On 25 June 2019, Justice Moshinsky of the Federal Court of Australia heard an application in the matter of Brimson Pty Ltd (in liquidation) seeking that the liquidator be appointed as receiver and manager of the business and its trust assets.

Background

The application was made in relation to three related companies:

(a) Brimson Pty Ltd (in liquidation) (Brimson);
(b) The Kane Retail Group Pty Ltd (in liquidation) (Kane); and
(c) The Teal Retail Group Pty ltd (in liquidation) (Teal);
(together, the Companies).

Each Company was, or was formerly, the trustee of a trading trust as follows:

(a) The Brimson Family Trust (the Brimson Trust);
(b) The Kane Retail Group Family Trust (the Kane Trust);
(c) The Teal Retail Group Family Trust (the Teal Trust);
(together, the Trusts).

At or around the time of incorporation each Company was appointed trustee of its respective Trust pursuant to declarations of trust. Two of these declarations, for Brimson and Teal, contained ipso facto provisions which operated to remove Brimson and Teal as trustees upon the company going into liquidation.

All three Companies were owned and operated by a single director, Mr Neil Brimfield. Each Company, in its capacity as trustee of its respective Trust, operated separate retail businesses known as ‘Snooze” under a franchise agreement. On 22 May 2019, Snooze Sleep Well Pty Ltd issued breach notices against each Company in accordance with these franchise agreements, and a week later the three Companies were placed into liquidation.

The Issues

The main issues here were, due to the operation of the ipso facto clauses of the trust declarations, both Brimson and Teal were removed as trustees of their respective Trusts, resulting in them holding trust assets as bare trustees. As such, the Liquidator did not have the power to dispose of the trust assets to help settle the Companies’ outstanding liabilities and wind up both Companies and Trusts.

In addition to this, the trust deeds for each of the Trusts did not appear to give their trustees the power to sell the trust assets, save for the purpose of applying the proceeds of sale of the property for the benefit of the Trust beneficiaries. The Court also considered if the creditors of the Companies were equivalent to trust creditors in this instance.

Relevant Law

It is a general principle that a company that is the trustee of a trading trust has a right of indemnity to resort to the trust assets to vindicate its right to be exonerated from a liability that it has incurred in the course of carrying out trust business. This right of indemnity has been found to endure in the event of liquidation, even when the company is removed as trustee (Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in Liq) [2018] FCAFC 40) (Jones v Matrix).

It was recently settled that the liquidator of an insolvent (former) corporate trustee cannot sell the trust’s property without order of the Court, or without appointing a receiver over the trust assets. This is because the trust assets are not “property of the company” but are instead trust property in which the corporate trustee has a proprietary interest in. The Courts are willing to permit a liquidator to sell trust assets or grant the liquidator the power of sale, however the more common course is to be appointed as receiver for the purposes of selling assets to distribute proceeds to trust creditors (Jones v Matrix).

This case also applied a recent High Court decision in the case of Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (Amerind). It was determined that in circumstances where a company has only ever acted as a trustee of one trust, and that has been the totality of its affairs, no issue arises as to the application of trust assets to company creditors because all the company’s creditors are considered trust creditors. In such situations, the proceeds from the exercise of the corporate trustee’s right of exoneration against the trust are to be distributed to the trust creditors in accordance with the order of priority prescribed by the Corporations Act 2001, and may only be applied in satisfaction of the trust liabilities to which that right relates.

The Decision

It was found that each Company acted solely as trustee of the relevant Trust, and thus, due to their right of indemnity, all creditors of the Companies were therefore creditors of the Trusts. In these circumstances, His Honour found it appropriate to make orders to facilitate the sale of the trust assets and the application of the proceeds in favour of the trust creditors.

An order was made granting the liquidator the same powers that a receiver can use to deal with the business and property of a company in respect of the business and assets of each trust under s420 of the Corporations Act, and furthermore the liquidator was granted relief from all liability in dealing with the trust assets prior to being appointed receiver.

This case is one of the first to apply the decision in Amerind. You can read more about this decision here.