S433(3) & 556 ??
Note on where the priority of payment regime in s 556 of the Corporations Act 2001 (Cth) did not apply in the winding up of a Company. In Amerind, 1 the Company in liquidation had traded solely as a trustee.
Upon an application by the liquidator concerning how a receivership surplus should be dealt with the Court found that the receivership surplus was property of the Trust but not property of the Company and that the priority of payment provisions in sections 433(3) and 556 of the Corporations Act did not apply.
THE COMPANY.
The business of the Company was found to have been solely conducted pursuant to a trust and the Court made the point that the significance between legal ownership and beneficial ownership of property should be preserved.
The Court was dealing with a receivership surplus of approximately $1,620,000. In the conduct of its business the Company had not always been described as a trustee, for example with respect to some insurance policies, a shareholders agreement and two asset sale agreements, one where the Company was a seller and one where the Company was a purchaser and a number of hire purchase and lease agreements only the Company name was used.
The Company did however produce annual special purpose reports and annual reports for the trust. And the ATO recorded the Company as “the trustee for X trust” and the branch code issued by the ATO to the receivers for the purpose of lodging the Company’s BAS was with respect to the ABN of the trust.
The Court found that liabilities of the Company were trust liabilities and there was no competition between Company creditors and trust creditors as all the liabilities to creditors were incurred by the trustee acting as such.
S 556?
Here the Court followed the reasoning in Re Independent 2 that s 556 is concerned only with the distribution of assets beneficially owned by a Company. It found here that all of the assets were trust assets that the statutory priority in s 556 did not apply and the creditors had no claim against the property of the Company but only against the property of the trust. And the creditors were to be paid equally and without preference if they had a right to be subrogated to an indemnity owed by the trust to the Company as trustee.
The basis of the claims by creditors against a trust. Here to establish a claim the creditors would need to show that they had a right to be subrogated to an indemnity owed by the trust to the Company, with respect to financial obligations entered into by the Company as trustee of the trust. Such right of indemnity is property held by the trust, it is not a personal asset of the trustee Company. The judgment in Re Frith3 is important here.
In that case it was said that “the creditor … has a right to sue the trustee who has incurred the debt” and “the creditor is subrogated” to that right of indemnity and “may claim the benefit of the indemnity to which the trustee is entitled”.4 The trustee must be sued in the first instance. However Re Frith is also authority that if the right of indemnity does not exist then there is no right of the creditor to be subrogated against anything.
Neil Hope. HOPE LEGAL PTY LTD: 0432 530 231
1 Re Amerind Pty Ltd (recs and mngrs apptd) (in liq) [2017] VSC 127.
2 Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) (2016) 305 FLR 222.
3 Re Frith; Newton v Rolfe [1902] 1 Ch 342.
4 Re Frith; Newton v Rolfe [1902] 1 Ch 342, 345-346 (Kekewich J).