Supreme Court of Victoria reconfirms liquidators’ rights to indemnity from trust assets under s556 Corporations Act

In the recent decision of Freelance Global Limited (in liq) v Bensted and Ors [2016] VSC 181, the Supreme Court of Victoria confirmed that liquidators of corporate trustees are entitled to recover their costs, expenses and remuneration from trust assets. In this case, the entitlement arose from applying either:

• section 556 of the Corporations Act 2001 (Cth) that prioritises liquidators’ costs, expenses and remuneration over unsecured debts or claims
• the common law ‘salvage principle’ or general equitable principles that broadly permit liquidators compensation for costs, expenses and remuneration incurred in connection with administering trusts property or creating a pool of assets for distribution.

Key messages

The Court made various orders in this proceeding. However, this note reports on the Court’s consideration of the liquidators’ entitlement to trust assets to meet their costs, expenses and remuneration. In this respect, the key messages from this case are:

• In Victoria, liquidators of a corporate trustee are entitled to be indemnified for their costs, expenses and remuneration from trust assets as a priority under section 556 of the Corporations Act, and also by application of equitable principles.
• Other priority creditors will also be paid out of trust assets in accordance with the priorities set out in section 556.
• The costs, expenses and remuneration of liquidators are to be fixed according to the Corporations Act.

Background

Freelance, the first plaintiff, ran a business where it organised the provision of independent contractors’ services to clients. The business was carried on through a discretionary trust structure where Freelance acted as trustee of the Freelance Trust No 1 (Trust) and held all assets in that capacity. On application from the independent contractors providing the client services, Freelance would appoint them as general beneficiaries of the trust (Beneficiaries).

Freelance invoiced and received payment from clients based on service records provided by the Beneficiaries. The monies were paid into Freelance’s ‘General Account’ and following certain deductions, then to the Beneficiaries, their superannuation accounts, or a ‘Held Account’ pending further instructions from the Beneficiaries.

In the face of $102 million of secured and unsecured creditor claims, administrators were appointed to Freelance on 28 February 2014. The administrators sold the business. At a meeting of creditors on 7 April 2014, it was resolved that Freelance be wound up, resulting in Freelance being disqualified from acting as trustee pursuant to a disqualification clause in the Trust’s deed of settlement (Trust Deed).

Under the Trust Deed, the trustee had an express right to be repaid its expenses and remuneration out of the trust property.

The Liquidators applied to the Supreme Court of Victoria for directions as to the proper application of the Trust’s assets. In particular, the Liquidators submitted that they should be indemnified and remunerated out of the Trust’s assets (including the General Account and the Held Account) in priority to the Beneficiaries’ claims.

Decision

Funds held on bare trust

Freelance was a bare trustee of the funds in the Held Account. The Liquidators submitted that they were entitled to be indemnified for the costs, expenses and remuneration incurred in the care, protection, preservation, realisation and distribution of money in the Held Account.

The Court stated that the liquidators of a corporate trustee acquired the trustee’s right of indemnity and exoneration and can have recourse to the trust property to discharge all liabilities which the trustee incurred in the proper administration of the trust before the winding up intervened. Further, the costs, expenses and remuneration of the liquidator of a corporate trustee, when it acts in no other capacity, incurred in carrying out trust obligations are debts of the company and may be paid from trust assets.

A bare trustee’s duties and powers are limited to protecting the trust assets. Accordingly, the Liquidators were not entitled to draw on the Held Account to recover costs, expenses and remuneration without a Court order.

The Liquidators sought indemnification from the Held Account on the basis of:

• The common law ‘salvage principle’ which provides that a person who works for the exclusive purpose of realising, caring for or preserving property to create a pool of assets is entitled to a charge against those assets for the expenses and remuneration incurred in such work.¹
• The general equitable principle that ‘he who seeks equity must do equity’. The Liquidators were entitled to fair compensation in circumstances where they incurred costs and expended skill and labour in connection with administering the Trust’s assets and enforcing the Beneficiaries’ rights.²

The Court cautioned that its discretion to allow costs, expenses and remuneration from trust assets is to be exercised sparingly. The discretion will usually be exercised if the work has to be done in the interests of the beneficiaries and there is no practical alternative to allowing remuneration.

