In section 433 of the Corporations Act 2001 we trust!

On 19 June 2019, the High Court of Australia handed down its highly anticipated decision on the treatment of employee claims in the winding up of trading trusts in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth & Ors [2019] HCA 20.

The legal issue

The decision arose from a long running dispute relating to the insolvency of Amerind Pty Ltd (Amerind) as to whether the obligations imposed on a receiver to pay, as a priority, certain employee creditors out of circulating assets pursuant to section 433 of the Corporations Act¹  also applies to the trust assets of an insolvent corporate trustee.

Background

Amerind was the trustee of a trading trust and carried out business solely in that capacity. It had various banking facilities and granted security over all its assets in support of those facilities. Amerind defaulted under those facilities, and was placed into receivership.
During the course of their appointment, the receivers realised Amerind’s non-circulating assets and the secured debts under the banking facilities were paid in full.  It followed that a surplus of approximately $1.6 million from the sale of circulating assets remained for distribution. 
A dispute ultimately arose between the Commonwealth (as a result of paying claims under the Fair Entitlements Guarantee scheme) and the appellant, Carter Holt Harvey Woodproducts Australia Pty Ltd (Carter Holt) both of whom claimed to be entitled to the remaining funds.

The High Court decision

The High Court unanimously dismissed Carter Holt’s appeal, however the Justices each adopted a different approach in their reasonings.

In a snapshot, the decision confirms that:

• Trust assets are subject to the trustee’s right of indemnity and section 433 of the Act will operate in respect of the realisation of those trust assets.
• The priority for payment of employee entitlements under section 433 will only apply to liabilities which are incurred by the trust – that is, the priority does not extend to the general body of creditors.

Importantly, the Court also confirmed that the reasoning and principles set out in respect of the operation of section 433 of the Act also apply to the statutory provisions applying in liquidation (ie sections 556, 560 and 561 of the Act).

Lavan comment

The decision of the High Court ultimately ends confusions as to the Court’s position on the obligation on receivers (and by extension liquidators, under the relevant provisions of the Act) to pay priority employee claims incurred by a trading trust out of trust assets.

However, as the decision does not encompass all aspects of trading trusts (particularly where there are “mixed” liabilities) caution should be exercised in circumstances where a corporate trustee:

• has incurred liabilities in its own right and in its capacity as trustee; or
• acted as trustee of more than one trading trust.²

In such instances, receivers and liquidators have the option to apply for directions under section 90-15 of the Insolvency Practice Schedule.