessary. The relevant expenses could thus be regarded as trust debts covered by the indemnity. He said that if that reasoning was wrong he would in any event (like Lush J) rely on the principle in Universal Distributing.[155]

182 Jacobs J agreed with King CJ. However, his Honour added that the legislation recognised that trust creditors who had been admitted to proof had a voice in determining the liquidator's salary or remuneration, which indicated that the trust assets to which they would otherwise have had recourse (through the trustee) were answerable for that remuneration.[156] Jacobs J found nothing in the legislative scheme as a whole to indicate that s 292 would not 'operate upon the trust assets to provide for the remuneration of the liquidator in priority to other claims'.[157]

183 His Honour noted s 291(2) which provided that, subject to s 292, the bankruptcy rules as to who may prove apply to the winding up of an insolvent company. His Honour reasoned that in a compulsory winding up, the trust creditors could prove, but only 'subject to section 292'.[158] He noted that Re Byrne involved a voluntary winding up in which the creditors could have fixed the liquidator's remuneration and accepted the obligation to pay it from the dividends to which they would become entitled from the realisation of the trust assets or otherwise. As they did not, the liquidator was unsuccessful.[159]

184 Jacobs J agreed with the 'general proposition' adopted by Needham J in Re Byrne that, save in cases of recoupment, 'trust assets are only available for the trust creditors and not for the creditors generally'.[160] But Jacobs J disagreed with Needham J's view that the liquidator must be a trust creditor in order to have recourse to trust assets, because unlike Needham J, he thought that s 292(1)(a) operated not only on funds available for creditors generally but also on trust assets, at least in cases of compulsory winding up by the Court.[161] His Honour regarded the holding in Re Enhill that trust assets were available for creditors generally as unduly wide in cases of exoneration.[162]

185 Matheson J agreed with both King CJ and Jacobs J.

186 In Re Independent Contractor Services (Aust) Pty Ltd (in liq) [No 2],[163] a trustee company in liquidation had, prior to winding up collected payments on behalf of the contractors, paid them into the trust and regularly distributed them to the contractors. The company had failed to make superannuation contributions in respect of the contractors as required by law. The contractors lodged claims for amounts owing as beneficiaries of the trust. The Australian Tax Office ('ATO') lodged a proof of debt in part in respect of the unpaid superannuation contributions and claimed priority under s 556 of the Corporations Act.

187 Brereton J rejected the ATO's claim to priority under s 556 for other reasons, but he also concluded that Re Suco Gold had wrongly held that liabilities of a trustee company should be paid from the trust property in the statutory order of priority.

Secondly, as to whether s 556 has any application in this context, the South Australian Full Court admittedly held in Re Suco Gold Pty Ltd that in respect of each trust of which the company in liquidation was trustee, liabilities were to be paid from the trust property in the order laid down in Companies Act 1962 (SA), s 292 - the predecessor of s 556_._ However, this is virtually universally accepted to be incorrect, although what is the correct position remains unclear. It is incorrect because s 556 is concerned only with the distribution of assets beneficially owned by a company and available for division between its general creditors. The essential alternatives are (as Daryl Williams QC suggested) that where the equities are equal, the trust creditors have priority according to the order in which the claims arose, on the basis that as each claim arose it brought with it an interest, via subrogation, in the trustee's lien over the trust assets; or that the trust creditors' claims rank pari passu (as suggested by the authors of Jacobs' Law of Trusts, and implicitly by McPherson J and R P Meagher QC).

In my judgment, the latter view is to be preferred. The trustee's lien does not attach to any particular asset, nor secures any particular liability, but is in the nature of a floating charge over all the trust assets, and secures the balance of the account as between the trustee and the beneficiary from time to time. The creditors do not acquire any direct interest in trust assets, but have a right to be subrogated to the trustee's equitable lien; theirs is a derivative right, so that if there is no balance due to the trustee from the beneficiary, the creditor can assert no claim against the assets. The creditor's right to be subrogated to the trustee's indemnity thus does not make the creditor a secured creditor of the trust in the ordinary sense, but gives the creditor a right to enforce the trustee's indemnity, only to the extent that the indemnity exists in the hands of the trustee. Where there are multiple creditors, they share that right. As the quantum of the indemnity fluctuates from time to time - as the trustee incurs debts to third parties, and incurs personal liability to the beneficiaries - as does the identity of the creditors - the better analogy is, as the authors of Jacobs' suggest, cases of competing claims by beneficiaries of different trusts to trace into a mixed fund, which produces a ranking pari passu.

It follows that the company, as trustee, had, and its Liquidator now has, a right of indemnity from, and lien over, the trust assets, which has priority over the interest of the beneficiaries, for liabilities it incurred in acting as trustee. As all the company's liabilities were incurred in its trustee capacity, all its creditors (including in particular the ATO in respect of superannuation guarantee charge and PAYGW penalty) are entitled to be subrogated to the Liquidator's lien. The statutory priority referred to in s 556 does not apply in respect of trust assets, and the creditors share pari passu in the trust assets, after providing for the costs of administration including the Liquidator's remuneration and expenses. But even if the statutory order of priority did apply, ICS's superannuation guarantee charge liability would not, in the circumstances of this case, be entitled to priority under s 556(1)(e)(i), because the contractors, in respect of whom it is payable, were not 'employees' of ICS for the purposes of s 556.[164]

189 His Honour did not deal with the implications of the High Court decisions in Octavo, Buckle or Bruton. Nor did his Honour discuss Re Enhill, although plainly, the latter is necessarily inconsistent with his reasoning.

190 Farrell J in the Federal Court followed Re Independent and adopted Brereton J's approach in Woodgate, In the matter of Bell Hire Services Pty Ltd (in liq).[165]

191 The primary judge found, and before us it was not disputed, that Amerind had traded solely in its capacity as trustee of the trust. It did not, however, consistently state that in its employee records and agreements with other parties. The company had no assets or money of its own with which to meet the liabilities it incurred in operating the trust business. Rather than paying such liabilities from its own funds and seeking reimbursement from the trust assets, Amerind sought to be indemnified from the trust assets for liabilities it incurred in carrying out the trust by using trust moneys to pay the trust creditors. The judge said that the moneys paid by the trustee to the creditors 'remained trust money, although the liability was that of the trustee'.[166]

192 The primary judge found that in those circumstances:

[T]he trustee had a right in equity to be indemnified (a right of exoneration as opposed to recoupment) from the trust assets for liabilities it incurred on behalf of the trust. That right of indemnity is supported by an equitable lien over all the trust assets, but is constrained to the limit of the liabilities that it secures. Creditors of the trust were entitled, in equity, to be subrogated to the rights of the trustee, and thus, with the aid of the court, exercise the trustee's lien, and the right to be indemnified, against the trust assets. The moneys so recovered would be trust moneys.[167]

The trust creditors were not in competition with other non-trust creditors of the trustee, as all the liabilities to creditors were incurred by the trustee acting as trustee.[168]

194 The primary judge rejected the submission of the applicant, the liquidator, and the receivers that the trustee's right of indemnity was 'property of the company' within the meaning of s 433(3) of the Corporations Act. His Honour stated that:

As the cases below establish, the trust assets, at all times, remain trust assets. The trust assets may be used to indemnify creditors for liabilities incurred on behalf of the trust. The trust creditors themselves have equitable rights to be subrogated to the rights of the trustee to be indemnified from the trust assets. The trustee's right of indemnity and related lien do not become 'property of the company' and are not available to meet other liabilities of the company. Rather, the right of indemnity and lien may only be used to satisfy liabilities incurred on behalf of the trust.[169]

195 His Honour observed that an indemnity from trust assets would not always be available to a trustee company. Thus, 'if, for example, the trustee acted improperly beyond its powers as a trustee', the relevant creditors 'would not be entitled to be subrogated to the trustee's right of indemnity over the trust assets that it may otherwise have had'. Further, his Honour said that '[a] trustee's right of indemnity is conditional on the trustee's account with the beneficiaries being clear, thus if a trustee is under an obligation to make good some loss or damage arising from a breach to the trust, such obligation would be deducted from the right of indemnity (and the related right of subrogation).'[170]

196 The primary judge held that the proceeds of sale of assets Amerind held as a trustee, which had been realised by the receivers, were not property of the company within the meaning of s 433(2) of the Corporations Act. Hence, they were not the 'property coming into his, her or its hands' as referred to in s 433(3).

197 His Honour concluded that the corporate trustee's right of indemnity (and lien), of which the receiver's surplus was the proceeds, was 'property held in trust', rather than 'the corporate trustee's own beneficial "personal property"'.[171] His Honour emphasised that '[t]he indemnity is not a personal asset of the trustee. It is trust property'.[172]

198 While the primary judge did not, in terms, identify the party for whom the trustee held the right of indemnity, he reasoned that:

The right of indemnity is over trust assets. The indemnity must be used to meet trust liabilities. The indemnity is not an exclusive right of the trustee. It may be exercised by the trust creditors through the right of subrogation. The indemnity is a right to be indemnified against claims by trust creditors. That requires that the indemnity be used to meet trust liabilities.[173]

199 His Honour distinguished, in that context, between the right of recoupment and the right of exoneration. His Honour concluded that where the right took the form of recoupment, the trust creditor had no rights against the trust estate as he had been paid with the trustee's own money. In contrast, in the case of exoneration, his Honour stated that 'the creditor is subrogated to the trustee's right of indemnity against the trust assets, and if the creditor is not paid, may take proceedings to enforce the indemnity against the trust estate'.[174]

200 The primary judge noted that the case concerned only exoneration rather than recoupment. Further, he noted that there was no allegation of factors which could exclude the indemnity, such as a breach of trust on the basis that the liabilities had not been properly incurred or there was an obligation to make good some loss or damage arising from a breach of trust.[175]

201 His Honour based his conclusions on 'four different lines of reasoning which overlap and support each other', as follows:

First, in the case where the indemnifying party has an interest in the extinction of the liability to which the indemnity relates, such an indemnifier 'is concerned in the discharge of those liabilities by the trustee so as to free the trust property from any charge thereon.' In that case, the money the subject of the indemnity must be used to discharge the liability which caused or created the emergence of the indemnity.

Secondly, assets to which the trustee is entitled to under its right of indemnity are trust assets, and trust assets may not be used for any other purpose than the authorised purposes of the trust, which includes paying debts incurred on behalf of the trust but does not include paying private debts of the trustee.

Thirdly, the trustee's right of indemnity, in the case of exoneration, is subject to the creditors' right of subrogation, which is a proprietary right. Thus the trustee's right of indemnity is not free from the proprietary interest of its creditors.

Fourthly, the trustee would not be freed of the claim giving rise to the indemnity if the trustee took assets of the trust under the purported right of indemnity to meet other personal expenditure of other non-trust liabilities and did not use the assets to be freed of the claims of the trust creditors.[176]

202 The primary judge held that, on the evidence, Amerind conducted its business in the capacity of a corporate trustee and acted solely in that capacity. His Honour stated that:

Amerind traded solely in its capacity as trustee of the trust. Although the manner in which Amerind entered into agreements with third parties, including suppliers, lessors, insurers as well as Amerind's employees, did not involve consistent disclosure that it acted in its capacity as trustee of the trust ...[177]

Accordingly, his Honour found that 'the receivers are justified in proceeding on the basis that the receivership surplus is properly characterised as property of the trust'.[178]

203 The primary judge acknowledged that Re Enhill and Re Suco Gold had held that the statutory regime did apply 'where the assets of a company are held on trust'.[179] However, his Honour preferred Brereton J's reasoning in Re Independent that the statutory provisions applied only to 'property of the company' and that the trustee's right of indemnity was not 'property of the company'.[180]

204 His Honour noted and endorsed Brereton J's views that Re Suco Gold's holding that s 556 applied to the payment of liabilities of a corporate trustee from the trade trust property, was 'virtually universally accepted to be incorrect, although what is the correct position remains unclear ... because s 556 is concerned only with the distribution of assets beneficially owned by a company and available for division between its general creditors'; and that the trust creditor's claim should rank pari passu.[181]

205 His Honour analysed ss 433, 556 and 560 of the Corporations Act. He observed that if Re Independent correctly stated the law in Australia, 'distributions of trust property are not subject to the priorities in s 433(3) of the Act'.[182]

206 His Honour acknowledged 'the considerable judicial consideration and differing views' on the issue of 'whether the right of indemnity of the trustee may constitute property of the company'.[183] His Honour considered that 'the better view is that where a company acts solely as a trustee and has no assets of its own, it does not'.[184]

Brereton J's conclusion in Re Independent is in line with the authorities discussed below, that a trustee of a trading trust has a right of indemnity over the assets of the trust in respect of liabilities incurred on behalf of the trust. The trustee's right of indemnity is supported by an equitable lien over all the trust assets and secures the balance of the account as between the trustee and beneficiary from time to time. The trustee's creditors have a right to be subrogated to the trustee's equitable lien. The right to be subrogated does not make the creditor a secured creditor of the trustee in the ordinary sense but gives the creditor a right to enforce the trustee's indemnity, only to the extent that the indemnity exists in the hands of the trustee. Accordingly, the trustee's right of indemnity itself is subject to the creditors' equitable right of subrogation. [185]

208 His Honour held that Re Enhill, which had not been followed in the Federal Court or any other state of Australia, was not binding on him.[186]

209 His Honour rejected the applicant's submission that the trustee company's legal title to assets would suffice to oblige it to make payments out of the property in accordance with the specified priority regime. He stated:

In my opinion, the 'property' referred to must be property of the company. To suggest that it covers property in the name of the company but that belongs to another person would be to overturn centuries of law recognising the distinction between the legal and beneficial ownership of assets.[187]

210 After analysing the relevant authorities at length, the primary judge reiterated his acceptance of Brereton J's analysis in Re Independent to the effect that an insolvent trustee's right of indemnity for exoneration was not part of his personal estate. Rather, it must be exercised and applied for the benefit of the trust to reduce the proprietary right of creditors over the assets of the trust estate and 'to achieve a true indemnification of the trustee from claims of the trust creditors'.[188]

211 Before the primary judge, it was common ground that for s 433(3) to apply, the receivers must be in possession of property of the company and that property must be 'subject to a circulating security interest'. If, contrary to his own conclusion, the trustee's right of indemnity was property of the company, Robson J had to determine whether it was subject to a circulating security interest. We deal with that aspect of the proceeding in Part 2 of this judgment.

Submissions on the application for leave to appeal

212 The Commonwealth submitted that the primary judge erred in denying employees their rightful status as priority creditors under the Corporations Act in following Bell Hire Services and Re Independent to hold that 'company law ends and trusts law takes over at a point before the trust assets are to be used by the insolvent corporate trustee exercising its right of indemnity to pay creditors'. The primary judge's reasoning that the corporate trustee does not beneficially own the right of indemnity which is thus not available for distribution under the statutory priority regime was, the Commonwealth submitted, contrary to the High Court's recognition in Octavo, Buckle and in Bruton that the trustee's right of indemnity (including for exoneration) was a beneficial interest in trust property amounting to a proprietary interest. That analysis was applied by the Full Courts in Re Enhill and Re Suco Gold so as to conclude that the statutory order of priorities applied to the distribution of the property.

213 The Commonwealth submitted that the construction of 'property of the company' bore the same meaning in s 433(3), in s 556 and in s 561 of the Corporations Act, which should apply if and to the extent that an insolvent corporate trustee had access to trust property to pay its creditors through its right of indemnity.

214 The Commonwealth submitted that the primary judge's holding did not accord with the policy of, and the parliamentary intention reflected by, those sections. The company's employees consequently lost the priority they would have enjoyed under s 433(3). They were instead ranked pari passu with all other unsecured trust creditors simply because the company conducted its business as a trustee rather than its own right. Such considerations apply with equal force to ss 556 and 561.

215 The Commonwealth submitted that Brereton J's decision that the words 'property of the company' encompassed only the trustee's charge and not the trust assets charged (which, while uncited, supported the primary judge's conclusion) was contrary to Finkelstein J's decision in Apostolou v VA Corporation of Australia Pty Ltd.[189] The latter was to be preferred both on principle and because it avoided the highly inconvenient necessity for the liquidator to apply to the Court before realising the relevant assets.

216 The Commonwealth submitted that the distinction between the corporate trustee's proprietary interest in the trust assets and the underlying assets was of no practical significance in this case, as the value of the debts properly incurred in administering the trust exceeded the value of the trust assets.

217 The Commonwealth submitted that as between the creditors and the trustee, the trustee's interest extended to the entire value of the trust assets; and, as between the creditors themselves, there was no reason why the statutory order of priority should not apply to the corporate trustee's personal debts.

218 The Commonwealth submitted that the primary judge erroneously focused on whether the trustee's interest in the trust property was 'personal' which was not the relevant question.

219 While the principal difference between Re Enhill and Re Suco Gold was not relevant in this case, the Commonwealth submitted that Re Enhill was to be preferred as more consistent with first principles, as once monies were appropriated in satisfaction of the trustee's right of exoneration, the trustee remained personally liable to its creditors, but neither they nor the trustee could have further resort to the trust fund in respect of the relevant liabilities. The beneficiaries accordingly were unaffected.

220 The Commonwealth submitted that the purpose of s 433 was clear from its long history and derivation. Priority for wages and salaries of employees was provided for in UK bankruptcy legislation in 1825 and extended to company winding up in the Companies Act 1883 (UK). The priority afforded to employee claims over floating charge holders was introduced by UK legislation in 1897, to overcome the 'great scandal' that since recognition of the floating charge in the 1870s 'debenture holders generally step in and sweep everything off', thereby depriving preferential creditors of their priority on winding up.

221 The Commonwealth submitted that if the decision below were upheld, the constant policy of the law over the past 120 years to maintain the priority of employees, including over floating charge holders, now reflected in ss 433 and 561, would be defeated or displaced by the mere happenstance that a business was carried on by a trustee.

222 According to the Commonwealth, the concept of beneficial ownership, now in relative eclipse, was not appropriate to construction of the statute. If, however, beneficial ownership were required, it submitted that Octavo and subsequent authorities established that the trustee's right of indemnity conferred such an interest.

223 The Commonwealth submitted that the relevant provision made no express reference to 'ownership' of the property. Moreover, property is defined widely in s 9 of the Corporations Act. It was necessary to focus on the wording of the statute, which comfortably applied to the trustee's proprietary interest. The Commonwealth submitted that the trust creditor's right to subrogation, which applied on bankruptcy or when it was otherwise futile to seek payment, and the prohibition on applying the moneys to meet the trustee's own liabilities, were, on insolvency, subjugated to the operation of the Corporations Act. Once the right of indemnity met the definition of 'property of the company', the Corporations Act 'crystallised' its subsequent treatment on insolvency. Further, if the 'property' were defined by the sole purpose of payment to a particular destination, that is, it was properly subject to a definitional restriction, this simply meant that Re Suco Gold was right. The Commonwealth nevertheless submitted that, any such limitation applicable in circumstances outside insolvency did not prevent the right from meeting the definition of 'property of the company', which must be applied to pay creditors.

224 The outcome in Re Suco Gold could alternatively be supported by the maxim that even outside the statute, equity follows the law. This, the Commonwealth contended, was at least as cogent as 'equity is equality', mandating a pari passu distribution, and would maintain employee priority even outside the statute.

225 The Commonwealth submitted that contrary to the view of the primary judge and Brereton J, Re Suco Gold was not universally accepted to be erroneous, but, to the contrary, had been widely applied, although the reasoning of many cases was not entirely clear and many appeared to concern only the liquidator's claims.[190]

226 The third respondent, CHH, submitted that it was not anomalous if fundamentally different outcomes resulted on insolvency because a company in liquidation had traded as a trustee. It merely reflected the fact that the trustee held the legal but not equitable title to the assets, which rested in the beneficiaries.

227 CHH acknowledged that the issue was one of statutory construction, but submitted that the framers of the Corporations Act could not have intended to displace the centuries - old division of legal and beneficial ownership and the usual consequences of the trust structure.

228 Property held on trust had always been excluded from distribution on insolvency despite the absence of an express provision to that effect in corporations legislation. Nor had parliament expressly extended the ambit of ss 433, 556 and 561 to include trust property.

229 The definition of 'property' in s 9 of the Corporations Act, although extensive, did not support the inclusion of trust property as 'property of the company'.

230 CHH submitted that its position was consistent with Octavo, as there, the property of the insolvent trustee was property that could be obtained by exercising the right of indemnity, rather than the trust property itself.

231 CHH submitted that both Re Enhill and Re Suco Gold were wrongly decided. If Re Enhill were binding on the primary judge, this Court, which was not bound, should decline to follow it.

232 CHH submitted that the right of recoupment or exoneration merely conferred an indirect interest in the trust property to which creditors could be subrogated in some circumstances, but not so as to confer a direct beneficial ownership in the creditors.

233 CHH submitted that the trustee's indemnity did not give the trustee a right to the trust property itself. Accordingly, the winding up provisions did not apply. Although the right of recoupment or exoneration was in the nature of an equitable charge or lien, it did not give the trustee a direct proprietary ownership of the trust property itself. Rather, the trustee was entitled to retain and realise the property to recoup or exonerate itself. This analysis applied to the whole range of trust assets.

234 CHH submitted that the holding in Octavo was not relevant to this case, as the legislation was in different terms and did not assist in determining what constituted 'property of the company' within the meaning of s 433 of the Corporations Act.

235 CHH submitted that the statement in Octavo that the trustee's rights of indemnity conferred a beneficial interest in trust property was simply referable to the charge or lien but 'does not make the trust property beneficially owned by the trustee'. Nothing in Buckle or Bruton was inconsistent with the proposition that the trustee had a proprietary right in the trust property, in the nature of a charge or lien, but was not the 'owner' of the property in any sense. CHH submitted that the 'property of the company' must be 'ownership' and not merely a proprietary right.

236 CHH submitted that the trustee's right of indemnity and charge or lien were not 'property of the company' but were held on behalf of the creditors who were entitled to be subrogated to them.

237 CHH submitted that the primary judge's holding did not deprive trust employees and other trust creditors of all rights, as they remained entitled to share in trust assets with others pari passu.

238 Since argument was heard on this application, Derrington J in the Federal Court has addressed the relevant issues in Lane, a case which concerned the Bankruptcy Act.

239 Derrington J held, contrary to Re Independent and the primary judge, that the trustee's right of indemnity for exoneration was a proprietary right which vested in an insolvent trustee's trustee in bankruptcy and, by analogy, would also be 'property of the company' in the corporate context. However, his Honour held that the right was a limited right with a sole purpose, being to directly pay trust debts, and that that did not alter on insolvency. He reasoned further that as the right was for the sole purpose of directly discharging particular liabilities it was not capable of being realised or producing 'proceeds'. As s 109 of the Bankruptcy Act mandated payment of priority claims from 'the proceeds' of property divisible among creditors, the right of indemnity was not covered, in his view. By analogy, his Honour reasoned that the same conclusion would apply in the corporate context, even though the Corporations Act provisions do not refer to 'proceeds'.

240 In Lane, the question was whether trust funds held by the trustee in bankruptcy of an insolvent individual trustee, who had incurred liabilities in conducting a trust business and who had a right of indemnity, were distributable to all creditors or only to trust creditors. The bankrupt had a personal estate and personal creditors, as well as trust creditors and a trust estate. In each case, the liabilities exceeded the assets. The trustees in bankruptcy applied for orders as to the application of the funds they held.

241 Derrington J observed that although the case arose under the Bankruptcy Act, 'neither the nature of [the trustee's right of indemnity] nor the manner in which it is held by a trustee, will alter depending upon whether the trustee is an individual or a corporation',[191] although the 'method by which the property of the insolvent trustee might be disposed of' might 'provide some legitimate ground of differentiation'.[192]

242 Derrington J set out the statutory regime including the definition of 'property' of the bankrupt in s 5, 'property divisible among creditors' in s 116, the provision providing for debts proved to rank equally in s 108 which refers to 'the proceeds of property', and s 109 which provides that subject to the Act the trustee in bankruptcy must apply 'the proceeds of the property' of the bankrupt in a specified order or priority.[193]

243 Derrington J observed that the property of the bankrupt 'was not necessarily the property which is actually distributed to the creditors'[194] as while the trustee in bankruptcy takes possession of all the property of the bankrupt, it is only from the proceeds of the realisation process that payments are made to creditors. Examples of property that could not be realised to produce proceeds were disclaimed onerous property and rights or powers which were productive of little or no realisation due to their inherent limitations.

244 While his Honour acknowledged that in Re Independent and the primary judgment here, the trustee's right of indemnity was viewed as trust property (which therefore did not vest in the trustee), he concluded that the right to be indemnified out of trust property was 'personal property, being a right to exercise power with respect to property within the meaning of s 116(1)(b) as informed by the definition of s 5'.[195] His Honour referred to a number of binding authorities which held that a trustee's right of indemnity is part of a trustee's personal estate, which will pass to a bankruptcy trustee in the event of the trustee's insolvency, including Savage, Octavo and Re Suco Gold.[196]

245 Derrington J analysed the nature of the indemnity, emphasising the fundamental distinction between rights of exoneration and rights of recoupment. His Honour observed 'the right of a trustee to be indemnified from the assets of the trust falls into two distinct parts'. By the right of indemnity for exoneration, 'the trustee is entitled to meet unsatisfied trust debts directly [emphasis added by Derrington J] from the trust assets by utilising the right of "exoneration"'. His Honour repeatedly emphasised the requirement for 'direct' payment to the trust creditor.[197]

246 His Honour cited with approval Ong's conclusion that 'the trustee is restricted in the use of the right of exoneration to using it for the purpose of discharging his liability to the trust creditors and no other.' The emphasis was added by Derrington J.[198]

247 His Honour referred to the emphasis on the distinction in In re Richardson, concluding that that decision indicated that, whilst a right of exoneration might vest in the bankruptcy trustee, this did not 'change its character to become a right to use trust funds to pay non-trust creditors'.[199] His Honour stated:

If the right of exoneration is limited in the trustee's hands, it is equally limited in the hands of the bankruptcy trustee. Neither the trustee nor, in his stead, the bankruptcy trustee, is entitled to use the funds which are the subject of the right of exoneration to discharge non-trust liabilities.[200]

The nature of the right of exoneration as a mere right or power to use trust funds to meet debts incurred in the operation of the trust, can also be detected in the origins of the rights of trust creditors to be subrogated to that right on the trustee's insolvency. This right evolved as a remedy in an administration action where the creditors of the executors, were entitled to prove in the estate under the administration decree and, where their debts were accepted, they would be paid directly out of the estate. The trustee was not entitled to assume beneficial ownership of the funds for the purposes of discharging the trust debts (see the discussion by HAJ Ford in Trading Trusts and Creditors' Rights, (1981) 13 Melb LR 1, 18-19).[201]

249 Derrington J characterised a right in a trustee to take an amount sufficient to extinguish trust debts from the trust fund and to appropriate that money to themselves with the intention of paying trust debts from the trustee's own assets 'swelled by the trust funds' as a 'third entitlement' (that is, neither exoneration nor recoupment) for which there existed no judicial authority, save for inferences to be drawn from Re Enhill. He rejected the existence of this 'third entitlement'.[202]

250 Derrington J reviewed the relevant authorities, including the primary judgment here, in detail.

251 Derrington J considered that it was possible to reconcile the apparent contradictions in this area by construction of the relevant provisions of the Bankruptcy Act. His Honour reasoned that in the Bankruptcy Act it is apparent from the references to the 'proceeds' of property, that some property is not in fact divisible under the statutory regime. His Honour identified the right of exoneration as property of this kind, because it is in 'form, and in substance ... a power to use funds for a singular purpose'.[203]

252 On the primary judge's approach the right of exoneration remained trust property, but the correct approach, Derrington J said, was as follows:

In essence, the right of exoneration is a right of a limited nature and, even when it passes to the bankruptcy trustee, it cannot be exercised other than by causing trust funds to be applied to meet trust debts ... The right of exoneration ... is not capable of being realised, although it can be used in the administration to cause or require the payment of the debts of the trust creditors.[204]

253 Derrington J reasoned that the distinction between the concepts in bankruptcy legislation of 'property of the bankrupt which is divisible among the creditors' and 'the "proceeds" of that property has to be maintained'. His Honour stated:

It is the proceeds of the realisation process which are applied proportionately as required by the operation of s 108 or in the priority dictated by s 109. There is nothing in Division 4 of Part VI, 'Realisation of Property' which would prevent a bankruptcy trustee from exercising a power of the bankrupt which had the effect of directly benefiting some creditors over others, albeit with indirect benefits flowing to the remaining creditors.[205]

254 Derrington J considered that this approach was consistent with Octavo. He said Octavo meant that it could not be 'seriously doubted' that the right of indemnity was not a trust asset and was property divisible among the creditors. But he considered that Octavo also made it clear that the right could only be used to meet the claims of trust creditors who were entitled to be subrogated to that right.[206]

255 His Honour rejected a submission that the nature of the right of subrogation was altered by operation of the bankruptcy regime.[207]

256 The entitlement of trust creditors to be subrogated to the trustee's right of indemnity was an important factor in Derrington J's analysis. It gave them, in his view, a 'favoured position',[208] and while it did not make them secured creditors, in Derrington J's view, 'they are certainly akin to secured creditors in some respects'.[209]

257 Derrington J held that the priority regime in s 109 of the Bankruptcy Act did not apply to the property represented by the right of indemnity because from that right no 'proceeds', as required by s 108, could be derived.[210]

258 Derrington J acknowledged that ss 555 and 556 of the Corporations Act did not 'expressly identify' that what is to be distributed is the 'proceeds' of the property of the company. He then observed:

The provisions of ss 108 and 109 of the Bankruptcy Act are more explicit and easily allow for the conclusion that property which cannot be turned into proceeds is not within their scope. Nevertheless, it would appear that ss 555 and 556 do contemplate the payment of debts by use of the company's property. That can only occur if that property is realised by sale or otherwise and 'proceeds', in the form of money, are produced. It would seem to follow that if the property in question was not capable of being realised, it would not be within the scope of ss 555 and 556. A trustee's right of exoneration is such property.[211]

Part 1 - Analysis

259 The primary judge's holding that contrary to both Re Enhill and Re Suco Gold the trustee's right of exoneration is not property of the company available for division among its creditors (whether trust creditors or general creditors) according to the statutory order of priorities, departs from established, if criticised, principles which, at least prior to Re Independent, had governed the treatment and application of the trustee's right of indemnity on insolvency. Although Re Enhill attracted criticism[212] its authority was, prior to the primary judge's decision, recognised, albeit without marked enthusiasm, in Victoria. Prior to Re Independent, the reasoning and principles elaborated in Re Suco Gold were, in all jurisdictions save Victoria, generally preferred to those of Re Enhill, largely because Re Suco Gold was seen to better accord with established trust principles. Nevertheless, deficiencies have also been identified in Re Suco Gold including, most saliently, the Full Court's failure to explain clearly how, if the proceeds of the right of the indemnity constitute property of the insolvent trustee company which must be applied according to the statutory scheme of priorities, general creditors of the company are to be excluded from the distribution.

