In the wake of the decision of the High Court of Australia in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (a summary of which can be found here) (Amerind) it is now established that a liquidator of an insolvent former trustee can:
However, Amerind did not address or provide a solution for all of the practical issues that may be faced by liquidators in these situations, such as where there is more than one trust or where the insolvent trustee may not automatically be ejected from its position as trustee.
These practical challenges were discussed recently in the cases below and provide useful guidance for practitioners when faced with these issues.
Gregorski Investments Pty Ltd (in liq) (Gregorski) was the corporate trustee of two trusts. The terms of one of the trust deeds allowed for the directors to appoint new trustees to the trust in the event of insolvency of Gregorski, but the other contained an ejectment clause whereby Gregorski would automatically (and immediately) be removed as trustee if it became insolvent.
When Gregorski was wound up upon an order of the Court, the directors replaced Gregorski as trustee of the first trust and appointed another related entity as trustee. However, the appointment caused the other trust to became a bare trust upon Gregorski’s automatic and immediate ejectment as trustee.
The liquidators of Gregorski applied to Court for orders to be appointed as receivers of both of the trusts. These orders were ultimately made by the Court.
As the High Court observed in Amerind the fact that a company is trustee of multiple trusts can be a complicating factor for liquidators. In making the orders, the Court confirmed that the fact that the insolvent company is trustee of more than one trust “does not alter the principles as they apply in respect of each trust separately”, but was satisfied in this case in relation to each of the trusts that the liquidators should be appointed as receivers of the trusts.3
Gembrook Investments Pty Ltd (in liq) (Gembrook) was the trustee of a family trust. The trust had insufficient funds to pay creditor claims.
On the day before the liquidator’s appointment, and in preparation for that appointment, the terms of the trust deed were amended so that the trustee could not be removed by reason of the appointment of a liquidator to the trustee. The amendments also provided that where a liquidator was appointed, all remuneration, fees, charges and expenses of the liquidation would be expenses properly incurred by the trustee in the administration of the trust and payable from the trust.5
The liquidator subsequently applied for orders authorising the distribution of proceeds from the sale of the trust assets. However, in considering the application, the Court expressed a number of concerns about the approach that had been taken in amending the trust deed to support the appointment.
The Court noted that it was unclear whether the amendment power in the trust deed had been exercised for the benefit of the creditors as opposed to the beneficiaries. The Court was also concerned that if an insolvent trustee continued to administer a trust, this could result in a failure to properly consider whether the trustee has engaged in conduct which compromises its power to be exonerated out of trust assets. And finally, the Court was of the view that where a trustee becomes insolvent and the trust is being administered in the interests of creditors and not beneficiaries, this may give rise to conflicting interests.
After considering these matters, the Court expressly stated that the liquidator should have applied to be appointed as a receiver in order to realise the trust assets and to apply the proceeds in satisfaction of the trustee’s right of indemnity, in preference to the course of action that had been taken.
Ultimately, the Court authorised the distribution of funds and the liquidators’ reasonable remuneration expenses on the basis that they were expended for the benefit of creditors and were therefore proper costs of the liquidation.
However, the Court did not allow the liquidator to recover his costs of the application and noted that if the liquidator had sought to be appointed as a receiver, the complexities of the application would have been avoided and provision could have been made for all remuneration to be approved by creditors in the usual way.
With an increasing number of companies holding the position of trustee of trading trusts, the development of the law post Amerind remains relevant to insolvency practitioners.
As the cases above identify, even where a corporate trustee is not automatically ejected by reason of its insolvency, issues can arise where the company continues to administer a trust, absent a court order.
If in doubt, liquidators and receivers have the option to apply for directions under section 90-15 of the Insolvency Practice Schedule.
[1] 2001 (Cth)
[2] [2019] FCA 1400.
[3] Connelly, in the matter of Gregorski Investments Pty Ltd (in liq) v 320 Nominees Pty Ltd as trustee of the Gregorski Property Trust [2019] FCA 1400 at [26].
[4] [2019] FCA 1143.
[5] Whilst the Court considered whether the amendment to the trust deed was a fraud on the power of amendment, it did not ultimately make a finding on the issue.
