We recently acted for a liquidator of an insolvent SME trustee company.
The trust deed automatically disqualified the company from being the trustee on its liquidation. Unsurprisingly, no third party stepped up to be appointed the new trustee of an insolvent trust, via the trust deed appointment provisions.
Acting cautiously under the current law, for the liquidator to gain control and the power of sale over the trust assets, he had to apply to the Court to seek his appointment as the court appointed receiver of the trust's assets. The immediate issue this raised, was whether there would be sufficient trust assets to fund such a receivership.
Thankfully, the Federal Court, via the docket Judge system, was efficient in dealing with the receivership process, from the appointment through to the receiver's discharge.
The Court recognised the need to adapt its rules to meet the needs of a small receivership. However, even this simple receivership, involving only a few assets and relatively minor investigation work, demonstrated the sobering reality that almost $40,000 of gross asset realisations are needed to pay for just the Court fees, the legal costs, the receiver's remuneration and the other expenses incurred in the receivership. That is without counsel being involved and with no disputes. Both we and the receiver had to forego some fees in this case, as the realisations came in at less than that sum.
The Court steps involved in a Court-managed receivership, demonstrate why it is quite expensive. Set out below is a summary of the steps for a simple administration, together with our hints for streamlining the process:
- File an Originating Process and an affidavit naming the liquidator and the insolvent company as plaintiffs to seek the liquidator's appointment as the receiver and manager of the trust assets, without security, and with the relevant powers required under s. 420 of the Corporations Act 2001(Cth), as if the reference in that section to a corporation, were to the trust.
- Seek an order to have the liquidator's remuneration fixed for the work done whilst they were the "bare trustee" of the trust assets – i.e. when they identified and preserved them.
- It may be possible to also seek an order to have the receiver's remuneration fixed prospectively for the next stage of work, if there are few assets to deal with.
- Serve, or at least notify, any likely interested persons, such as creditors and beneficiaries.
- Seek to have the receivership application heard at the first return date.
- Adjourn the proceeding after the receiver's appointment, leaving enough time to enable the investigations, asset identification, asset sales and creditor identification to be completed.
- Seek the Court's advice on any legal concerns along the way, particularly given the uncertainty of the law in this area and the receiver's role as a Court officer.
- Once the trust's assets have been sold and applied, the receiver must normally seek an order to lodge their final accounts with the Court and to serve them on interested persons. Normally the accounts receive a return date for a hearing, to have them checked and passed by the Registrar.
- In small receiverships, with simple accounts and good evidence of the receivership process, the Court may waive the need for this separate accounts hearing and deal with the accounts at the final hearing. This has occurred in a number of reported cases and occurred in our case.
- Once the receivership is complete, assuming you are seeking the accounts waiver, file and serve an Interlocutory Process and affidavit seeking orders for:
- Fixing the final remuneration;
- The filing of the accounts instanter;
- The waiver of the rules requiring the separate service and passing of the final accounts.
- A discharge of the receiver; and
- Possibly, the release of the receiver.
The Court receivership process with its costs, demonstrates why the Corporations Act should be amended to simplify the administration of insolvent trusts. Relatively simple amendments could allow the liquidator to administer the trust assets, without the need for a Court application and attendant costs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.