260 Both Re Enhill and Re Suco Gold characterised the trustee's right of indemnity (not excluding the right of exoneration) as property of the company divisible amongst creditors according to the statutory order of priorities. The apparently fundamental disagreement on whether the proceeds of the right of exoneration are divisible on insolvency only among trust creditors, to the exclusion of general creditors, has had less practical significance than might have been anticipated. Many of the decided cases have concerned insolvent trustee companies with trust liabilities only. Typically, the only claims which were arguably not trust-related were the liquidator's claims for costs, fees and expenses. It has been held that where it can be established that the liquidator's work and costs were essential or beneficial to the trust, the related claims may be satisfied on the basis of Re Suco Gold; or alternatively, under the principles of Universal Distributing.

261 Accordingly, prior to Lane, it seems that no court had found it necessary to determine the controversy generated by the different holdings in Re Enhill and Re Suco Gold over whether the proceeds of the right of indemnity for exoneration are divisible amongst all creditors or trust creditors only. That is also the position in the present case, as Amerind has only trust creditors. Thus, the only issues we are required to determine on this part of the application are:

(a) whether the trustee's right of indemnity, if a right of exoneration, constitutes 'property of the company' within the meaning of ss 433, 555 and 556 of the Act; and

(b) if the right of exoneration is 'property of the company', does the statutory order of priorities (or some other principle) govern the distribution of the proceeds to the trust creditors?

262 The determination of the above questions has significant consequences. If the decision below be correct, classes of statutory preferred creditors such as employees who, in recognition of their particular needs and status, have, by successive legislation, long been accorded priority over other classes of unsecured creditors and over floating chargeholders, will not enjoy that priority when they have dealt with a corporate trustee acting in that capacity. Instead, on the insolvency of a corporate trustee, distributions of the proceeds of the trustee's right of indemnity to all trust creditors (whatever the respective status or category of their claims under the statute) will be made outside the statute. More generally, the administration of insolvent corporate trustees may be effectively removed from the comprehensive statutory insolvency regime governing, amongst other things, proofs of debt, equitable distribution, and avoidance of antecedent transactions.

263 At the heart of the various different approaches to the treatment of the trustee's right of indemnity for exoneration in insolvency lie the proper characterisation of the nature of the right and the clear identification of its defining purpose. If the exoneration of the trustee's personal estate is the defining purpose of the right, such that satisfaction of trust creditors' claims is more akin to a means of achievement of that right, then that right may legitimately be overridden in insolvency, reflecting the analysis of Young CJ in Re Enhill. Alternatively, if the satisfaction of the trust creditors' claims is integral to the purpose, and a defining characteristic, of the right of indemnity by way of exoneration, the property can have no existence which is independent of a requirement that the trust liabilities be discharged, as reflected in the analysis of King CJ in Re Suco Gold.

264 Young CJ's analysis in Re Enhill was, in our view, more internally consistent than some academic criticism may suggest. His observations suggest that he saw the fundamental purpose of the right of indemnity as the protection of the trustee by the exoneration of his personal estate, and that he conceived of the discharge of the trust related liabilities (albeit that they were the basis of the right of indemnity) more as a means of achieving that fundamental purpose than as an essential definitional aspect of the right. Young CJ concluded that once the trustee's right of indemnity was characterised as property of the company, it necessarily followed that the statutory order of distribution was attracted without any exception or qualification merely because the property had been subject to an antecedent limitation upon its use which was at odds with the prescribed statutory order. On the basis of that characterisation of the right, Young CJ's approach seems logically coherent.

265 If, on the other hand, Young CJ's conception of the nature of the trustee's right is rejected and the purpose of meeting the trust liabilities is seen as integral and definitional, it might then be more logically coherent to conclude (as did Brereton J and the primary judge) that the right of indemnity by way of exoneration is not property of the company at all. That approach would accord with Professor Ford's analysis. However, as Professor Ford himself recognised, it is not consistent with High Court authority. Derrington J recognised that inconsistency but concluded that the property represented by the right was not regulated by the statutory regime for other reasons. Brereton J and the primary judge both recognised that a conclusion that the right of indemnity by way of exoneration was not property of the company at all would lead to a situation where there were two insolvency regimes operating, one outside the statute and one within. In one sense, Re Suco Gold also creates two separate regimes for distribution operating in parallel, although both within the relevant statutory provisions. That may be seen as being logically coherent with the view that the purpose of meeting trust liabilities is an integral feature of the trustee's right.

266 As indicated, Young CJ viewed the right of indemnity by way of exoneration as capable of existing independently of its application to meet the claims of trust creditors so that when insolvency intervened, the antecedent obligation to exercise the right so as to meet those claims was overridden by the prescribed statutory order of priorities. This approach has the advantage of consistency, but it also has drawbacks. It renders the trust creditors' right of subrogation of little or no substance in the very circumstance which would trigger it. It creates a position where, on one view, there is an unauthorised application of trust assets.

267 It seems to us to be unlikely that any analysis can comprehensively reconcile the competing considerations at play, all of which are supported to some degree in the diverse relevant authorities.

268 We turn then to the particular questions raised, being whether the right of indemnity by way of exoneration is property of the insolvent trustee company, and whether the disposition of the relevant property is governed by the Corporations Act. Whilst it is unnecessary for us to decide it, we will make some further observations on the question whether the distribution, if otherwise governed by the Corporations Act, is confined to trust creditors.

Is the right of indemnity by way of exoneration 'property' of the insolvent trustee company?

269 The primary judge's conclusion that the corporate trustee's right of indemnity by way of exoneration was not 'property of the company' cannot be sustained in the light of relevant High Court authority.

270 The primary judge emphasised from the outset of his analysis that the character of the relevant assets would never change. Money used by a trustee in exercise of the right of exoneration 'remained trust money', in the primary judge's view. The assets 'remain trust assets'. The right of indemnity was 'property held in trust', rather than 'the corporate trustee's own beneficial 'personal property'.

271 It is inconsistent, in our opinion, with High Court authority to hold that the right of indemnity is not property of the corporate trustee because the assets are trust assets. In Octavo the High Court held the trustee's interest 'amounts to a proprietary interest'. In Buckle the High Court held that once a right of indemnity (including for exoneration) arose 'there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries'. In both Buckle and CPT the High Court said that it was not possible to identify the trust fund until account was taken of the right of exoneration. In Bruton the High Court reiterated that the trustee's right 'amounted to a proprietary interest'.

272 The primary judge's 'four different lines of reasoning' which supported his conclusion cannot stand against the High Court authorities, in our view. We make the following further observations:

• The first line of reasoning was that the 'indemnifier' is 'concerned' as to the discharge of the indemnified liabilities. This is the issue addressed In re Richardson, Liverpool, and by Clyne J in Re Doyle. It may be significant that the High Court has never addressed In re Richardson. In any event, this consideration, at most, supports a contention that the trustee's proprietary interest comes with an inherent limitation.
• The second line of reasoning was that the right of indemnity can be used only for the authorised purposes of the trust. Again, this consideration, at most, supports a contention the proprietary right comes with an inherent limitation.
• The third line of reasoning was that the creditors have a right of subrogation and that is a proprietary right. In our view the authorities do not support that characterisation of the right of subrogation, but, in any event, the creditors' rights can rise no higher than the trustee's rights. In Octavo the High Court expressly addressed the effect of the creditors' right of subrogation in a passage quoted earlier.
• The fourth line of reasoning was that the trustee would not be 'freed' of the trust debt if trust assets were used to meet non-trust debts. The trustee is personally liable. That liability will continue if the trust debt is not paid. But to the extent the trustee has already been indemnified there can be no further claim upon the trust assets, either by the trustee or by way of subrogation. We do not see that consideration as being of assistance.

273 As Derrington J has cogently explained, in the light of the High Court decisions in Savage, Octavo, Bruton, Buckle and CPT it cannot be seriously doubted that the right of indemnity by way of exoneration is property of the insolvent trustee company.

Is the distribution of the relevant 'property' governed by the Corporations Act?

274 Derrington J in Lane held that the right of exoneration was property of the insolvent trustee, but that the provisions of the Bankruptcy Act governing the distribution of the insolvent's property did not apply. He reached this conclusion by, firstly, drawing a distinction between assets which are capable of producing 'proceeds' and those which are not. The examples he gave for the latter were onerous property disclaimed by a bankruptcy trustee and rights or powers productive of little or no realisation due to their inherent limitations. He then characterised the nature of the right of exoneration. He suggested not only that the right must be used solely to meet trust obligations but also that that use must be 'direct'. He characterised the purported exercise of the right by appropriating funds to the trustee's own money and then paying trust debts from that augmented source as a 'third entitlement' for which there existed no judicial authority. Finally, Derrington J appeared to adopt Professor Ford's characterisation of the right of exoneration as a 'mere right or power', notwithstanding his conclusion that it constituted a proprietary interest. He accepted that his approach would place trust creditors into a position 'akin' to secured creditors.

275 On this basis Derrington J declined to follow Re Suco Gold and Re Enhill in applying the relevant insolvency legislation to the disposition of the property constituted by the right of indemnity.

276 In our view Re Suco Gold and Re Enhill are correct on this issue. Once it is accepted that the right of indemnity is property of the insolvent, the insolvency legislation must apply.

277 The first and most compelling reason for this is that High Court authority appears to require it. The High Court applied the preference provisions in Octavo. If the payments made in that case had not come from assets otherwise subject to the statutory insolvency regime there could not have been any preferential effect. Instead, there was a preference as between Octavo and other creditors 'entitled to a share in the money paid'.[213] In Bruton the High Court held that the Commissioner's attachment appeared to infringe s 500 of the Corporations Act, as the Full Federal Court had held. That section regulates attachment 'against the property of the company' after winding up.

278 Derrington J's reliance on the use of the term 'proceeds' in the bankruptcy legislation is not, in our view, derived from, or suggested by, any relevant authority. We do not consider that the references to proceeds should be given the significance he gives them. The term 'proceeds' seems to us to be apt to describe the financial result of exercising the right of exoneration. In any event, the references to 'proceeds' relied upon by Derrington J do not appear in the Corporations Act. The term 'property' is defined widely in s 9 of the Corporations Act, and there is no warrant in that provision for confining it by reference to 'proceeds'. The references to 'proceeds' relied upon by Derrington J in ss 108 and 109 of the Bankruptcy Act do not appear in ss 555 and 556 of the Corporations Act.

279 Whilst it might be accepted that, at least where beneficiaries have an interest in the discharge of the trust debts, the right of exoneration must only be used for that purpose, the imposition of a requirement of 'directness' is not, in our view, a requirement found in the existing authorities. It is not consistent with Liverpool. Of course, in Liverpool there was no fiduciary relationship.

280 Professor Ford did characterise the right of exoneration as a 'mere right or power', but he also clearly saw the inconsistency between that characterisation and the High Court's decision in Octavo. Derrington J's analysis, in substance, resurrects the characterisation of the right as a 'mere' power without attributing substance to its acknowledged designation as property of the trustee. In any event, the existence of an inherent limitation on the 'power', given that it is 'property' in the relevant sense, would not justify a conclusion the statutory regime did not apply.

281 Once it is accepted that the right of exoneration is property of the company in the relevant sense, the provisions of the Corporations Act, and in particular ss 433, 555 and 556 must apply, as both Re Suco Gold and Re Enhill have held. Any other conclusion appears inconsistent with the High Court authorities to which we have referred.

Is that distribution, if otherwise governed by the Corporations Act, confined to trust creditors?

282 It is unnecessary to decide this question in order to determine this application. We have concluded that Re Enhill and Re Suco Gold were correct when they decided that the right of indemnity by way of exoneration was property of the company and that the statutory corporate insolvency regime applies to its distribution. The issue of whether that property has an inherent characteristic which confines its distribution to trust creditors is not one that we need to decide, as all of Amerind's creditors are trust creditors.

283 It is certainly true that if one analyses the position focusing on trust principles the approach in Re Suco Gold has cogent arguments in support of it. It brings the position closer to Professor Ford's analysis of the nature of the right of exoneration, it is more consistent with trust creditors' rights of subrogation, it avoids what might otherwise amount to a misapplication of trust assets or the trustee 'profiting' by using trust assets to meet personal liabilities, and it is consistent with the principle (articulated in Buckle relying on Scott on Trusts) that the right of exoneration exists only for the purpose of enabling the discharge of the trustee's obligations by recourse to the trust assets.[214]

284 On the other hand, there are considerations which support the Re Enhill approach. They include:

(1) Re Enhill gives effect to the statutory provisions in ss 555 and 556 which regulate provable claims. Trust creditors have provable claims. Section 555 provides that 'all debts and claims proved'...'rank equally'... and if the property of the company is insufficient 'must be paid proportionately'.[215] If the property constituted by the right of exoneration is to be distributed only to trust creditors, all debts and claims proved are not ranking equally and the property is not being paid out proportionately. Similarly, s.556 provides that the specified debts (including employee claims) 'must be paid in priority to all other unsecured debts and claims'. How do trust debts escape this provision's application to 'all other unsecured debts'?

(2) No relevant authority establishes that trust creditors have a proprietary interest in the trust assets or are themselves beneficiaries of the trust. They have a remedy by way of subrogation which can rise no higher than the trustee's own right. The remedy, in its genesis at least, was not to advantage them, but to avoid a position where beneficiaries might be seen to benefit improperly. Re Enhill effectively negates this remedy in winding up, but that is not necessarily contrary to fundamental principle, as the fundamental principle in winding up is equality among unsecured creditors.

(3) Clyne J correctly observed that it will usually be 'obvious' that beneficiaries are interested in ensuring that a trustee exercising a right of exoneration applies the funds to meet the relevant trust claims because that will be necessary for the protection of the trust estate. This approach reconciles In re Richardson and Liverpool. But once winding up intervenes, except in unusual cases, beneficiaries are not concerned with the application of the proceeds of the right of indemnity. Given that the relevant 'property' is always limited by the extent of the trustee's own right of indemnity, in all but exceptional cases, beneficiaries' interests will be entirely unaffected by the manner in which the proceeds of the right of indemnity are applied.

(4) On one view, there is tension between Octavo's conclusion that the payments in that case were a preference, given the characteristics of a preference as earlier explained, and a conclusion that the proceeds recovered in that case would not have been distributed amongst all creditors, including non-trust creditors if there had been any.

Part 1 - conclusion

285 In the circumstances, the trial judge ought to have held that the receivers were justified in proceeding on the basis that (a) the receivership surplus was not trust property and (b) the priority regime in ss 433(3), 556 and 560 of the Corporations Act applies to that surplus insofar as those assets were circulating assets at the relevant time. We will turn to the latter issue in Part 2 of these reasons.

286 In the meantime, whilst the discussion above discloses that there must be some doubt about which of Re Enhill or Suco Gold is correct, it suffices to say that unless and until a subsequent appellate decision decides otherwise, the law as it stands in Victoria as articulated in Re Enhill should continue to be followed by trial judges in this State.[216]

Part 2: Assets subject to a 'circulating security interest'

The trustee's right of indemnity as a 'circulating asset'

287 It is now necessary to turn to the second ground upon which the judge held that s 433 did not apply, namely that the right of indemnity was not subject to a 'circulating security interest'. It is convenient to set out the relevant parts of that provision:

(2) This 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[217] 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 ... :

(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.

(3) 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:

...

288 Section 51C of the Corporations Act defines the term 'circulating security interest' to mean 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.

