Australia: The best of times, the worst of times: trust assets in liquidations and receiverships

The recent decision of the New South Wales Supreme Court in Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (no 2) [2016] NSWSC 106 found that the statutory scheme of priority does not apply to realisations from circulating trust assets. This decision has potentially profound impacts for both employees and secured creditors in the context of both liquidations and receiverships.

A SUMMARY OF THE CASE

Independent Contractor Services (Aust) Pty Ltd (Company) was trustee of the Independent Contractor Services Trust (Trust). The sole function of the Company was to administer the Trust. In 2012, the Company was wound up. At that time, however, there were amounts standing to the credit of the Company in its bank account. The liquidator was unsure about whether those amounts were:

  • the property of the Company (and should therefore be distributed in accordance with the statutory scheme of priority laid down by section 556 of the Corporations Act); or
  • held on trust for the beneficiaries.

In an earlier, related decision, the Court held that the evidence proved the existence and validity of the Trust and the liquidator would not be entitled to treat the amounts standing to the credit of the Company or collected by the liquidator since their appointment, as beneficially owned by the Company. In other words, the funds were to be treated as being held on trust for the beneficiaries.

After that decision, the Australian Tax Office (ATO) lodged a proof of debt which included an amount in respect of the superannuation guarantee charge (SGC), being a tax liability of employers calculated by reference to the wages an employer has paid to its employees.

Section 556(1)(e) of the Corporations Act affords priority to any SGC payable ahead of claims of ordinary unsecured creditors.

WHAT WERE THE LIQUIDATOR'S CONTENTIONS?

In light of the earlier decision of the Court that the funds standing to the account of the Company were to be treated as trust assets, the liquidator applied to the Court for a direction that the funds realised from the trust assets should be applied towards that part of the ATO liability which related to the SGC in priority to unsecured creditors, in accordance with section 556(1)(e).

In proposing such a direction, the liquidator relied on the prevailing case law which held that the priority scheme in section 556 does apply to trust assets.

As the payment by the Company of distributions to its contractors was an authorised function of the Company in its role as trustee, the liability of the Company to the ATO in respect of the SCG was incurred in the administration of the Trust.

It is well-established that a trustee is entitled to be indemnified from the trust assets for liabilities incurred by them in administering the trust. That right of indemnity is secured by a lien over the trust assets which confers a right in the trust assets (in the nature of a security interest) which has priority over the rights of the beneficiaries of the trust. Upon the liquidation of the trustee, the right of indemnity and the lien vests in the liquidator. A creditor of the trust is then entitled to be subrogated to the rights of the liquidator (in other words, stand in the shoes of the liquidator) in respect of their right to indemnity and the lien.

Accordingly, the liquidator contended that the Company had a right to be indemnified from the trust assets in respect of the liability to the ATO, and the ATO (as a creditor of the Trust), was entitled to be subrogated to the rights of the liquidator in respect of the right to indemnity and the lien.

WHAT WERE THE COURT'S FINDINGS?

The Court found that the liability to the ATO did not fall within section 556(1)(e). The Court looked at the definition of "employee" in section 556 and concluded that the contractors were not in fact employees within the meaning of section 556.

The Court also found that section 556 does not apply to trust assets. In doing so, the Court commented that it's view was that long standing authority was incorrect because section 556 deals with the distribution of assets which are beneficially owned by a company and not assets which are held by it on trust.

For that reason, the Court held that in the present case, the Company had a right of indemnity from, and a lien over, the trust assets for liabilities incurred in administering the Trust, which then passed to the liquidator. That right took priority over the interests of the beneficiaries of the Trust.

As all of the Company's liabilities were incurred in its capacity as trustee of the Trust, all of its creditors (including the ATO) were entitled to be subrogated to the liquidator's lien. As the statutory priority in section 556 was found not to apply to trust assets, all of the Company's creditors were to share equally in the trust assets.

WHAT ARE THE IMPLICATIONS OF THE DECISION ?

This decision contradicts long standing authority, which held that the priority regime in section 556 does apply to trust assets in circumstances where the trustee company is in liquidation, or indeed receivership (where the secured assets are subject to a circulating security interest).

However, importantly, it means that secured creditors will have priority over the claims of employees in respect of circuiting security interests and therefore has application both in a liquidation or receivership environment.

In respect of a liquidation, section 561 of the Corporations Act provides that employee entitlements, including payment of the SGC as referred to in section 556, must be paid in priority over the claims of a secured party in respect of a circulating security interest.

In respect of a receivership, section 433 of the Corporations Act affords the same priority to employees entitlements (including payment of the SGC). Given that section 556 is no longer said to apply to trust assets, the priority given to employee entitlements over secured creditors in sections 561 and 433 respectively, by virtue of section 556, also no longer applies.

The result of this is that secured creditors now stand to recover the entirety of the proceeds of trust assets which are subject to circulating security interests.

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.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.