The High Court’s decision puts to rest the long standing question: does section 433 of the Corporations Act 2001 (Cth), which obliges a receiver to pay certain unsecured employee creditors in priority to secured creditors out of circulating assets, apply to trust asset proceeds in the winding up of an insolvent corporate trustee? This is a significant issue given the number of trading trusts in Australia and the material advantages given to priority employee creditors by the Corporations Act.
The High Court has held that section 433 of the Corporations Act does apply to the distribution of trust property in the winding up of an insolvent corporate trustee, but the extent of its application depends on the nature of the trustees' right exercised. The High Court's summary of its decision can be accessed online. It relevantly states:
'The High Court unanimously held that, in the winding up of a corporate trustee, the "property of the company" available for payment of creditors includes so much of the trust assets as the company is entitled, in exercise of its right of indemnity, to apply in satisfaction of the claims of creditors, but that proceeds from an exercise of the right of exoneration may be applied only in satisfaction of trust liabilities to which the right relates. The Court also held that s 433(3) required the receivers to pay the debts in accordance with the statutory priorities in a winding up. A majority reasoned that Amerind's right of indemnity was not "property [of the company] comprised in or subject to a circulating security interest", but the inventory itself was such "property of the company" and the receivers were, as Amerind would have been, entitled to apply the proceeds of its realisation in satisfaction of the claims of trust creditors.'
While the Court dismissed both grounds of appeal, the reasons for doing so were not unanimous. Kiefel CJ and Keane and Edelman JJ gave joint reasons as did Bell, Gageler and Nettle JJ. The remaining member of the Court, Justice Gordon, agreed with Bell Gageler and Nettle JJ, but gave separate reasons as to why, at "a level of principle and practice, the appeal should be dismissed" (at [106]).
The practical outcome of today’s decision is that there is now certainty about whether section 433 of the Corporations Act applies to trust assets in circumstances where the insolvent company is acting solely as trustee for a single trust. While the High Court's decision gives welcome certainty to a difficult area of the law, insolvency practitioners should continue to exercise care when dealing with trust property.
The High Court’s full reasons for judgment can be accessed on its website.
MinterEllison’s detailed analysis of the decision will follow in due course.