289 A 'PPSA security interest' is relevantly defined in s 51 of the Corporations Act as 'a security interest within the meaning of the [PPSA] and to which that Act applies'.[218] A security interest 'attaches' to a circulating asset when the grantor of the security interest has rights in the asset and either value is given for the security interest or the grantor does an act by which the security interest arises.[219] It will be convenient to consider the definition of 'circulating asset' later in these reasons.

290 At trial, the parties agreed that, in order for the distribution of the proceeds of the right of indemnity to be governed by the priority regime, two conditions must be satisfied. First, the receiver must be in possession of 'property of the company'. Secondly, if the receiver is in possession of 'property of the company', the property must be property which is 'subject to a circulating security interest'.[220] For the reasons given in Part 1 above, the first condition was satisfied in the present case, at least by virtue of the receivers holding the right of indemnity, more particularly the right of exoneration in respect of amounts owed to trust creditors. It is now necessary to consider whether the 'property of the company' of which the receivers are in possession is 'subject to a circulating security interest'.

291 The 'security interest' in question is the security held by the bank, namely the general security deed. It is necessary to refer to its central provisions.

292 Under the general security deed, the bank is described as 'the Secured Party' and Amerind as 'the Grantor'. The general security deed is expressed to be 'granted by the Grantor in favour of the Secured Party'.

293 Clause 2.1 relevantly provides that for the purpose of securing payment of the amount owing the Grantor grants a 'security interest' in the 'personal property' to the Secured Party and charges the 'other property' to the Secured Party by way of fixed charge. Clause 2.2 provides that the 'security interests' taken by the Secured Party under the general security deed extend to all of the 'collateral', being all of the Grantor's present and after-acquired property.

294 Clause 40.1 defines certain terms used in the general security deed. The following definitions are relevant for present purposes:

collateral means the personal property and other property:

(a) of whatever kind and wherever situated;

(b) whether [the Grantor is] the beneficial owner or [holds] as trustee of a trust; and

(c) whether [the Grantor holds] it jointly or with one or more other persons (whether in partnership or not and whether named in the Details or not).

...

other property means all [the Grantor's] present and after-acquired rights and interests in land and any other property, rights and interests that is not personal property.

...

personal property means all of [the Grantor's] present and after-acquired personal property (as defined in the PPSA and to which the PPSA applies) and all present and after-acquired personal property (as defined in the PPSA and to which the PPSA applies) in which [the Grantor has] rights.

...

security interest:

(a) in relation to any personal property (as defined in the PPSA) has the same meaning as in the PPSA; and

(b) in relation to any other property means any security for the payment of money or performance of obligations including a mortgage, charge, lien, pledge, trust or power.

295 Section 10 of the PPSA defines 'personal property' as property, including a licence, other than land or a right, entitlement or authority granted by statute and declared not to be personal property for the purposes of the PPSA. As a note to the definition indicates, s 8 provides that the PPSA does not apply to various interests in personal property, and it will be necessary to return to this provision.

296 Returning to the general security deed, cl 10.2 outlines the circumstances in which the Grantor may not, without the Secured Party's prior written consent, do, or agree to do, certain things in respect of the collateral. Clause 10.2 excludes from these restricted activities the following dealings:

... a disposal of inventory in the ordinary course of [the Grantor's] business. [The Grantor] may collect accounts which are the proceeds of inventory or accounts that arise from granting a right, or providing services, in the ordinary course of [the Grantor's] business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided).

If [the Grantor disposes] of, [deals] with or [parts] with possession of any interest in inventory in the ordinary course of business, [the Secured Party's] security interest will extend to the proceeds [the Grantor receives] in respect of that inventory.

298 It is not in dispute that the general security deed extended to give the bank security over property including that to which Amerind might have recourse in its capacity as trustee exercising either its right of recoupment or its right of exoneration, and that it extended to give security over the right of indemnity itself. The debate, as articulated later in these reasons, was whether the right of indemnity was subject to a circulating security interest. In short, the Commonwealth submitted that it was and CHH submitted that, because the right of indemnity was not a 'circulating asset', it was not subject to a circulating security interest. But it is first necessary to consider whether this issue properly arises for consideration at all.

Is it necessary that the right of indemnity be subject to a circulating security interest?

299 At trial the parties proceeded upon the basis that the property which must be subject to the circulating security interest in order for s 433 to apply was the right of indemnity. The judge held that the right of indemnity was not so subject, and the Commonwealth challenges that conclusion. However, the Commonwealth now also contests the premise upon which the argument at trial proceeded. CHH did not raise any objection to the Commonwealth taking this course.

300 The Commonwealth submitted on the appeal that: (a) the 'property of the company' of which the receivers were in possession includes not only the right of indemnity but also the underlying assets to which the trustee could have recourse in exercise of its right of exoneration; and (b) it is therefore not necessary that the right of indemnity itself be subject to a circulating security interest or be classified as a circulating asset.

301 In the Commonwealth's submission, s 433(2)(a) applies where two conditions are met. First, a receiver is appointed over property subject to a circulating security interest. Here, this condition was met by the appointment of the receivers pursuant to the general security deed. Secondly, the receiver is appointed as receiver of property that is subject to a circulating security interest (here, the property of Amerind to which the receivers may have recourse pursuant to the right of indemnity). That property is then available to pay the company's creditors: s 433(3). It is not necessary that the means by which the property is available to pay the company's creditors is itself subject to a circulating security interest. The Commonwealth submitted that since the right of indemnity gives its holder a proprietary interest in the trust assets themselves, the relevant question is which, if any, of those assets are circulating assets. In other words, the Commonwealth submitted that the section should be applied recognising the practical importance of the actual assets that come into the hands of the receiver.

302 The Commonwealth contended that Parliament cannot be taken to have intended that the priority regime in s 433 would only apply where the right of indemnity was subject to a circulating security interest. It submitted that no identifiable policy objective would be achieved by such a construction and that it would risk employees being deprived of the benefit of their priority under s 433 if the company had conducted business as a trustee.

303 In oral argument, the Commonwealth also drew attention to s 8(1)(c) of the PPSA, which reads as follows:

8 Interests to which this Act does not apply

(1) This Act does not apply to any of the following interests (except as provided by subsection (2) or (3)):

...

(c) a lien, charge, or any other interest in personal property, that is created, arises or is provided for by operation of the general law;[221]

The Commonwealth submitted that, by operation of s 8(1)(c), the PPSA is not concerned with the right of indemnity and therefore it would be anomalous to seek to ascertain whether the right of indemnity was subject to a circulating security interest or to decide whether the right of indemnity is a circulating asset within the meaning of the PPSA.

304 CHH submitted that s 433(2) of the Corporations Act made it clear that the section applies only to the extent that the property coming into the hands of the receiver is subject to a circulating security interest. It submitted that the property in question in the present case was the right of indemnity. In order to attract s 433 it was therefore necessary for the right of indemnity to be a circulating asset and thus subject to a circulating security interest. It was submitted that s 433 operated in this way consistently with s 561 of the Corporations Act, which applied to give employee claims in a liquidation priority of payment out of property 'comprised in or subject to the circulating security interest'.

305 CHH submitted that the Commonwealth's argument regarding s 8(1)(c) of the PPSA showed, not that it was unnecessary to inquire whether the trustee's right of indemnity was subject to a circulating security interest, but that it was not so subject. In other words, s 8 arose for consideration only when deciding whether the right of indemnity was a circulating asset.

306 The receivers generally supported the submissions of the Commonwealth but departed from those submissions in so far as they concerned s 8. The receivers submitted that s 8(1)(c) of the PPSA does not remove the right of indemnity from the ambit of the PPSA and therefore from the definition of 'circulating security interest' in s 51C of the Corporations Act. They said that s 8(1)(c) of the PPSA is concerned with the application of the PPSA to certain 'interests' and that the right of indemnity, which they described as a series of proprietary rights rather than a security interest, is not a form of interest with which s 8 is concerned. As such, s 8(1)(c) had nothing to say as to whether the right of indemnity was capable of constituting a 'circulating asset' or whether an inquiry as to that matter was apposite.

307 Before evaluating the above arguments, it is necessary to set out the definition of the term 'circulating asset' in s 340 of the PPSA:

340 Meaning of circulating asset

General definition

(1) For the purposes of this Act, if a grantor grants a security interest in personal property to a secured party, the personal property is a circulating asset if:

(a) the personal property is covered by subsection (5) (unless subsection (2) or (3) applies); or

(b) in any other case - the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor's business, free of the security interest.

Exceptions

(2) Despite paragraph (1)(a), personal property covered by subsection (5) is not a circulating asset if:

(a) an effective registration with respect to the property, in relation to the grantor, discloses, in accordance with the regulations, that the secured party has control of the personal property; and

(b) the secured party has control of the personal property.

Note: For the meaning of control in this subsection, see section 341.

(3) Despite subsection (1), personal property covered by subsection (5) is not a circulating asset if:

(a) the personal property is goods; and

(b) the security interest is perfected by possession.

(4) For the purposes of paragraph (1)(b), personal property is not a circulating asset merely because the secured party has given express authority to transfer specific personal property, or a specific class of personal property, free of a security interest.

(4A) Despite subsection (1), if a grantor grants a security interest provided for by a transfer of an account or chattel paper, the account or chattel paper is not a circulating asset in relation to the security interest.

Current assets

(5) This subsection covers the following personal property:

(a) an account that arises from granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided);

(b) an account that is the proceeds of inventory;

(c) an ADI account[222] (other than a term deposit);

(d) currency;

(e) inventory;

(f) a negotiable instrument.

Example: An example of an account mentioned in paragraph (a) is an account that is a credit card receivable.

Note: For the meaning of inventory in this subsection, see section 341.

308 Section 341 of the PPSA defines 'control' and 'inventory'. It is set out later in these reasons.[223]

309 It will be recalled that these definitions are attracted by s 51C of the Corporations Act, which defines 'circulating security interest' (an expression not deployed in the PPSA). The latter definition in turn has two alternative parts. It first includes a 'PPSA security interest' which has attached to a 'circulating asset'; it extends also to a floating charge, but s 339(5) of the PPSA provides that this is to be taken (including in the Corporations Act) as a reference to a security interest that has attached to a circulating asset, to the extent that the charge has attached to personal property in which title is in the grantor.[224] It therefore appears that the reference to a floating charge adds little, if anything, to the definition.

310 A 'PPSA security interest' is defined in s 51 of the Corporations Act in terms which require that the PPSA 'applies' to the interest. It needs to be borne in mind that the 'security interest' at this point is the security provided for in the general security deed. The PPSA applies to that charge.[225]

311 The next question under the first limb of the definition of 'circulating security interest' is whether the PPSA interest has attached to a circulating asset. Without embarking on any detailed analysis of the assets to which the charge in the general security deed applies, it is plain that it has so attached, at least to some extent. The requirement of 'attachment' is satisfied because Amerind had rights in secured assets and the bank gave value for the security interest.[226] The identification of a 'circulating asset' to which the security interest is attached is met because, at the least, the parties now accept that the proceeds of stock realisations by the receivers constitute a circulating asset.[227]

312 On that basis, the debentures under which the receivers were appointed, were secured by a 'circulating security interest', and the first condition in s 433(2)(a) is satisfied. The same result is reached if the alternative path is taken, via the reference to a floating charge in the definition of 'circulating security interest'.

313 That being so, s 433(2)(a) then asks whether the property over which the receiver has been appointed is subject to the circulating security interest.[228]

314 In the case where the company in question has traded as a trustee, the property of the company, of which possession has been taken by the receiver, will include the right of indemnity. But, as a result, it will also include the property to which the company might have recourse, in its capacity as trustee, pursuant to the right of indemnity. That property may, or may not, be subject to a 'circulating security interest'.

315 In these circumstances, no requirement appears in the legislation by which it would be necessary to inquire, still less to establish, that the right of indemnity by means of which the receiver could have recourse to the trust property must itself be subject to a circulating security interest. Such a requirement would add an additional hurdle to the application of s 433 without any apparent rationale. It would serve to thwart the application of s 433 to those trust assets which are circulating assets to which a security interest has attached, on an arbitrary basis where the right of indemnity does not itself satisfy that requirement.

316 In light of this conclusion, it is not necessary to consider the Commonwealth's further submission that it would be perverse to construe s 433 as requiring discrete consideration of whether the right of indemnity is a circulating asset in circumstances where, by virtue of s 8(1)(c) of the PPSA, the right of indemnity is not an interest to which the PPSA applies. However, we think that the submission reads too much into the provision. Section 8 provides for the exclusion from the PPSA of certain interests in personal property. It extends to the trustee's right of indemnity because it is a 'lien, charge or any other interest in personal property' within s 8(1)(c). But while such interests are excluded from the security interests governed by the PPSA, this says nothing as to whether a security interest might constitute personal property within the meaning of 'circulating asset' (to which a security interest within the PPSA might attach). Put differently, s 8 does not say that a 'lien, charge or other interest in personal property' is not capable of being itself 'personal property'.

317 For the preceding reasons, however, the Commonwealth's submission that it is not necessary that the trustee's right of indemnity be subject to a circulating security interest should be accepted. However, to the extent that the Commonwealth might be taken to have suggested that s 433(2) and (3) might operate disjunctively, that submission should be rejected. In other words, the property coming into the hands of the receiver, within the meaning of s 433(3), is the property of which possession is taken (or control is assumed) as described in s 433(2). It is that property which must be subject to a circulating security interest. That requirement cannot be avoided by treating s 433(3) as being addressed to a potentially different kind of property which comes into the receiver's hands not having been so subject.[229] In that regard, s 433 applies in the same way as s 561 of the Corporations Act in respect of a liquidation.

Was the trustee's right of indemnity subject to a circulating security interest?

318 The next question is whether the trustee's right of indemnity was subject to a circulating security interest. For the reasons set out above, that question does not strictly arise, but it is useful to consider it in any event. It should be noted that argument proceeded, both at trial and before us, on the basis that even if the right of indemnity was subject to a circulating security interest, it would not follow that all the property to which recourse might be had under the right of indemnity was itself so subject. The parties accepted that it would remain necessary for the trust property to constitute a 'circulating asset' to which the charge in the general security deed had attached.[230]

319 Argument proceeded, as did the reasons of the trial judge, on the basis that the question whether the right of indemnity was subject to a circulating security interest could be answered by deciding whether the right was a circulating asset. In effect, 'circulating asset' was a convenient shorthand description of property subject to a circulating security interest. There is an obvious attraction to proceeding on that basis, because it focuses attention on the property upon which s 433 will or will not operate. However, it should be noted that the legislation is not explicit in this regard. The definition of 'circulating security interest' in s 51C of the Corporations Act calls for the PPSA security interest to have 'attached to a circulating asset'. When one turns to s 433, it applies to property which is subject to (or comprised in) a circulating security interest. It does not say, in terms, that the property must be a circulating asset.

320 Section 433 therefore does not expressly make the connection between property subject to a circulating security interest and property which constitutes a circulating asset. It does not in terms require that the definition of 'circulating asset' be applied to each item of property said to be subject to a circulating security interest. However, it would be surprising if s 433 were to apply in respect of property that was not a circulating asset merely because the security interest in question happened also to apply to 'a circulating asset'. That would give s 433 an operation potentially wider than its traditional application to property the subject of a floating charge. The language of the provision in its form before the enactment of the PPSA made it clear that it applied to property the subject of a floating charge.[231] The parties' assumption that it extended only to circulating assets after the enactment of the PPSA was consistent with that position and we proceed on that basis.

