Proctor : July 2019
46 PROCTOR | July 2019 How to distribute trust property in corporate insolvency? BY JOSHUA STOREY It is uncontroversial that trusts form a critical part of the Australian economy.1 It is common for trusts, especially when operating as trading trusts, to have a corporate trustee. It is also not uncommon for these corporate trustees to experience the same insolvency issues that any corporation may. However, unlike other corporations, corporate trustees have the additional nuance of holding property on trust and incurring debts personally as trustee. For this reason, Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth & Ors (M137 of 2018) (Carter Holt), which is before the High Court, is of immense practical importance as the position on how the law should deal with corporate trustees in insolvency is not as clear in Australia as many practitioners would like it to be. Carter Holt is an appeal from the Victorian Court of Appeal decision last year in Re Amerind Pty Ltd; Commonwealth of Australia v Byrnes and Hewitt & Ors (2018) 54 VR 230;  VSCA 41 (Commonwealth of Australia v Byrnes, commonly referred to as the Amerind appeal)2 which was heard in February of this year. The case provides an opportunity to consider two3 important questions on the insolvency of trustees: first, to what extent, if any, should the assets of a trust held by a corporate trustee be considered assets of the company and available to pay non-trust creditors (the first question); and second, does the statutory priority regime apply to the distribution of trust assets (the second question). In answering these questions, courts have had to reconcile a point of tension between statutory insolvency and trust law, with different approaches resulting. The basics A trust does not have legal personality distinct from that of the settlor, trustee or beneficiary. A trust is merely a relationship given unique treatment by equity. While trustees hold legal or equitable title to the assets on trust, they do not own them beneficially. Simply, the assets of the trust are not the assets of the trustee. When a trustee enters into a contract or incurs another liability as trustee it does so personally. General law, statute and usually the trust deed itself give a right for trustees to indemnify themselves out of those trust assets for expenses and liabilities properly incurred as trustee.4 These rights are often described as one right of indemnity, but it is more helpful to see them as two distinct rights: a reimbursement (or recoupment) right for expenses paid personally by a trustee and an exoneration right for the trustee to apply trust assets directly to discharge trust liabilities. This is a critical distinction for the purposes of understanding the issues before the High Court in Carter Holt and the necessary characterisation of what is the property of a corporate trustee. The problem A trustee’s right of indemnity is proprietary in nature5 and can be exercised by a person appointed over the trustee company in insolvency proceedings (for example, a liquidator).6 Practically, the application of this right by insolvency practitioners has been met with some confusion. The right of reimbursement In relation to the right of reimbursement described above, the position is straightforward. The trustee company has used its own corporate funds to satisfy a liability it incurred as trustee and is out of pocket as a result of doing so. It is entitled to reimbursement in its own right. It can retain the funds received, and they are no longer trust funds – they are just assets of the company. A liquidator of the trustee exercising that right and receiving funds will be able to distribute those funds received among all creditors of the company under the statutory priorities in s556 of the Corporations Act 2001 (Cth), whether or not they are trust creditors. The right of exoneration The position with the right of exoneration is not so clear. The trustee company has a personal liability incurred as trustee to a creditor. It is entitled to use the trust assets to discharge that liability. In one sense it has a personal right to see its personal liability discharged. In another sense it has a power as trustee to use the assets to discharge the liability. The trust assets to be so applied remain trust assets until they are paid to the relevant trust creditor. They are not paid to the trustee company in its own right. If they were treated as assets of the trustee company in insolvency, the effect would be that trust assets held by a corporate trustee would be available to non-trust creditors or trust creditors of another trust which the corporate trustee is also appointed to. That is, trust assets would be applied for non- trust purposes: to pay the personal non-trust creditors of the trustee company. Further, as the trustee’s right of exoneration is limited during the life of a corporate trustee to only being available to meet trust creditors, this would mean that this right changes upon the occurrence of an insolvency event to extend to non-trust creditors. It would mean that the use of a corporate trustee would result in a markedly different outcome than if a personal trustee was appointed, as trust property is not included in the property of a bankrupt and cannot be used to meet the claims of general creditors.7 Editor’s note: The High Court handed down its decision in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth  HCA 20 as this edition of Proctor was going to press. An update will be included in the next edition.