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31 Jul 2017

Trust law circumvents employees' priorities


3 min

Case law determines that employees of insolvent trusts don’t get paid in priority.

Trading trusts has become ‘the new black’ and with that, a renewed minefield for the insolvency industry. Over the last five years, the use of trust structures to operate businesses has steadily increased. The flow-on effect on insolvency administrations has recently brought court decisions that affect creditors’ rights and priorities.

In usual circumstances where a company traded without the adjunct of a trust, insolvency practitioners would recover the company assets, and then distribute the proceeds (after costs) under the order of priority set out in either sections 433(3), 556 or 560 of the Corporations Act 2001. The authority is clear and provides, among other matters, a right of priority to certain creditors including employees and the Department of Employment under its right of subrogation for funding employees’ outstanding entitlements under the Fair Entitlements Guarantee scheme (FEG).

Where a company is a corporate trustee of a trust however, an insolvency practitioner typically has a right of indemnity, and discharges outstanding debts directly from trust assets under the following provisions:

  • general law

  • the trust deed

  • various trust legislation.

How the assets are classified is important as there are some recent authorities which have considered whether the priorities afforded in the Corporations Act applies to trust assets.

In a recent decision of the Victorian Supreme Court, Re Amerind Pty Ltd (Receivers and Managers Appointed) (In Liquidation) [2017] VSC 127 consideration was given to what is meant by “property of the company”. Justice Robson held that the priorities afforded in the Corporations Act only applies to company assets owned beneficially, and not to trust property. As such, the relevant trust legislation applies to those assets and therefore creditors share the net asset proceeds on a pari passu basis (equally). In this case the Department of Employment were parties to the proceedings, and because of this ruling, it stands to have its claim of $3.8 million (of taxpayer’s monies) used to pay the Amerind Pty Ltd’s accrued employee entitlements—diminished considerably.

This ruling opposed the Woodgate decision, in the matter of Bell Hire Services Pty Ltd (in liquidation) [2016] FCA 1583, where it was determined that the Corporations Act priorities applied; however, Amerind Pty Ltd followed Justice Brereton’s decision in Re Independent Contractor Services (Aust) Pty Ltd (in Liquidation) (No 2) [2016] 305 FLR 222.

While further authorities have since followed the decision in Amerind and Independent Contactors (see in Kite v Mooney, in the Matter of Mooney’s Contractors Pty Ltd (in Liquidation) (No 2) [2017] FCA 653) uncertainly remains in insolvency circles, leaving insolvency practitioners heading off to court to obtain directions before distributing any surplus funds to creditors. Of course, this incurs additional costs, further diminishing the return to creditors.

This uncertainly is set to remain until decided by a higher court (the Department of Employment is considering an appeal of the Amerind Pty Ltd decision). Alternatively, and potentially more likely, legislation will be amended to align the Corporations Act and trust law. However, legislative reform doesn’t come without its own challenges given that trust law is governed by state legislation rather than Commonwealth. We will be actively watching this space.

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