321 The trial judge rejected the Commonwealth's submission that the right of indemnity fell within s 340(5) of the PPSA and was therefore a circulating asset.[232] He held, in particular, that the trustee's right of indemnity was not an 'account' arising from granting a right or providing services in the ordinary course of a business of granting rights or providing services of that kind, under s 340(5)(a) of the PPSA.[233]

322 The judge also rejected the Commonwealth's submission that the interest held by the trustee was a floating charge within the meaning of s 51C of the Corporations Act. He said:

A floating charge is not defined in the Corporations Act, save that for the purposes of the Corporations Act a floating charge includes a charge that conferred a floating security at the time of its creation but has since become a fixed or specific charge.[234] At law, a charge is fixed when it applies to a specific asset. A charge is floating when a charge is not attached to a specific asset but potentially may apply to a specific asset when the charge is crystallised.

A floating charge by its nature requires a chargor and a chargee. There is no chargor or chargee with a trustee incurring debts on behalf of a trust. The trustee's right of indemnity arises by way of equity.

Further, a floating charge only fixes upon some event of crystallisation. The trustee's right of indemnity is fixed. It attaches upon incurring of the debt to all trust assets. It does not require any act of crystallisation, as required with a floating charge.

The trustee's lien applies to all the trust assets without distinction, whether they be fixed or circulating. The value of the lien increases and decreases according to the liabilities incurred by the trustee. The fact that the trustee may dispose of trust assets free from the lien does not mean that the lien is not fixed.[235]

323 The trial judge noted that the trustee's lien was described by Brereton J in Re Independent as being 'in the nature of a floating charge over all the trust assets', rather than as a floating charge in and of itself.[236] The trial judge said that this was supported by the fact that the value of the charge 'expands and contracts with the liabilities incurred by the trustee on behalf of the trust.'[237]

324 In its proposed appeal, the Commonwealth submitted that the right of indemnity is a circulating asset and thus subject to a circulating security interest. It said that the trial judge's characterisation of the right of indemnity as 'fixed',[238] as opposed to being a circulating asset, should not be accepted. It contended that the right of indemnity confers a proprietary right in each item of trust property and should be characterised according to the nature of the trust assets available to satisfy it. If those assets are circulating assets, then so too is the right of indemnity for the purposes of s 433.

325 CHH submitted that the right of indemnity cannot be a circulating asset within the meaning of s 340 of the PPSA because it is a right over the whole of the trust assets, at least in circumstances where there is only one trust and the insolvent trustee acted solely as the trustee of a trust. CHH argued that the trustee does not have a proprietary interest in the trust assets.[239] As a result, the authority conferred by the general security deed to deal with the inventory and its proceeds does not mean that the right of indemnity is subject to a circulating security interest. On this view, the right of indemnity is a single asset that is subject to a fixed charge, and the value of that asset will fluctuate as liabilities are incurred and paid.[240] Echoing the trial judge and Brereton J in Re Independent, CHH argued that the right of indemnity is not a security interest, but only an interest in the nature of a security interest. Accordingly, it said, the right of indemnity cannot fall within the definition of 'circulating security interest' in s 51C of the Corporations Act and does not constitute any of the personal property listed in s 340(5) of the PPSA.

326 The receivers adopted the submissions advanced by the Commonwealth on this issue.

327 If, contrary to our opinion, it is necessary that the trustee's right of indemnity be subject to a circulating security interest, then as explained earlier the issue resolves to whether the right of indemnity is a circulating asset. It is not pertinent to inquire whether the right of indemnity is a circulating security interest or a floating charge. In that regard, consideration of whether the right of indemnity is in the nature of a floating charge, because its value expands and contracts according to the liabilities the trustee incurs, may be misleading. The real question is whether s 340 of the PPSA applies to the right of indemnity.

328 The Commonwealth did not persist on its proposed appeal with the argument that the right of indemnity was an 'account' within s 340(5)(a) of the PPSA. Instead, it submitted that the right was not fixed but represented a right in respect of each item of trust property. If those items were circulating assets, then that character flowed through to the right of indemnity as well, to the extent that it might be satisfied by recourse to such assets.

329 The Commonwealth's submission should be accepted. If any purpose is served, contrary to our opinion, by characterising the right of indemnity as a circulating asset or otherwise, that purpose extends no further than identifying those trust assets to which the trustee might have recourse under the right of indemnity which are subject to a circulating security interest, and which are therefore subject to the operation of s 433. The right of indemnity is not 'fixed' in any practical sense. It enables recourse to trust assets varying in extent over time as the trustee's liabilities expand and contract and as the value of the assets also varies. To the extent that the trust assets are circulating assets, that description befits the right of indemnity which is, after all, a means of recourse to those same assets.

Conclusion: the trustee's right of indemnity as a 'circulating asset'

330 For these reasons, s 433(3) operates to require the priority regime to be applied in respect of such property subject to the general security deed as constitutes circulating assets within the meaning of s 340 of the PPSA. Nothing is added by asking whether the trustee's right of indemnity is itself a circulating asset.

331 It is then necessary to determine the proper characterisation of those assets which are the subject of a notice of contention filed by CHH.

332 During their appointment, the receivers characterised each of the assets of Amerind as either (a) a circulating asset that was subject to s 433 of the Corporations Act, (b) a circulating asset that was not subject to s 433,[241] or (c) a non-circulating asset.[242]

333 At trial, CHH disputed this characterisation in relation to each of the following four assets:

(a) cash in a trade account that Amerind held with the bank;

(b) funds that were advanced to Amerind by the bank to purchase certain accounts that had been assigned to the bank under two debtor finance facilities ('the purchase price paid by the bank');

334 The trial judge accepted the receivers' characterisation of each of the above as a circulating asset.[243] By its notice of contention, CHH contends that the trial judge erred in characterising the assets, other than the stock realisations, as circulating assets.

335 For the purpose of addressing the notice of contention, it is necessary to refer to some further provisions of the PPSA. First, s 341 defines 'control' and 'inventory'. It provides:

341 Meaning of control and inventory

General rules

(1A) For the purposes of subsection 340(2), a secured party has control of personal property if:

(a) the secured party has control of the property within the ordinary meaning of the term 'control'; or

(b) the secured party has control of the property within the meaning of Part 2.3 (possession and control of personal property); or

(c) in a case in which the personal property is inventory or an account - the secured party has control of the inventory or account because of:

(i) paragraph (a) or (b); or

(ii) subsection (1), (2), (3) or (4); or

(d) in a case in which the personal property is an ADI account - the secured party has control of the account because of paragraph (a) of this subsection or section 341A.

(1B) For the purposes of subsection 340(5) and this section:

(a) inventory has its ordinary meaning; and

(b) the definition of inventory in section 10 does not apply.

Control of inventory

(1) For the purposes of subsection 340(2), a secured party has control of inventory if:

(a) the secured party and the grantor have agreed in writing that the grantor:

(i) will specifically appropriate the inventory to the security interest; and

(ii) will not remove any specifically appropriated inventory without previously obtaining the specific and express authority of the secured party to do so; and

(b) the grantor's usual practice is to comply with the agreement.

Control of accounts

(2) For the purposes of subsection 340(2), a secured party has control of the following kinds of accounts (the relevant account) in the circumstances set out in subsections (3) and (4) of this section:

(a) an account mentioned in paragraph 340(5)(a);

(b) an account that is the proceeds of inventory.

(3) The secured party has control of the relevant account if:

(a) the secured party, and the person to whom the relevant account is owed, have agreed in writing that amounts paid in discharge of the relevant account must be deposited into a specified ADI account; and

(b) the usual practice is for such amounts to be so deposited; and

(c) the secured party controls the ADI account within the meaning of paragraph (1A)(d); and

(d) depositing any such amounts into the specified ADI account does not result in any person coming under a present liability to pay:

(i) the person to whom the relevant account is owed; or

(ii) if the person to whom the relevant account is owed is a body corporate - a related body corporate (within the meaning of the Corporations Act 2001).

(4) If the secured party is a transferee of the relevant account, the secured party has control of the relevant account if payment by the account debtor to the secured party would discharge the obligation of the account debtor under subsection 80(8) to the extent of the payment.

336 Section 341A of the PPSA then describes the circumstances in which a secured party has 'control' of an ADI account. It reads as follows:

341A Control of an ADI account

(1) For the purposes of subsection 340(2), a secured party has control of an ADI account if:

(a) one or more of the following applies:

(i) the secured party is the ADI;

(ii) the secured party is able to direct disposition of the funds from the account without further consent by the grantor;

(iii) the secured party becomes the ADI's customer with respect to the account; and

(b) if the secured party is not the ADI - depositing an amount in the ADI account does not result in any person coming under a present liability to pay:

(i) the debtor; or

(ii) if the debtor is a body corporate - a related body corporate (within the meaning of the Corporations Act 2001).

Note: However, a security interest in an ADI account is only perfected by control if the secured party is the ADI (see sections 21 and 25).

(2) A secured party has control under subsection (1) even if the grantor retains the right to direct the disposition of funds from the account.

337 Prior to the appointment of the receivers, Amerind had three credit facilities with the bank:

(a) a 'commercial term facility' with a facility limit of $3,000,000 ('commercial term facility');

(b) a 'trade finance facility - multi option' with a facility limit of $4,000,000 ('trade finance facility'); and

(c) a 'debtor finance facility' with a facility limit of $18,000,000 ('pre-appointment debtor finance facility').

338 The operation of the pre-appointment debtor finance facility was described by the trial judge as follows:

On a daily basis, Amerind 'offered' to sell the bank all of the accounts/book debts that it had generated since the last offer. It did this by automatically uploading a schedule of all unpaid invoices raised by the company into the bank's debtor finance online portal.

The bank, at its discretion, could accept or refuse to purchase all or some of the accounts. All of Amerind's rights, title and interest in the accounts passed to the bank upon acceptance by the bank of Amerind's offer. The bank could, at its discretion, give the account debtor written notice of the assignment to perfect its legal title to the account.

The purchase price paid by the bank for each account was the full face value of the account. All accounts, however, were assigned a 'reserve amount' of between 15 and 100 per cent of the full face value. The purchase price for all assigned accounts, less the reserve amount, (the drawdown amount) was shown in the debtor finance ledger. The drawdown amount was available to Amerind and was paid by the bank into Amerind's trade account at Amerind's request.

Upon payment of the account (either in part or in full) the bank would make the reserve amount (in part or in full) available in the debtor finance ledger, which would be applied in reduction of other amounts owing to the bank and then paid to Amerind.

Upon termination of the pre-appointment debtor finance facility and payment of all amounts owing to the bank under the pre-appointment debtor finance facility, the bank was obliged to pay any residual reserve amount to Amerind.

Funds paid by debtors, in payment of the accounts, were paid into the debtor account. The bank conducted daily 'sweeps' of the debtor account so that all moneys held in the debtor account were reduced to nil each day. Although the debtor account was in Amerind's name, Amerind had no access to funds in the debtor account.

Funds 'swept' away from the debtor account were retained by the bank. The bank accounted for amounts received in the debtor finance ledger and the drawdown amount was available to be paid by the bank in consideration for the accounts assigned. It was not possible on the appointment date to identify which portion of the drawdown amount available on that day was referrable to a specific account, because funds available for drawdown in the debtor finance ledger were not directly attributable to any particular account.

Most of the funds in the trade account at any given time were attributable to amounts drawn down by Amerind under the pre-appointment debtor finance facility. However, some other amounts were also credited to the trade account where Amerind's customers paid for goods with cash or credit card, at the point of sale.[244]

339 Amerind held two ADI accounts with the bank: a trade account (cash at bank) and a debtor account. Between 20 December 2012 and 6 March 2014, Amerind traded with the assistance of the pre-appointment debtor finance facility. The bank purchased all of Amerind's accounts and maintained a separate ledger account for the purpose of the pre-appointment debtor finance facility, which enabled Amerind to view the funds that were available for drawdown under the pre-appointment debtor finance facility at any given time.

340 At any given time, no more than 85 per cent of the approved sales ledger, less any funds that were advanced to Amerind and interest on the facility, was available to Amerind for drawdown.

341 The amount of the approved sales ledger was determined by the 'sales ledger', being the total outstanding assigned accounts, less any amounts 'disapproved', which became additional reserve amounts and were deducted from the drawdown account. 'Disapproved' amounts included (i) debts that were aged more than 90 days, (ii) any amounts owing from a supplier where Amerind had an offset account with the supplier, and (iii) 'moneys in transit' which were advised by the company's debtors as having been paid but which had not yet been received.

342 On 20 December 2012, the bank registered its security interest under the general security deed on the Personal Property Securities Register ('PPSR'). In that registration, it disclosed that it did not have control of the assets over which the security interest had been granted.

343 On 4 March 2014, Amerind made its final request for available drawdown amounts under the pre-appointment debtor finance facility.

(a) the bank informed Amerind by email that the pre-appointment debtor finance facility no longer had any available funds to be drawn and that all debtor collections were to be placed towards permanent debt reduction of that facility.

(b) the bank issued a notice demanding repayment of the commercial term facility, the trade finance facility and the pre-appointment debtor finance facility ('the demand') and, on the same day, acting pursuant to the demand, the bank terminated those facilities;

(c) the bank registered a financing statement on the PPSR disclosing that it had control of the property described as 'ADI Account with Bendigo and Adelaide Bank'; and

[T]he bank has not frozen your trading account which must continue to operate on a credit only basis ... The bank has an expectation that any assets of the company will be dealt with in the ordinary course of business.

345 On 11 March 2014, the administrators and the receivers were appointed to Amerind.

346 On or around 11 March 2014, the bank sent to all of Amerind's debtors a notice stating that all current and future debts of Amerind had been assigned and transferred to the bank, which would manage the ledger and handle collection of payments for the company's invoices.

Reasons of the trial judge: characterisation of the trade account

347 It was common ground between the parties at trial that the trade account was an ADI account within the meaning of s 340(5)(c) of the PPSA.[245]

348 At trial, CHH submitted that the trade account was personal property covered by s 340(5), but that the exception in s 340(2) applied with the result that the trade account was not a circulating asset. The receivers and the Commonwealth submitted that s 340(1)(b) applies to personal property 'in any other case', namely where s 340(1)(a) does not apply (either because the property is not covered by s 340(5) or because, while covered by s 340(5), it falls within s 340(2) or (3)). They submitted that, to be classified as a non-circulating asset, it is necessary for the asset to avoid being classified as a circulating asset under both s 340(1)(a) and (b). In other words, the personal property may be classified as a circulating asset if s 340(1)(b) applies, even if the asset is not so classified under s 340(1)(a) because the exception in subs (2) applies. CHH rejected this construction and submitted that it needed only to establish that s 340(2) applies, where the asset falls within s 340(5), to avoid the asset being classified as a circulating asset. CHH submitted that, if the personal property is expressly 'not a circulating asset' by reason of s 340(1)(a) read with subs (2), there is no requirement to ascertain whether it falls within the category of assets provided for in s 340(1)(b).

349 The trial judge preferred the construction that had been advanced by the receivers and the Commonwealth. He concluded:

In my opinion, the [receivers and Commonwealth's] interpretation of s 340 of the PPSA is correct. The object of these provisions is to treat as a circulating asset personal property that is otherwise subject to a grant of security, where the grantor retains actual control, with the consent of the security holder, over dealing with the property in the ordinary course of business.

Accordingly, I find that the cash at bank (Amerind trade account) is correctly classified as a circulating asset.[246]

Submissions of CHH: characterisation of the trade account

350 CHH accepted that the trade account was a current asset covered by s 340(5)(c) of the PPSA. However, it submitted that the bank at the relevant times had 'control' of the account within the meaning of s 341A(1)(a)(i) and had registered a financing statement on the PPSR disclosing that it had control of the account. CHH submitted that the trade account was therefore not a circulating asset because it fell within the exception in s 340(2) of the PPSA. It submitted that, as provided for in s 340(2)(a), there was 'an effective registration with respect to' the account and (in accordance with s 340(2)(b)) 'the secured party [had] control of' the account within the meaning of s 341.

