What To Do With An Insolvent Corporate Trustee?

By Benjamin Caddaye, Law Clerk and Alicia Hill, Principal, MST Lawyers

In the recent decision of Cremin, in the matter of Brimson Pty Ltd (in Liq) [2019] FCA 1023, the Federal Court provides useful guidance of what a liquidator should do when faced with an insolvent corporate trustee with a right of indemnity over trust assets. In situations where the corporate trustee ceases to be the trustee upon becoming insolvent, Brimson highlights the need to approach the Court before the liquidator is able to realise the assets of the trust to meet the company’s liabilities. The decision is one of the first since the handing down of the High Court’s findings in Carter Holt Harvey (Amerind) concerning the nature of the right of exoneration and the limit of what it can be used to indemnify.

Background

This case before Moshinsky J in the Federal Court concerned the liquidation of three companies that, as trustees of three trading trusts, ran three Snooze franchises in Melbourne’s south-east.

Mr and Mrs Brimfield were the ultimate beneficial owners of the Snooze franchises, and structured their business to run through three trustee companies, ‘Brimson’, ‘Kane’ and ‘Teal’.

On 22 May 2019, the main Snooze franchisor issued breach notices to each of the three companies in relation to breaches of their franchise agreements.

Shortly after this on 28 May, a liquidator was appointed to each company under a creditors voluntary winding up pursuant to s 491 of the Corporations Act 2001 (Cth).

Under the terms of the Brimson and Teal trust deeds, clauses operated to remove the respective corporate entities as trustees upon the companies having liquidators appointed. This meant that the liquidator, while having power over the companies, did not have power concerning the trusts (or their assets). Due to the operation of the trust clauses, from the date of appointment of the liquidators, the companies themselves were removed as trustees and had no power to deal with the trust property.

The liquidator reviewed the companies books and determined that there was a shortfall in the vicinity of $2,300,000 in company assets over liabilities.

As a consequence, the liquidator applied to the Court seeking the power to act as the receiver of the respective trusts and realise their assets to meet the trust debts.

Trustee’s Powers

When acting as a trustee, a corporate entity is entitled to a general right of indemnity from the trust’s assets to cover the expenses and liabilities it incurs in the execution of its duties under the trust deed. This is recognised in the law of equity, as well as being contained in s 36 of the Trustee Act 1958 (Vic).

The right of indemnity is regarded as an equitable lien or a charge over the assets of the trust, which gives priority to the trustee ahead of other creditors.

Therefore, in the ordinary course, the corporate trustee would have had recourse to the assets of the trusts to meet the debts of the company that were incurred in the course of acting as trustee pursuant to the terms of the trust deed.

However, there were complicating factors:

  1. under the terms of the Brimson, Kane and Teal trust deeds, the corporate trustees did not have the power to sell trust assets, except to benefit the trust’s beneficiaries. Therefore, they were not empowered by the trust deed to sell the property to meet the debts, despite the indemnity; and
  2. even if such powers existed, as a result of the liquidation, the companies were no longer trustees of the Brimson and Teal Trusts.

Application Of Principles

The application before Moshinsky J was relatively straightforward in terms of how the law applied to the Brimson scenario. However, it is also one of the first times the decision of the High Court in Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (Amerind) has been applied, which clarified the law concerning the nature of the right of exoneration and its limits.

His Honour recognised that:

  1. where a corporate trustee enters liquidation, because the right of indemnity is an equitable lien, it persists despite the company having been removed as trustee.
  2. it was now settled law that the liquidator of a former corporate trustee cannot sell trust property without an order of the Court, or by appointment as the receiver over the trust’s assets.

The rationale behind this restriction confirms Amerind in that while the equitable lien is property of the company, it is merely a right of exoneration through the equitable lien. Therefore, the trust property itself cannot be regarded as property of the company.

His Honour also made it clear that the proceeds from the realisation of the trust’s assets may only be used to satisfy the liabilities of the company that relate to the trust, and not the general debts of the trustee company unrelated to the trust.

This is because the right of exoneration could only extend to the trust debts of the trustee company and not the general debts. The purpose of the power of exoneration is not to exonerate the trustee company’s debts unconditionally.

As all the company debts were trust debts, his Honour considered it appropriate to make orders facilitating the realisation of the assets so their proceeds could be used in favour of the trustee companies’ creditors. His preferred method of enabling this was to appoint the liquidator as receiver and manager of the assets and undertaking of each trust.

Commercial Considerations

This decision is important because illustrates the way that a court will react to an application from a liquidator of an insolvent corporate trustee.

It highlights that the court is able to appoint receivers to the trust formerly administered by the trustee to permit dealing with trust property. It also confirms that the assets of a trust subject to a right of exoneration are not assets of the company, and only be used to satisfy the trust debts.

So if you are a creditor of the company and not the company acting as trustee you may be treated differently to trust creditors.

As his Honour made clear, a company that formerly acted as a trustee but is then removed retains the right to enforce its indemnity from trust assets but cannot sell or deal with trust asses unless empowered by the Court to do so.

If you have any questions about this article or the issues raised in it, please feel free to contact Alicia Hill of MST Lawyers’ Dispute Resolution and Litigation team by email or phone +61 8540 0200.