Trust Killarnee (until the High Court says otherwise)

The recent Federal Court decision of Ross v Manpak Holdings Pty Ltd, in the matter of Manpak Holdings Pty Ltd [2018] FCA 1548 has applied the Full Federal Court’s decision in Killarnee. McKerracher J held that there was no appreciable difference between liquidation and deed administration when considering how assets held on trust may be dealt with and how proceeds arising from such dealings may be applied for the benefit of creditors.

The facts

In Manpak the company operated as the trustee of a unit trust which carried on a business as a wholesaler.  Whilst the company traded in its capacity as a trustee for the trust, it did not always submit creditor applications with clear reference to that capacity.  As a result, assets and liabilities were sometimes acquired by the company and in other circumstances by the company as trustee.  Also some suppliers had registered their PPSR registrations only against the company’s ACN with others registering only against the trust’s ABN.

Administrators were appointed to the company and the trust.  As is common, the trust deed operated so that upon the appointment of administrators, the trustee was disqualified from holding office.

The Administrators, by resolution of the creditors, implemented a deed of company arrangement then (now as Deed Administrators) entered into an agreement for the sale of the business (both in the company’s own capacity and in its capacity as trustee of the trust).

In light of the decisions in Killarnee and Re Amerind, the Administrators sought directions from the Court to validate the realisation of the trust property (which formed part of the sale of the business) and to deal with the proceeds of that sale (part of which were proceeds of the realisation of trust property). Click here to see our previous article on Re Amerind.

McKerracher J noted the divergence of approach between Killarnee and Re Amerind in relation to whether the trustee’s right of exoneration and proceeds of its exercise, were property of the trust or the corporate trustee.  His Honour noted that the High Court of Australia had granted special leave to appeal the Amerind decision and resultantly, this divergence was an issue likely to be considered by the High Court.  

The decision

The Deed Administrators had sought orders that they were entitled to:

• realise the proceeds from the sale of the assets of the trust; and
• apply the proceeds of the realisation of the company and trust’s property pursuant to the terms of the DOCA.

His Honour made the declarations sought and ordered that the Deed Administrators may have their costs reasonably incurred in acting as administrators and for the application.

The impact

Deed Administrators (not just liquidators or receivers and managers):                            

• should seek court approval to deal with the assets of the trust where the trustee has been removed or disqualified prior to or upon appointment of an external administrator and then may deal with the assets of the trust; and
• should then apply the realisations of trust property in accordance with the relevant DOCA (noting it is common for the priority regime in the Corporations Act¹ to be closely followed in many DOCAs).

This decision shows that the Federal Court will continue to apply the principles in Killarnee, at least until the High Court decision in Re Amerind is handed down.