351 CHH submitted that the opening words 'in any other case' in s 340(1)(b) indicate that s 340(1)(b) is relevant only if the personal property concerned is not addressed by s 340(1)(a). In other words, 'in any other case' should be construed to mean 'in any case other than that referred to in s 340(1)(a)', namely where the personal property is not covered by sub-s (5). So viewed, ss 340(1)(a) and 340(1)(b) are mutually exclusive alternatives that deal with discrete types of assets: those covered by s 340(5) and those that are not. It was said that this construction gives full effect to the language of subss (2), (3), (4) and (4A) of s 340, which provide for circumstances in which personal property is not a circulating asset. CHH argued that the question whether the bank gave Amerind express or implied authority to transfer the funds in the ordinary course of business, so as to engage s 340(1)(b), is therefore irrelevant.

352 CHH argued that the trade account, by the operation of s 340(5)(c), is covered specifically by s 340(1)(a), with the result that s 340(1)(b) has no work to do. Because s 340(2) applied, the exception within s 340(1)(a) was attracted. The trade account was therefore not a circulating asset as defined by s 340 and so was not subject to the statutory priority regime.

353 CHH also submitted that the relevant time for assessing whether there is a circulating security interest for the purposes of s 433(2)(a) of the Corporations Act is the date of appointment of the receivers.[247]

Submissions of the Commonwealth: characterisation of the trade account

354 The Commonwealth submitted that, assuming that the relevant time of assessment is the appointment date, which was after the second PPSR registration was lodged, s 340(1)(a) does not apply. It argued that the words 'in any other case' in s 340(1)(b) should be construed to mean 'in any case where s 340(1)(a) does not apply'. Because the exception in s 340(2) was attracted, s 340(1)(a) did not apply and it was necessary to consider the 'other case' under s 340(1)(b).

355 In contending that ss 340(1)(a) and 340(1)(b) operate in this way, the Commonwealth relied upon a passage in the Replacement Explanatory Memorandum to the Personal Property Securities Bill 2009 (Cth) which was said to show that Parliament intended that it will always be necessary to inquire as to the actual intentions of the parties, as s 340(1)(b) provides. The passage is as follows:

The definition of circulating asset would confirm the existing case law on floating charges, which provides that in determining whether a floating charge exists over personal property, consideration must be given to both the express terms of the agreement between the parties as well as to the actual level of control exerted by the secured party. The provision takes into account current case law on the nature of floating charges so that, in determining whether a charge is a floating charge, consideration would be given to the intention of the parties as demonstrated by both their contract and their practice.[248]

The Commonwealth submitted that this showed that Parliament intended that it should remain critical to ask the question in s 340(1)(b). The opposing construction would make that question irrelevant whenever either of the exceptions in s 340(2) or (3) applies, whether or not the asset is listed in s 340(5).

356 The Commonwealth further submitted that there is no suggestion in the PPSA that an asset listed in s 340(5) can only ever fall within s 340(1)(a). In other words, there is no suggestion that, if an asset is listed in sub-s (5), the asset could never be a circulating asset under s 340(1)(b). It was said to be perverse if a secured party could in fact provide authority for the asset to be dealt with in the ordinary course of business, but the asset was not classed as a circulating asset.

357 The Commonwealth submitted, in the alternative, that the relevant time for assessing whether there is a circulating security interest for the purposes of s 433(2)(a) of the Corporations Act is not when the receiver is appointed, but when the security interest is created.[249] It argued that the introduction of the language of the PPSA in s 433 of the Corporations Act did not direct attention away from the character of the relevant security interest. Otherwise a secured party could disclose that it has control of assets by lodging an amended registration the day before appointing a receiver, when, at all times prior to that, the register recorded that the creditor did not control those assets. The Commonwealth contended that, in the present case, the bank's security interest attached to the trade account at the time of entry into the general security deed and the first registration of that interest on 20 December 2012. That registration disclosed that the bank did not control the assets. The Commonwealth said that, when created, the circulating security interest did not engage the exception in s 340(2) and, thus, since the trade account fell within s 340(5) as an ADI account, the trade account was a circulating asset by the operation of s 340(1)(a).

Submissions of the receivers: characterisation of the trade account

358 The receivers adopted the submissions advanced by the Commonwealth. They further submitted that the statement in the Replacement Explanatory Memorandum upon which the Commonwealth relied was unambiguous in expressing an intention on the part of the legislature to preserve the approach to floating charges that existed prior to the enactment of the PPSA. Accordingly, the receivers argued, there was no purposive reason to construe ss 340(2) and 340(3) in such a way that they override the general provision in s 340(1).

359 It is convenient to begin by identifying some matters not in controversy. First, the trade account was an ADI account within the meaning of s 340(5)(c). Secondly, by virtue of s 341A(1)(a)(i), the bank had control of the account for the purposes of s 340(2). Thirdly, there was an effective registration to that effect for the purposes of s 340(2)(a) on and from 6 March 2014. The receivers were appointed after that time.

360 If the correct date for ascertaining whether property is subject to a circulating security interest under s 433 is the date of appointment of the receiver, it would follow that s 340(2) was satisfied and the issue for resolution would be whether satisfying that exception meant that the bank account was not a circulating asset even if s 340(1)(b) were to be satisfied.

361 If the date for ascertaining whether property is subject to a circulating security interest is the date of creation of the security interest, then s 340(2) would not be satisfied and the property would be a circulating asset by virtue of s 340(1)(a). No issue would arise as to whether s 340(1)(b) operated.

362 In support of its alternative submission that the date for ascertaining whether property constitutes a circulating asset was the date the security interest was created, the Commonwealth relied upon CMI.[250] That case concerned the question whether a trading profit made after appointment of receivers constituted 'property coming into' the receiver's hands under s 433 of the Corporations Act. In answering that question in the negative, Mullins J held that the property coming into the hands of the receiver 'must be property that falls within the designation in s 433(2)(a). That property is identified by the operation of s 433(2)(a) which operates at the date of the appointment of the receivers'.[251] The paragraph of the judgment upon which the Commonwealth relied states:

The scheme of the priority, in the case of a receivership, revolves around the date of the appointment of the receivers and operates in respect of the assets that are identified on the basis that they would have been the subject of the floating charge, as created, had the charge not crystallised on that date.[252]

363 Mullins J cited two authorities for that proposition, to which she had earlier made reference. The first was Steinberg v Herbert,[253] a decision of the Full Court of the Supreme Court of Western Australia in which the issue was whether an amendment to s 331 of the Companies (WA) Code, a predecessor of s 433 of the Corporations Act, applied to particular property. In the course of deciding that it did not, Brinsden J stated that the order of priority under the section 'was fixed at the date the receiver was appointed'.[254] Similarly, Kennedy J stated that the critical time for the determination of creditors' rights was upon the appointment of the receiver.[255] In the second case, General Credits Ltd v Chemineer Nominees Pty Ltd (in liq),[256] Gobbo J held that moneys coming into the hands of a mortgagee's agent in possession after its appointment were required to be applied in accordance with s 331 of the Companies (Victoria) Code even after the principal and interest under the debenture charge had been repaid. In so holding, he stated that the critical time was when the mortgagee took possession and the obligation under s 331 came into existence.[257]

364 CHH contended, by way of reply, that CMI had been cited to an effect contrary to the submissions of the Commonwealth in Re Forge Group.[258] We agree with that submission. In any event, none of these authorities lends support to the argument advanced by the Commonwealth. It is possible to read the passage quoted from the judgment of Mullins J in CMI as requiring evaluation at the time of granting the security only by placing undue emphasis on the words 'as created' and by ignoring the authorities to which she referred.[259]

365 On the other hand, these cases do not strictly decide the present question. Each of them rejected an argument that s 433, or its predecessors, applied as at a date later than the appointment of the receiver. It was not necessary for any of them to determine whether the section applied by reference to events at any earlier date. But the point is equally well made in the present context that s 433 operates as at the time when a receiver is appointed or comes into possession of relevant property. There is no textual basis in s 433 for ascertaining the character of that property by reference to any earlier date.

366 The Commonwealth submitted that, if the relevant date for determining the status of assets is the date of appointment of the receiver, mischief could be done by an unscrupulous creditor by taking 'control' of what were previously circulating assets immediately before appointing a receiver and thereby taking those assets outside the definition of 'circulating asset' and beyond the reach of s 433. If that is so, however, it seems to us that it is a consideration better directed to the construction of s 340 than to the operation of s 433. The result suggested by the Commonwealth would flow, less from the timing of characterisation of the relevant assets, and more from the operation of the concept of 'control' within the definition of 'circulating asset'. It will therefore be convenient to return to the argument in that context.

367 For the above reasons, consistent with the tenor of the cited authorities, we conclude that the time for determining whether property of which a receiver has taken possession is a 'circulating asset' is the time when the receiver takes such possession, not the time when the security interest is created.

368 It therefore becomes necessary to return to s 340 to consider the relationship between ss 340(1)(a) and (b). Two readings of the relationship between those paragraphs are possible. The first, advanced by the Commonwealth, is that para (b) is to be considered if, after applying para (a), the property in question is not a circulating asset. In other words, property is a circulating asset if it satisfies either para (a) or para (b). Read in that way, the words 'in any other case' effectively emphasise the word 'or' which links the two paragraphs. This would mean that, even where property was excluded from the definition by sub-s (2), that would not be the end of the matter because it could still be included by operation of sub-s (1)(b).

369 The second construction, advanced by CHH, is that para (b) is to be used as the defining provision in the case of property that is not covered by sub-s (5). Accordingly, the fact that sub-s (2) applies to exclude property from the definition is not a basis for going on to inquire whether it is included by sub-s (1)(b).

370 There are textual indications supportive of both constructions. It may fairly be said that the Commonwealth's construction gives the words 'in any other case' little if any work to do. The construction treats the two paragraphs simply as alternative means of satisfying the definition. On the other hand, CHH's construction would deprive both paras (a) and (b) of operation where sub-s (2) applies in respect of property covered by sub-s (5), even though the opening words of sub-s (2) are 'Despite paragraph (1)(a)'. Those words imply that sub-s (2) has no bearing on cases falling within sub-s (1)(b). Subsection (3) commences with the words 'Despite subsection (1)' and is more easily capable of being read as an exception to para (b) as well as para (a). Moreover, CHH's construction would seem to give the words '(unless subsection (2) or (3) applies)' in para (a) no operation at all. But it must be acknowledged that the Commonwealth's construction also gives them little importance, confining them to acting as a pointer to two applicable exclusions which apply of their own force in any event.

371 There are contextual indications that favour the Commonwealth's construction. First, sub-s (1) is headed 'General definition', and sub-ss (2)-(4A) are collected under a heading 'Exceptions'. This tends to suggest that the two limbs of the general definition are to be considered first and that the exceptions are then to be applied according to their terms. The construction of CHH undermines that structure by excluding consideration of sub-s (1)(b) in respect of property covered by sub-s (5) whenever subs (2) or (3) applies. As already indicated, that result is arguably also at odds with the opening words of sub-s (2). On the other hand, sub-s (3) is plainly applicable to exclude property from the definition under either limb of sub-s (1).

372 Secondly, the division of sub-s (1) into two paragraphs highlights that the words '(unless subsection (2) or (3) applies)' limit only para (a). The construction advanced by CHH has the effect of giving those words a wider operation, and in that respect gives the words 'in any other case' an operation that sits uncomfortably with the structure of the provision. The structure tends instead to suggest that the 'other case' is that which is not described in para (a), read as a whole.

373 As the opening words of sub-s (2) and (3) indicate, those provisions are exceptions to sub-s (1)(a) and sub-s (1) respectively. On the construction advanced by CHH, the distinction makes sense because, in effect, sub-s (2) is providing for a different test of 'control' in those cases where the property in question is listed in sub-s (5) - a test dependent in part upon registration. In contrast, other property must satisfy a test concerned with authority in the ordinary course of business. That is the test provided for 'in any other case' than those where the property is covered by sub-s (5). On this construction, sub-ss (1)(b) and (2) are differently approaching similar subject matter and subs (2) is rationally confined to cases within para (a), as its opening words suggest. That in turn indicates that the difference between paras (a) and (b) lies in whether the property in question is covered by sub-s (5), not whether sub-s (2) (or (3)) applies to that property. This construction gives the words 'in any other case' sensible meaning beyond merely emphasising the alternative between the two paragraphs which the word 'or' already identifies.

374 The Commonwealth's construction likewise accepts that subs (2) is an exception only to para (a). But the Commonwealth denies that this warrants treating para (b) as providing a different test for property not covered by subs (5). Support for the Commonwealth's position is to be found in subs (3), which contemplates operating as an exception, not only to para (a) but also to para (b). On CHH's approach, the latter application of subs (3) concerns only property not covered by subs (5), yet subs (3) is directed only at property that is so covered. That points to a disharmony between CHH's construction and the structure of the section. The Commonwealth's construction also reflects the fact that the words 'in any other case' in para (b) refer to the whole of para (a), rather than saying '[if] the personal property is not covered by subsection (5)'.

375 The mischief to which the Commonwealth referred in its submissions as to timing, by which a grantor could achieve control by registration and thereby attract the exception in sub-s (2) is in our opinion not a significant consideration in the task of construction. The risk identified is inherent in a system of registration. Moreover, sub-s (2) requires both registration and actual control. If there is actual control, even if deemed by statute, it is hard to see where the mischief lies in the potential for registration reflecting that fact.

376 The extrinsic material to which the Commonwealth referred is of some assistance. It uses language not specific to sub-s (1)(b), referring only to 'the actual level of control exerted by the secured party' and 'the intention of the parties as demonstrated by both their contract and their practice'. This language is apt to describe the operation of both sub-s (1)(b) and the exclusion in sub-s (2), the latter of which is to be read, of course, by reference to the definition of 'control' which reflects the paragraph quoted. On the other hand, the Commonwealth's construction is most faithful to the existing case law to which the Replacement Explanatory Memorandum refers, by providing for the 'authority to transfer' test in para (b) to have general application. This is consistent with the Commonwealth's submission that it would be perverse if an asset that could be dealt with in the ordinary course of business was not a circulating asset.

377 For the above reasons, the Commonwealth's construction better reflects the structure of the provision and the text of the exceptions, as well as finding support in extrinsic material, and is accordingly to be preferred. Section 340(1)(b) therefore arises for consideration in any case where personal property has not already been found to be a circulating asset by operation of subs (1)(a). The paragraphs are alternatives, either of which may be satisfied in order to bring property within the definition.

378 It follows that the trade account could be a circulating asset if either of paras (a) and (b) were satisfied. As to subs (1)(a), the test is not met. Although the trade account was an ADI account within the meaning of s 340(5)(c), s 340(2) applied to take it out of s 340(1)(a) because when the receivers took possession of the account there was an effective registration disclosing control and there was actual control by virtue of s 341A(1)(a)(i). As to subs (1)(b), the test is met because, as the bank's email of 6 March 2014 made clear, Amerind had authority to deal with the account.[260] This ground of the notice of contention should therefore be rejected.

Second class of asset in dispute: purchase price paid by the bank

379 On 25 March 2014, the receivers caused the company to enter into a new debtor finance facility ('the post-appointment debtor finance facility') to facilitate the company's post-appointment cash-flow and trading activities. The post-appointment debtor finance facility was on substantially the same terms as, and operated in a similar fashion to, the pre-appointment debtor finance facility.[261]

380 Under both the pre-appointment debtor finance facility and the post-appointment debtor finance facility ('the debtor finance facilities') the bank agreed to advance funds to Amerind to purchase the accounts assigned to the bank under the debtor finance facilities. The funds were advanced in two tranches:

(a) a 'drawdown amount', being an initial amount (up to 85% of the value of the account) advanced under each facility; and

(b) a 'reserve amount', being the remainder of the funds that were to be advanced to Amerind, subject to certain conditions.

381 Whereas amounts payable by the bank to Amerind under the pre-appointment debtor finance facility had been paid into the trade account, amounts received under the post-appointment debtor finance facility were instead paid into an account opened by the receivers after their appointment ('the receivership account'). As under the pre-appointment debtor finance facility, all receipts from assigned book debts were paid into the debtor account, which was 'swept' to a nil balance daily by the bank.[262]

382 After their appointment, the receivers collected $2,528,896 on account of the reserve amount under the pre-appointment debtor finance facility (net of bank interest, fees and charges). CHH submitted that these amounts were deposited into the trade account, but the Commonwealth (without contesting that assertion) contended that the evidence did not reveal into which account this money was paid.

383 The receivers also received $2,978,351 on account of the reserve amount under the post-appointment debtor finance facility (again net of bank interest, fees and charges). They also held an amount of $1,624,158 on account of the drawdown amount under the post-appointment debtor finance facility. As mentioned, these amounts were paid into the receivership account.

384 The receivers had classified the drawdown amount and the two reserve amounts as circulating assets. CHH disputed this classification at trial.

Reasons of the trial judge: characterisation of the purchase price paid by the bank

385 The trial judge accepted submissions by the receivers to the effect that the drawdown amount and the reserve amounts made available to Amerind after the appointment date were amounts paid to Amerind by the bank, on account of both stock sold before the receivers' appointment and stock on hand as at the appointment date but sold thereafter. These amounts were, in substance, the identifiable and/or traceable proceeds of sale of stock, raw material and finished goods held by the company prior to and as at the appointment date and, as such, deemed to be circulating assets under s 340(5)(b) that were subject to s 433.[263]

386 The judge went on to hold that the time at which to characterise the relevant asset was on the appointment of receivers, not after. That is when possession or control within s 433(2)(a) occurs, which is why the property caught by that provision is limited to assets identifiable at that time. The judge relied on CMI in this regard.[264] It appears that the judge regarded CMI as deciding that the amounts in question were, to the extent that they represented assets not possessed by the receivers at the time of their appointment, not subject to s 433 of the Corporations Act. Otherwise, s 433 was applicable.[265] In either case, it appears, the judge treated the amounts as circulating assets. He did not directly address the question whether s 340(2) applied.

Submissions of CHH: characterisation of the purchase price paid by the bank

387 CHH submitted on the appeal that the post-appointment amounts had been received after control was asserted by the receivers and the necessary registration was in place, so that s 340(2) was satisfied. Alternatively, s 340(1)(b) was not satisfied because, after the receivership, it could not be said that the amounts could be transferred in the ordinary course of business. It is convenient to consider the evidentiary basis of these submissions later in these reasons.

388 These submissions avoided dealing directly with the question whether the amounts in question were to be dealt with under s 340(1)(a) or (b) or whether they were covered by s 340(5). Counsel for CHH accepted that neither of the relevant accounts was an ADI account, so that the application of s 340(5) turned on whether the accounts were the 'proceeds of inventory' under s 340(5)(b).

389 In that regard, CHH contended in its written submissions that those amounts were not, as the trial judge had found,[266] 'in substance the traceable proceeds of sale of stock, raw materials and finished goods held by the company prior to and as at the date of appointment' with the result that they were covered by s 340(5)(b). Rather, they were new advances made by the bank to Amerind. Its primary submission was therefore that the amounts received after the receivers were appointed were not covered by s 340(5) and fell to be considered under s 340(1)(b), which provision they did not satisfy.

390 CHH made similar submissions in respect of the reserve amount under the pre-appointment debtor finance facility. However, that amount differed because CHH submitted that it was held in the trade account considered above, which was an ADI account. On that basis, it was said to be in the same position as the other moneys held in that account.

Submissions of the Commonwealth: characterisation of the purchase price paid by the bank

391 The Commonwealth said that the purchase price paid by the bank after 11 March 2014 resulted from the sale of stock that was in existence and held by Amerind prior to the appointment date. First, under the pre-appointment debtor finance facility, Amerind sold stock, debtors were generated, those debts had been factored to the bank and Amerind was awaiting payment for the sale of those debts. The Commonwealth submitted that the amount thus payable by the bank was an account that was the proceeds of inventory within s 340(5)(b). It relied on the wide definition of 'proceeds' in s 31 of the PPSA, to which we shall return below.

392 Secondly, the Commonwealth submitted that, under the post-appointment debtor finance facility, stock on hand at the appointment date was sold, the debts were factored to the bank, and the bank paid for the purchase of those debts. The Commonwealth submitted that stock, as 'inventory' under s 340(5)(e) of the PPSA, was a circulating asset and that the receivers used the post-appointment debtor finance facility to convert that stock into cash.

393 The Commonwealth submitted that the suggestion by CHH that amounts paid by the bank for post-appointment debts were 'new advances' made by the bank to Amerind mischaracterised the arrangements. The Commonwealth said that the bank did not 'advance' money to Amerind in the sense of making a loan and expecting repayment; instead, the bank purchased from Amerind book debts and paid consideration for those debts. The amounts in question all related to book debts that arose from the sale of stock that Amerind held prior to the appointment date. According to the Commonwealth, the process involved Amerind converting pre-appointment stock into cash; the mere conversion of a pre-appointment circulating asset from one form to another was said not to alter its character as a circulating asset for the purposes of s 433 of the Corporations Act.

394 Next, the Commonwealth submitted that s 340(2) did not operate to take the purchase price paid by the bank outside the class of circulating assets in s 340(1)(a) of the PPSA. That was because, irrespective of any issue of actual control, the bank had not disclosed control of the accounts in its registration.

395 To the extent that it might be necessary to consider, the Commonwealth rejected CHH's contention that s 340(1)(b) of the PPSA was not satisfied in relation to the purchase price paid by the bank because the bank did not give Amerind authority to deal with that property, in the ordinary course of its business, free of the bank's security interest. The Commonwealth argued that this submission was incorrect because up until the appointment date, Amerind was free under the general security deed to use the funds as it wished, and that did not change after the appointment date.

Submissions of the receivers: characterisation of the purchase price paid by the bank

396 The receivers submitted that the reserve amount was (a) personal property over which Amerind had granted a security interest to the bank,[267] (b) an account that arose from the bank providing funds under the debtor finance facilities,[268] and (c) an account that was the proceeds of inventory.[269] Accordingly, the receivers submitted, the reserve amount was a circulating asset for the purposes of s 340(1)(a) of the PPSA. The receivers contended that the exception in s 340(2) did not apply to the reserve amount because the bank's registration over the reserve amount did not disclose that it had control over that property.

Analysis: characterisation of the purchase price paid by the bank

397 The purchase price paid by the bank raises the following questions:

(a) Were any of the amounts an ADI account within s 340(5)(c)?

(b) Were any of the amounts the proceeds of inventory within s 340(5)(b)?

(c) If so, in respect of any amount, was there an effective registration at the time of the receivers' appointment disclosing control of that amount within s 340(2)?

(d) If not (or in any event), in respect of any amount, had the bank given Amerind authority for any transfer of the amount in the ordinary course of Amerind's business, free of the bank's security interest, within s 340(1)(b)?

398 In addressing these questions, it is necessary to commence, for the reasons stated earlier, by reference to the circumstances at the time of the receivers' appointment. At that time, the receivers took possession both of Amerind's contingent right to receive outstanding reserve amounts under the pre-appointment debtor finance facility when the debts that had been sold to the bank were paid by the various debtors, and of Amerind's existing stock.

399 The first issue may be dealt with shortly. CHH submitted that the amounts received under the pre-appointment debtor finance facility were paid into the trade account. But no evidence was produced for that statement, including after the Commonwealth drew attention to the lack of such evidence. The affidavit of Mr Byrnes referred somewhat ambiguously to the post-appointment debtor finance facility having operated 'in much the same way' as the pre-appointment debtor finance facility but noting that, 'following a request by the Receivers', the drawdown amounts and any reserve amounts payable to Amerind were credited to the receivership account instead of the trade account. This evidence, of one the receivers, falls well short of stating that amounts continued to be paid into the trade account after the receivership. Elsewhere in his affidavit, Mr Byrnes does not distinguish the receivers' receipt of amounts under the two facilities. This tends to suggest, if anything, that the amounts were all paid into the receivership account.

400 For that reason, CHH's submission that the reserve amounts paid under the pre-appointment debtor finance facility were an ADI account lacks an evidentiary basis and cannot be accepted.

401 The next question is whether the amounts were the 'proceeds of inventory'. The Commonwealth relied on the definition of 'proceeds' in s 31 of the PPSA. That definition relevantly provides:

proceeds of collateral to which a security interest is (or is to be) attached means identifiable or traceable personal property of the following types, subject to subsections (2) and (3):

(a) personal property that is derived directly or indirectly from a dealing with the collateral (or proceeds of the collateral);

(2) Proceeds are traceable whether or not there is a fiduciary relationship between the person who has a security interest in the proceeds ... and the person who has rights in or has dealt with the proceeds.

Restriction to proceeds in which grantor has a transferable interest

(3) However, personal property is proceeds only if:

(i) the grantor has an interest in the proceeds; or

(ii) the grantor has the power to transfer rights in the proceeds to the secured party (or to a person nominated by the secured party); and

(b) the interest in the proceeds does not arise because of the operation of paragraph 140(2)(f).

Note: Paragraph 140(2)(f) provides for the distribution of an amount or proceeds to the grantor upon the enforcement of a security interest.

402 Turning first to the reserve amount received under the pre-appointment debtor finance facility, the Commonwealth relied on the fact that, at the time of the receivers' appointment, Amerind was entitled to be paid the reserve amount in respect of each debt as and when the debt was paid. The receivers took possession of Amerind's rights to payment. It was submitted that the reserve amount subsequently received pursuant to that right was derived directly or indirectly from prior dealings with the stock, which constituted collateral so as to satisfy s 31(1)(a) and (3) of the PPSA. At the same time, the stock constituted inventory and the reserve amounts were the 'proceeds' of that inventory.

403 CHH, by way of reply, contended that s 31(3)(a) of the PPSA was not satisfied. It was said that Amerind did not have an interest in the proceeds, or any power to transfer rights in them to the bank because it had sold the debts to the bank.

404 In our opinion the Commonwealth's submissions are correct. The notion of 'proceeds' is broadly defined. The reserve amounts were in effect the final instalment of the amount received from selling the debts owed to Amerind as a result of selling its inventory. That suffices to establish the indirect derivation required by the definition. The submission that s 31(3)(a) is not met should be rejected. The 'proceeds' in question are the very proceeds of dealing with the debts, so the analysis is not advanced by identifying that the debts have been sold to the bank. Amerind had an interest in the proceeds of that sale and the power to transfer rights in them to the bank.

405 The position in respect of the amounts received under the post-appointment debtor finance facility is no different. In this instance, the receivers took possession of the inventory themselves and made arrangements for its sale and for the factoring of the resulting debts. Again, the amounts thereby received were derived, directly or indirectly, from dealing in the inventory and constituted proceeds of that inventory. CHH's submission that the amounts received were the result of 'new advances' by the bank after the appointment date does not suggest any contrary conclusion. The submission mischaracterises the arrangement, by which the bank purchased the debts rather than making any advance to Amerind. The fact that the arrangement was entered into after the appointment date does not deny the fact that it concerned inventory held by the receivers on that date.

406 It follows that the amounts in question are all circulating assets unless s 340(2) applies. In that context, CHH relied on the email of 6 March 2014 from the bank to Amerind in which the bank advised that the debtor finance facility no longer had funds available to be drawn down and all debtor collections were to be 'placed towards permanent debt reduction of the facility'.[270] The bank went on to state its 'expectation that any assets of the company will be dealt with in the ordinary course of business'. CHH submitted that this communication evidenced that the bank had control of the reserve amount outstanding under the pre-appointment debtor finance facility, within the meaning of s 340(2). CHH made no corresponding submission regarding control of the amounts received under the post-appointment debtor finance facility.

407 CHH's submission in this regard depended on the ordinary meaning of the word 'control' rather than the extended meaning of that term as defined under the PPSA. The Commonwealth did not contend that there was no control manifested over the reserve amounts to be received under the pre-appointment debtor finance facility in the circumstances revealed by the email. Plainly enough, Amerind had no choice but to deploy those amounts in reduction of its indebtedness to the bank.

408 Issue was taken, however, in relation to the question of registration. The Commonwealth submitted that the bank's registration of its security interest did not disclose the above control. The registration in question, as at the date of the receivers' appointment, stated that there was control in respect of a security interest for which the collateral was of the class 'Intangible property - General intangible', more particularly of the description 'ADI Account with Bendigo and Adelaide Bank'. It extended to 'proceeds' (all present and after acquired property) but expressly not to 'inventory'. It is evident that this registration did not disclose control either of the inventory of Amerind or of the amounts which Amerind was entitled to receive by way of reserve amounts following upon the factoring of its debts. The amounts to be received in connection with the factoring arrangements were not, as we have noted, paid into the relevant ADI account.

409 It follows that the exclusion in s 340(2) is not satisfied and the purchase price paid by the bank was a circulating asset.

410 In light of that conclusion, it is unnecessary to consider the application of s 340(1)(b) of the PPSA. It suffices to state that the evidence referred to above shows that the bank had not given Amerind authority to deal with the reserve amounts it would receive under the pre-appointment debtor finance facility free of the bank's security interest. It might be thought unlikely that the bank afforded any greater latitude to the receivers under the post-appointment debtor finance facility, but that issue need not be explored further.

411 The notice of contention accordingly fails in so far as it seeks to have the purchase price paid by the bank classified as not being a circulating asset.

Third class of asset in dispute: miscellaneous receipts

412 The final class of assets the subject of CHH's notice of contention consisted of 'pre-appointment tax refunds' and 'other general receipts' (collectively, 'the miscellaneous receipts'). The receivers classified the miscellaneous receipts as circulating assets. CHH disputed this classification at trial. The trial judge accepted the submissions of the receivers and the Commonwealth.[271]

413 CHH submitted that the miscellaneous receipts were not circulating assets, even though they might be 'currency' within the meaning of s 340(5)(d) of the PPSA, because they were assets that were not 'on hand' as at the appointment date. CHH submitted that the receipts were always under the control of the bank rather than Amerind and that s 340(2) was attracted. It contended, alternatively, that the receipts did not fall within s 340(1)(b) because Amerind was never authorised to transfer them free of the bank's security, in the ordinary course of its business.

414 The Commonwealth submitted that the test under s 433(3) of the Corporations Act is not whether the assets in question were 'on hand'. It argued that the principle in CMI[272] is that the property 'coming into' the hands of the receivers must be property that falls within s 433(2)(a) of the Corporations Act, namely property that is an asset identifiable at the appointment date.[273] According to the Commonwealth, the receipts were so identifiable at the appointment date. For example, the tax refunds represented an entitlement that Amerind had prior to the appointment date.

415 The Commonwealth's submissions should be accepted. As explained earlier in these reasons, the critical question is what property was in the possession of the receivers upon their appointment, not whether property is 'on hand'. Here, Amerind was owed money by the Commissioner of Taxation as a result of overpayments of tax before the appointment date. The unchallenged evidence of Mr Byrnes was that the other receipts were all derived from circumstances and transactions that arose before the appointment date. As such, they were accounts arising from providing services in the ordinary course of business, within s 340(5)(a) of the PPSA and therefore circulating assets. In the absence of registration, no question of control under s 340(2) arises.

