|Services:||Banking & Finance, Restructuring & Insolvency|
|Industry Focus:||Financial Services|
What you need to know
- In a decision handed down on 23 March 2017, the Supreme Court of Victoria has gone some way to solidify a consistent trend in three important insolvency principles, the first of which is that assets of a corporate trustee are not 'property' of the company and are therefore not subject to the priority regime under the Corporations Act (Cth) 2001 (Corporations Act).
- The second is that timing is critical when determining whether property constitutes a circulating security interest caught by section 433 of the Corporations Act.
- The third is that a security interest arises under the Personal Property Securities Act (Cth) 2009 (PPSA) (for the purposes of registration) when the first delivery of retention of title stock occurs even where subsequent invoices restate the terms and conditions of delivery.
Last week the Supreme Court of Victoria handed down its decision in Amerind 1 which concerned an application by the receivers of Amerind Pty Ltd (which was also in liquidation) for directions concerning competing claims to a surplus created following the trading on of a business by the receivers of a company which exclusively acted as trustee of a trust.
The decision provides guidance on three insolvency issues.
Issue one - does the priority regime in the Corporations Act apply to trust assets of an insolvent corporate trustee?
No, it does not – although in so deciding, the Court declined to follow a previous decision of the Full Court of Victoria, and in doing so preferred the reasoning of the comparatively recent decision of the New South Wales Supreme Court in Independent Contractor Services.2
In short the decision in Amerind couches the position in these terms:
- the priority regime applies to 'property' of the company
- 'property' is defined in the Corporations Act as meaning "any legal or equitable estate or interest in real or personal property"
- a trustee's right of indemnity against trust assets (and the corresponding rights of creditors of the trust to be subrogated to the position of the trustee) is not legal or equitable property of the company, but a right of the trustee (and creditors of the trust).
In Amerind, the company acted exclusively as trustee of a trust. Accordingly, any assets which might be subject to the trustee's right of indemnity or otherwise available to creditors of the trust was trust property and not company property. As a corollary then, trust property was not 'property' of the company and the priority regime which applies to an insolvent entity (eg employees' entitlements are paid first) does not apply.
As the New South Wales Supreme Court noted in the Independent Contractors Services case, in terms of trust assets "the creditors share parri passu [equally] in the trust assets after providing for the costs of administration, including the Liquidator's remuneration and expenses".3
Interestingly, the Court also determined that the trustee's right of indemnity was not a circulating asset (as it arises by virtue of the operation of equity and not at law or pursuant to a charge) and on that basis was not caught by section 433 of the Corporations Act (see below).
Issue two – does section 433 of the Corporations Act apply to trust assets in existence prior to the appointment of a receiver?
Clearly, in light of the finding above, section 433 does not apply to property that a company holds as trustee. This is because trust assets are not 'property' of the company available to the general body of creditors of the company. Rather, the proceeds of a trustee's right of indemnity are an equitable right available only to satisfy the claims of trust creditors. It follows from this that receivers (and liquidators) have no obligation to pay surplus trust assets to employees and other priority creditors before distributing to the general trust creditors.
As to the timing issue concerning the application of section 433, see our recent article on the decision in Langdon.
Amerind (without referring to Langdon) confirmed that section 433 only applies to 'property' by determining its character "on the appointment date, and not after". Although it was a moot issue given the findings about trust property, the Court still considered an argument that certain recoveries were not received "within the ordinary course of business" if they were recovered by the receivers post-appointment and therefore section 433 ought not apply.
As the Court found, couching the question in that way rather misunderstands the test under section 433. The evidence established that the recoveries were in respect of stock sold pre-appointment and stock on hand as at the appointment date. That the funds were recovered post the appointment of the receivers was not to the point. What is relevant is that those assets were identifiable as at the date of the receivers' appointment and would therefore have been caught by section 433 if they represented property of the company. This finding is consistent with Langdon.
Issue three – when does a security agreement in regularly traded retention of title property come into force for the purposes of determining the proper registration date?
Another issue arose in relation to a retention of title creditor. Certain stock of the company had been supplied on a retention of title basis. The creditor had supplied the stock since 2012 under a master agreement. Each stock order contained terms and conditions relating to the specific stock supplied. The creditor only registered their interest the day before the appointment of the receivers. They contended that in respect of the last supply of stock the registration was valid because it occurred within 20 business days of that delivery.
The receivers and liquidators contended that the security agreement which triggered the requirement to register was the 2012 agreement and not each subsequent invoice. It followed, they submitted, that the recently supplied stock had vested upon the appointment of the liquidators due to late registration.
The Court agreed with this approach. In doing so, the Court approvingly referred to a number of recent authorities such as Elkerton4 and Carpenter5 which concerned the issue of when a security agreement is created for the purposes of registration under the PPSA. What is evident is that there are a now a number of analogous authorities which require the issue to be determined by asking when the security agreement "came into force" and not, as the creditor contended, by applying an overly technical test to the contractual arrangements between creditor and debtor. Given that one of the underlying principles of the PPSA is that it favours substance over form, this appears to be entirely correct.
There appears to be gathering momentum in favour of the view that assets of a corporate trustee are not property of the company for the purposes of insolvency law. Some of that momentum is likely the result of an historical uncertainty (as outlined in Amerind) as to whether the general body of creditors of a company have the same claim to trust assets as creditors of a corporate trustee. Assuming Amerind to now represent the law, it seems clear that the priority regime in the Corporations Act does not apply to a corporate trustee's assets and creditors of a trust should share in the assets equally.
There is now a number of very recent cases confirming that whether the priority regime in section 433 (and section 561 for liquidators) applies requires an assessment as to whether the property in the hands of the receiver existed at the date of appointment or afterwards. When property is recovered is not the test; it is the character of the property that is determinative.
Finally, Amerind is a reminder to retention of title suppliers to perfect their security interest immediately. The idea that each subsequent supply represents a fresh security agreement seems to be as close to dead and buried as it can be.
This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories