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By Selwyn Black, Esq. and Nicholas Huang, Esq.
Carroll & O’Dea Lawyers
Sydney, Australia

The recent case of Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 provides some guidance in relation to which creditors can have recourse to the trust assets held by an insolvent trustee, and what priority is applied to trust creditors of an insolvent trustee.

The Key Facts

  1. Killarnee Civil & Concrete Contractors Pty Ltd (Company) carried on business as trustee of a trust (Trust).
  2. The Company did not conduct business on its own account or on behalf of any other trust. All of the Company’s assets and liabilities were held and incurred in furtherance of the terms the Trust.
  3. The deed establishing the Trust (Deed) contained:
    • Powers for the trustee to deal with the Trust property; and
    • Provisions indemnifying the trustee where it has acted in accordance with the terms of the Trust.
  4. Section 71 of the Trustees Act 1962 (WA) states that:

A trustee may reimburse himself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers.

  1. Creditors resolved to wind up the Company. Administrators were appointed who arranged for the Company to realise certain assets held as trustee of the Trust.
  2. The Company went into liquidation. The liquidator realised the remaining assets of the Trust and recovered unfair preference proceeds.
  3. Debts and claims in the winding up of the Company included amounts owing to the liquidator in costs, and unsecured debts owed to employees, the government, and Westpac.

The Issues

  1. Two important questions before the Court were:
    • Is an insolvent trustee’s right of exoneration from trust assets available to satisfy the debts of all creditors of the company, or is that right limited to satisfying only the debts of the trust creditors of the trust; and
    • If the right of exoneration can only be used to pay the trust creditors of the trust, does the order of priority in the Corporations Act apply or do all trust creditors rank equally outside the operation of the Corporations Act.
  2. The right of exoneration is the right of a trustee to use the assets of a trust to exonerate itself from liability for the debt or liability that has been incurred in carrying out the duties or functions of trustee.

The Decision

  1. The leading judgment examined earlier cases and the general principles relating to trusts and the right of exoneration.
  2. The following findings were made:
    • A trustee’s right of exoneration, and the lien over the trust assets in support of that right, is the property of the trustee;
    • Although a liquidator normally has the power to deal with all the property of an insolvent company and distribute the proceeds to all creditors, the right of exoneration is affected by equitable obligations;
    • The nature and character of the right of exoneration means that it is only exercisable to pay trust creditors;
    • In exercising the right of exoneration, the order of priority set out in the Corporations Act applies to the trust creditors of the trust; and
    • The costs of the liquidator are payable out of the trustee’s right of indemnity.
  3. Two practical outcomes resulting from this case include that:
    • The trust assets held by an insolvent trustee cannot be applied pursuant to the right of exoneration to satisfy the claims of non-trust creditors; and
    • Employees still have priority over other unsecured creditors where they were employed by an insolvent trustee carrying on business through a trust.

Conclusion

This decision gives some clarity to an area of law which has had a degree of uncertainty for approximately 40 years. However, we note that the judges in this case were not unanimous in their views, and a High Court judgment may be necessary to put the issue to bed.