In the result, the Court directed that the Liquidators are justified in paying their costs, expenses and remuneration ‘reasonably incurred’ by them as administrators and liquidators in connection with the Held Account from monies in the Held Account. Further, the Court ordered that the remuneration be fixed pursuant to sections 449E and 499 of the Corporations Act.

Trust assets

Justice Riordan held that as the outgoing trustee, Freelance retained its right of indemnity from Trust assets in respect of creditors’ claims and the Liquidators’ costs, expenses and remuneration incurred while properly acting as trustee (including while the Liquidators acted in their capacity as voluntary administrators).

However, a liquidator will not have an immediate right of recourse to trust assets if the liquidator engages in activities other than solely as trustee or the terms of the trust deed are inadequate.

Justice Riordan held:

• Whether or not the Liquidators have an immediate right of recourse to Trust assets, the Court has the power to order that the Trust assets be applied to meet claims under section 556 of the Corporations Act in the course of the winding up. Freelance Global acted ‘at least to a significant extent’ as a trustee of a trading trust and so should be put in as good a position as the liquidator of a corporate trustee that acted solely as trustee of a trading trust.
• The Liquidators were required to discharge the pre-liquidation liabilities that had been incurred (as trustee) in the order of priority under section 566.
• It is reasonable to regard the costs and expenses of the winding up as debts of the company in discharging duties imposed by the trust and covered by the trustee’s right of indemnity.

Justice Riordan considered the same conclusion would be reached by applying the principles in Universal Distributing Co Ltd (in liquidation) and Re Berkeley Applegate.

The Court noted that the continuation of the right of indemnity became less clear once Freelance was disqualified as trustee upon liquidation. However, it was unnecessary to decide whether the same conclusion would be reached if the trustee’s debts were incurred after disqualification, since the business was sold before the disqualification.

In the result, Justice Riordan granted the Liquidators’ application, directing that they be indemnified from the Trust’s assets for all costs, expenses and remuneration incurred as liquidators and administrators of Freelance. Again, remuneration was ordered to be fixed pursuant to the Corporations Act.

Significantly, Justice Riordan did not refer to the decision of the Supreme Court of New South Wales in Independent Contractor Services³ where Justice Brereton determined that section 556 did not apply to the remuneration of a liquidator of a corporate trustee, since the court was exercising its inherent equitable jurisdiction to allow remuneration out of trust assets. Rather, Justice Riordan said that the application of section 556 to trust assets is widely accepted in previous decisions.⁴ For further detail, please see our previous update on the case.

Commentary

The varying approaches taken by Courts in Victoria and New South Wales illustrate the unsatisfactory and inconsistent application of the Corporations Act to corporate trustees. This issue must eventually come before an appellate court for clarity. Until then, liquidators in Victoria are justified in drawing on trust assets of a trading trust for payment of their costs, expenses and remuneration without Court order (provided the corporate trustee acted at least substantially in the capacity as trustee, remains appointed as trustee and where creditor approval is obtained). Where the corporate trustee is a mere bare trustee of a trading trust, it is necessary for liquidators to apply to the Court for directions.

In our view, it is sensible and practical to apply the priorities set down in section 556 for a corporate trustee as decided in Freelance. There is little practical difference between a trading trust and a corporate entity trading purely in its own name. The choice of structure ought not produce different outcomes for creditors, particularly employees who should not be denied the benefit of priority conferred by section 566 for payment of wages and superannuation.

¹Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) [2016] NSWSC 106 (Independent Contractor Services)
²Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32.
³Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171.
⁴Among them, Re Enhill Pty Ltd [1983] VR 561, Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 and Re French Caledonia Travel Service (2003) 59 NSWLR 361.