Australia: Corporate trustees, priority creditors and PPSA registrations: one case, three insolvency issues

Last Updated: 30 March 2017
Article by Scott Guthrie
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:

  1. the priority regime applies to 'property' of the company
  2. 'property' is defined in the Corporations Act as meaning "any legal or equitable estate or interest in real or personal property"
  3. 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.

Key takeaways

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

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
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 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.