416 Amounts were claimed under this heading in respect of interest. No ground was suggested, and none appears, for treating interest any differently. The judge was right to treat all these amounts as circulating assets.

417 The notice of contention should accordingly be dismissed.

418 In light of the conclusions we have reached on the appeal, the judge's decision must be set aside. It follows that the costs discretion will fall to be re-exercised and that there is no utility in granting leave to CHH to cross-appeal, which it seeks in respect of the costs order made at trial. Leave to cross-appeal is therefore refused.

419 The judge ordered, relevantly, that the receivers were not justified in proceeding on the basis that the priority regime in the Corporations Act applied to the proceeds of the various assets constituting the receivership surplus, in so far as those assets were, as at the date of the receivers' appointment, also circulating assets. That order must be set aside in light of Part 1 of these reasons. However, the Commonwealth and the receivers differed as to the appropriate relief that should follow.

420 The Commonwealth sought an order declaring and directing that the receivers were justified in proceeding on the basis that the priority regime applies to the assets in question. The receivers submitted that the precise form of order depended on what orders were made in the interim as to the treatment of the funds in issue. In addition, directions would be needed to reflect conclusions reached by the trial judge that would become relevant if the conclusion as to the application of the priority regime were to be set aside, and it was suggested that such directions should be made as part of the appeal in order to avoid the costs of remitter to the trial judge.

421 In the circumstances, it is preferable that the parties be invited to prepare appropriate orders giving effect to the above reasons.

MATTHEW JAMES BYRNES AND ANDREW STEWART REED HEWITT IN THEIR CAPACITY AS JOINT AND SEVERAL RECEIVERS AND MANAGERS OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

BRENT MORGAN IN HIS CAPACITY AS LIQUIDATOR OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

MATTHEW JAMES BYRNES AND ANDREW STEWART REED HEWITT IN THEIR CAPACITY AS JOINT AND SEVERAL RECEIVERS AND MANAGERS OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

BRENT MORGAN IN HIS CAPACITY AS LIQUIDATOR OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

[1] [2017] VSC 127; (2017) 320 FLR 118 [38] ('Reasons').

[3] [1979] HCA 61; (1979) 144 CLR 360 ('Octavo').

[4] [2017] FCA 953 ('Lane'). The parties were aware of the decision in Lane and alerted the Court to it. They did not seek to make further submissions.

[5] (1888) 40 Ch D 370.

[6] Ibid 376-7. This passage was cited in the summary of the trustee's right of indemnity set out in the consultation paper by the Trust Law Committee of the United Kingdom dated 7 March 1997.

[7] [1945] HCA 37; (1945) 72 CLR 319 ('Vacuum Oil').

[9] [1802] EngR 342; (1802) 8 Ves Jun 4; 32 ER 250.

[11] [1804] EngR 336; (1804) 10 Ves Jun 111; 32 ER 786.

[13] (1880) 15 Ch D 548 ('Re Johnson').

[16] [1901] 1 QB 108 ('Jennings v Mather').

[18] Jennings v Mather [1902] 1 KB 1.

[19] [1902] 1 Ch 342.

[21] [1906] HCA 37; (1906) 3 CLR 1170 ('Savage').

[23] [1910] 1 KB 271 ('Governors of St Thomas'). It is important that this should not be confused with In re Richardson; Ex parte the Governors of St Thomas's Hospital [1911] 2 KB 705 (see below).

[24] Governors of St Thomas [1910] 1 KB 271, 278-9.

[25] [1911] 2 KB 705 ('In re Richardson').

[29] [1914] 2 Ch 617 ('Liverpool').

[30] Ibid 633. Professor Ford has described this distinction as 'puzzling' given that the lease had expired: Harold Ford, 'Trading Trusts and Creditors' Rights' [1981] MelbULawRw 1; (1981) 13 Melbourne University Law Review 1, 23.

[31] Liverpool [1914] 2 Ch 617, 641.

[32] [1922] NZGazLawRp 213; [1923] NZLR 1009 ('Jarvis').

[34] [2012] NSWCA 26 ('Agusta').

[38] Ibid [57] - this explanation is plausible and coherent, but it has to be said that it is not one found in the older authorities. Jennings v Mather, and similar older authorities, did not address the issue of multiple trust creditors in explaining equity's refusal to permit execution against trust property.

[43] Ibid [72]-[74] (citations omitted).

[44] Section 501 makes similar provisions in relation to voluntary windings up.

[45] (1992) 8 WAR 42, 54.

[46] (1959) 102 CLR 97.

[48] Re A & J Lazzarotto Pty Ltd (in liq) v Harrison (Unreported, Full Court of the Supreme Court of Victoria, Young CJ, Lush and Fullagar JJ, 16 December 1977).

[49] (1997) 189 CLR 407 ('Sheahan v Carrier Air Conditioning').

[52] (1995) 13 ACLC 1604.

[53] Sheahan v Carrier Air Conditioning (1997) 189 CLR 407, 425 (Brennan CJ), quoting James v Commonwealth Bank of Australia (1995) 13 ACLC 1604, 1607-8 (Young CJ) (emphasis added by Brennan CJ).

[54] Sheahan v Carrier Air Conditioning (1997) 189 CLR 407, 428.

[55] [1968] HCA 44; (1968) 123 CLR 295 ('Kratzmann v Tucker').

[56] [1935] 1 Ch 392.

[57] Kratzman v Tucker [1968] HCA 44; (1968) 123 CLR 295, 300-1.

[58] Sheahan v Carrier Air Conditioning (1997) 189 CLR 407, 424.

[59] Octavo [1979] HCA 61; (1979) 144 CLR 360, 367.

[68] Harold Ford, 'Trading Trusts and Creditors' Rights' [1981] MelbULawRw 1; (1981) 13 Melbourne University Law Review 1.

[70] Robin Brett, 'Trusts and Creditors' Rights: Octavo Investments Pty Ltd v Knight' (1982) 11(1) Australian Tax Review, 7.

[71] Denis Ong, Ong on Subrogation (Federation Press, 2014) 33-8.

[72] [1998] HCA 4; (1998) 192 CLR 226 ('Buckle').

[73] Buckle [1998] HCA 4; (1998) 192 CLR 226, 245 [47] (Brennan CJ, Toohey, Gaudron and Gummow JJ), quoting Austin W Scott and William F Fratcher, Scott on Trusts (Little, Brown and Company, 4th ed, 1988) vol 3A, 345 [246].

[74] Buckle [1998] HCA 4; (1998) 192 CLR 226, 246-7 [48]-[51] (citations omitted).

[75] [2005] HCA 53; (2005) 224 CLR 98 ('CPT').

[76] [1841] EngR 629; (1841) 4 Beav 115; 49 ER 282. To the effect that an adult beneficiary (or beneficiaries) who is (or are) absolutely entitled may require transfer to the trust property to them.

[77] CPT [2005] HCA 53; (2005) 224 CLR 98, 120 [50].

[78] Ibid 121 [51] (citations omitted).

[79] [2009] HCA 32; (2009) 239 CLR 346 ('Bruton').

[81] Ibid 358-9 [43] (citations omitted).

[82] Ibid 351 [9] (citations omitted).

[85] Ibid 359 [47] (citations omitted).

[86] Bruton [2009] HCA 32; (2009) 239 CLR 346, 359 [47] (French CJ, Gummow, Hayne, Heydon and Bell JJ), citing Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) [2008] FCAFC 184; (2008) 173 FCR 472, 494 [61].

[87] (1943) 13 ABC 128.

[94] [1981] 1 NSWLR 394 ('Re Byrne').

[98] It went without saying that this would not extend beyond the trustee's own right of indemnity.

[99] In a subsequent decision Needham J rejected the liquidator's claim to being a trust creditor: Re Byrne Australia Pty Ltd [No 2] [1981] 2 NSWLR 364.

[100] [1983] VicRp 52; [1983] 1 VR 561 ('Re Enhill').

[118] [1862] EngR 473; (1862) 4 De GF & J 488, 498; [1862] EngR 473; 45 ER 1273, 1277.

[119] Re Enhill [1983] VicRp 52; [1983] 1 VR 561, 568.

[132] [1933] HCA 2; (1933) 48 CLR 171 ('Universal Distributing').

[133] (1983) 33 SASR 99 ('Re Suco Gold').

[163] [2016] NSWSC 106; (2016) 305 FLR 222 ('Re Independent').

[164] Ibid 230-2 [23]-[25] (citations omitted).

[165] [2016] FCA 1583 ('Bell Hire Services').

[186] Reasons [82], [279]-[288].

[189] (2010) 77 ACSR 84.

[190] The judgments in which Re Suco Gold was said to have been applied were: Re ADM Franchise Pty Ltd (1983) 7 ACLR 987, 988-9 (McLelland J); Re Indopal Pty Ltd (1987) 12 ACLR 54, 57 (McLelland J); Re Matheson Ex parte Worrell v Matheson [1994] FCA 1021; (1994) 121 ALR 605, 615-17 (Spender J); Sjoquist v Rock Eisteddfod Productions Pty Ltd (1996) 19 ACSR 339, 343 (McClelland CJ in Eq); 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377 [34]-[35] (Finkelstein J); Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361, 423-4 [201]-[203] (Campbell J); Kardiasmenos v Pioneer Management Pty Ltd [2005] NSWSC 770 [45] (Smart AJ); Moyes v J & L Developments Pty Ltd [2007] SASC 268 [4] (Debelle J); Apostolou v VA Corporation of Australia Pty Ltd (2010) 77 ACSR 84, 94 [48] (Finkelstein J); Brisconnections Management Co Ltd v Dalewon Pty Ltd [2010] QSC 311; (2010) 79 ACSR 530, 536 (McMurdo J); Prior v Simeon [No 2] [2011] WASC 61 [20] (Corboy J); Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 [14], Order 4 (Gordon J); Re Rolcross Pty Ltd (in liq) [2012] NSWSC 846 [16] (Black J); Re National Personnel Pty Ltd (in liq) [2012] VSC 508 [39], [48(1)] (Riordan J); Garra Water Investments Pty Ltd (in liq) v Ourback Yard Nursery Pty Ltd [2012] SASC 44 [44]-[47] (Gray J); Re Neeeat Holdings (in liq) (2013) 299 ALR 744, 748 [17], Order 2 (Kenny J); Bendigo & Adelaide Bank Ltd v Reborn Enterprises Pty Ltd (Trustee) [2016] FCA 1197 [10], Order 3(b) (White J); Freelance Global Ltd (in liq) v Bensted [2016] VSC 181 [82] (Riordan J).

[191] Lane [2017] FCA 953 [22].

[212] Re Enhill has often been dismissed without much real analysis. Jacobs' Law of Trust in Australia, 2006 edition, for example, stated it to be 'obviously wrong', its 'vice' being 'the assumption that trust property transferred to the trustee to meet a trust liability somehow ceases to be trust property'. The High Court in Octavo stated that 'bald descriptions of property as "trust property" [are] inadequate'. In Buckle the High Court said that in relation to the trust assets there exist 'the respective proprietary rights, in order of priority, of the trustee and the beneficiaries'.

[213] Sheahan v Carrier Air Conditioning (1997) 189 CLR 407, 424 (Brennan CJ).

[215] On voluntary winding up, s 501 makes similar provision.

[216] We note that Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 and Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 do not directly address the position of trial judges where there are conflicting intermediate appellate decisions in different jurisdictions.

[217] The trial judge held that 'debenture' in s 433 should be given its ordinary meaning, rather than the meaning in s 9 of the Corporations Act: Reasons [75]. No party doubted this conclusion.

[218] The expression 'security interest' is extensively defined in s 12 of the PPSA in terms not presently relevant.

[219] PPSA s 19(2).

[221] No party contended that the exceptions in subsections (2) or (3) applied to the present case.

[222] Section 10 defines an ADI account as an account with an authorised deposit-taking institution as defined in the Banking Act 1959 (Cth).

[223] See below [335].

[225] Section 8 contains exclusions of various kinds of interests in personal property, including liens arising under the general law, but that does not detract from the application of the PPSA to the general security deed and the security interest it creates.

[226] PPSA s 19(2).

[228] The above analysis proceeds on the basis, consistently with the arguments of the parties, that the words in s 433(2) 'of any property comprised in or subject to a circulating security interest' relate to both the preceding phrases, namely 'a receiver is appointed ...' and 'possession is taken or control is assumed ...'

[229] See, to the same effect in relation to the previous form of s 433, Whitton v ACN 003 266 886 Pty Ltd (ctlr apptd) (in liq) [1996] NSWSC 534; (1996) 42 NSWLR 123, 135-6 ('Whitton'); Re CMI Industrial Pty Ltd (in liq) [2016] 1 Qd R 241, 252-3 [50] ('CMI').

[231] Whitton [1996] NSWSC 534; (1996) 42 NSWLR 123, 135.

[234] Corporations Act s 9 (definition of 'floating charge').

[236] Reasons [387]-[388], quoting Re Independent [2016] NSWSC 106; (2016) 305 FLR 222, 231 [24].

[239] Re Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 1484; (2014) 103 ACSR 401, 407 [19].

[240] CHH further submitted that nothing said by the High Court in Octavo, Buckle or Bruton was inconsistent with this analysis of the nature of the trustee's right of indemnity.

[241] After the receivers took possession of Amerind's business, they continued to trade. The receivers classified circulating assets that were generated on or following the appointment date as circulating assets that were not subject to s 433.

[242] The receivers made a net loss of $1,224,677 from trading after their appointment. At trial, the Commonwealth submitted that the receivers appeared to have apportioned the 'loss' incurred by that trading entirely against the proceeds of circulating assets to which s 433 applied, whereas, the Commonwealth submitted, the loss should have been allocated against the non-circulating assets. In the event, the trial judge gave no direction: 'Precisely what the Commonwealth suggests ought be altered is not explained and it is noteworthy that the liquidator raises no such issues'. See Reasons [465]-[478].

[243] Reasons [442], [455], [459], [464].

[244] Reasons [15]-[22] (citation omitted).

[246] Reasons [441]-[442] (citation omitted).

[247] CHH cited Re Forge Group Ltd (recs and mgrs apptd) (in liq) (2017) 118 ACSR 434, 445 [79]-[81] ('Re Forge Group').

[248] Replacement Explanatory Memorandum, Personal Property Securities Bill 2009 (Cth) 138 [9.67].

[249] In support of this contention, the Commonwealth cited CMI [2016] 1 Qd R 241, 252 [46].

[250] [2016] 1 Qd R 241, 252 [46].

[253] (1988) 14 ACLR 80.

[256] (1986) 4 ACLC 570.

[258] (2017) 118 ACSR 434, 445 [79]-[81], 450 [114].

[259] The words 'as created' derived from a corresponding English provision which was considered in Re Pearl Maintenance Services Ltd [1995] 1 BCLC 449, a case referred to by Mullins J: CMI [2016] 1 Qd R 241, 247-8 [22]-[23].

[260] See [344](d) above.

[261] See [338] above.

[262] It was not contended that the debtor account was a circulating asset.

[264] Reasons [453], citing CMI [2016] 1 Qd R 241, 252 [45]-[46].

[265] This conclusion is consistent with the receivers' case, which the judge said he accepted, in that the receivers treated amounts received in respect of stock held as at the appointment date as circulating assets subject to s 433 and amounts received in respect of stock acquired by the receivers after their appointment as circulating assets not subject to s 433.

[270] See [344](a) above.

[272] [2016] 1 Qd R 241.