Australia: Part 1: Trusts and insolvency—is it different in bankruptcy?

A personal taste to the ongoing trust complexities.

As many readers are aware, there has been no shortage of cases in recent years dealing with a scenario where a corporate trustee of a trust goes into liquidation. Judges have drawn on various authorities to provide guidance on key principles surrounding the liquidator exercising the company's right of indemnity and supporting lien, and the interactions with the Corporations Act 2001 (most notably, whether the priority provisions apply). Despite the number of cases, uncertainty remains and currently, no firm overriding authority on a final position.

At Worrells, while we are avidly watching the judgements that are continually handed down in the corporate sphere, we are involved in a trust matter that adds another layer of complexity to the 'trusts and insolvency' issue. We are the bankruptcy trustees of an estate where the bankrupt is trustee of a trust. We recently sought directions from the Federal Court of Australia on various matters surrounding the bankruptcy's administration and how to deal with the trust assets in Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953.

The matter involves a bankrupt who was sole trustee of discretionary family trust that owned and operated a Subway franchise business and employed several staff. Prior to our appointment, the trust sold the Subway business resulting in substantial sale proceeds. It must be noted that the bankrupt remained as trustee of the trust after our appointment as bankruptcy trustees. This is because there was no ipso-facto clause removing the bankrupt as trustee due to the bankruptcy.

From the outset, it was apparent that we were dealing with both Subway business assets, being the sale proceeds (trust assets), and the bankrupt's personal assets (non-trust assets). We also found the Subway business had outstanding debts (trust creditors) and separately, the bankrupt's personal debts (e.g. personal credit cards, loans, and tax debt) (non-trust creditors) that exceeded the value of trust and non-trust assets. Compounding the complexity, was an unfair preference claim, comprising of payments partially made using the bankrupt's own funds and trust funds, but the debt only related to a trust debt. The lack of precedence involving a bankrupt trustee of a trust and administrations dealing with both trust and non-trust assets and creditors led us to seek directions from the Federal Court of Australia.

A 111-page judgment was handed down by Justice Derrington, referring to the large number of directions that we sought, and the uncertain state of the law in relation to the matters. His Honour provided much-needed guidance on some key principles around a bankrupt trustee's right of indemnity out of trust assets, which is summarised as follows:

  1. A trustee has the right of indemnity from trust assets in respect of trust debts.
  2. The right of indemnity from trust assets falls into two distinct parts, being the right of recoupment (right to reimbursement from trust assets for trust debts discharged by the trustees using personal funds) and right of exoneration (right to discharge trust debts from trust assets).
  3. The trustee has an equitable lien supporting the right of indemnity. Upon the trustee's insolvency, trust creditors are subrogated to the trustee's right of exoneration and supporting lien.
  4. The right of recoupment and right of exoneration is the insolvent trustee's personal property, which passes to the bankruptcy trustee as 'property of the bankrupt divisible amongst creditors'.
  5. The right of recoupment results in the trust funds being transferred beneficially to the bankrupt estate, available to meet claims of both trust and non-trust creditors, under the priority provisions of the Bankruptcy Act 1966.
  6. The right of exoneration is much more limited. It does not result funds being beneficial received by the bankrupt estate, merely a right to use trust funds to discharge trust debts to the exclusion of non-trust creditors.
  7. As all trust creditors have equal rights of subrogation to the right of exoneration and supporting lien; payments out of this right are to occur pari passu ).

Some interesting observations can be made from His Honour's guidance above.

Firstly, how the right of indemnity exercised by a bankruptcy trustee compares to that of a liquidator. The bankrupt estate runs alongside the bankrupt's ongoing personal duties and obligations as trustee of the trust. This differs from a liquidated company that remained as trustee of the trust that would be fully controlled by the liquidator as company officer. In this administration, as the trustee is bankrupt, the only recourse is for trust creditors to claim in the bankrupt estate. His Honour explains that the right of indemnity that arises is 'property of the bankrupt' and that it is this right of indemnity that vests in the bankruptcy trustees.

Secondly, His Honour's interpretation of sections 58 and 116 and their interaction with section 108 and 109 of the Bankruptcy Act. His Honour states that while a bankruptcy trustee can take possession of all 'property of the bankrupt', only 'proceeds' from this realisation process are payable under the priority provisions. His Honour expresses that although the right of exoneration is 'property of the bankrupt', this right is not capable of being realised to produce 'proceeds' under section 108 and 109. What is interesting is that the Corporations Act's priority provisions do not refer to 'proceeds', however, His Honour does address that the right of exoneration itself is incapable of being realised. Furthermore, His Honour noted that a right of exoneration provides a very narrow right for the sole purpose of discharging trust debts.

A growing list of authorities confirms that the priorities outlined in sections 108 and 109 of the Bankruptcy Act and section 556 of the Corporations Act for distribution of trust assets do not apply, and this is the first case we know of that involves a bankrupt trustee and the Bankruptcy Act. Its effect has a significant impact on employees of trading trusts, particularly the Commonwealth where it has paid employee entitlements under the Fair Entitlements Guarantee (FEG) regime and seeks to recover these advances as a priority. This point of contention is currently being considered in two matters, being Re Amerind Pty Ltd (Receivers and Managers Appointed) (In Liq) VSC 127 of 2017 and Killarnee Civil and Concrete Contractors Pty Ltd (In Liq) WAD 181 of 2016, where the Commonwealth is involved and undoubtedly, seeking that the priority provisions should apply.

The proceeding in our matter is ongoing with considerations on how to allocate the unfair preference monies, and how to distribute the trust assets in view of the orders that the statutory priorities do not apply.

In our next article on this administration we will cover what orders were made in respect of the distribution of the trust and non-trust assets, the 'hotch-pot' principle, and the judgment details regarding our remuneration and costs and therefore how those will be paid from the asset pools.

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

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

Similar Articles
Relevancy Powered by MondaqAI
Carroll & O'Dea
Worrells Solvency & Forensic Accountants
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”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Carroll & O'Dea
Worrells Solvency & Forensic Accountants
Related Articles
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions