What is a bare trustees' power of sale of trust assets and to make distributions to creditors in insolvency?

‘Trading Trusts’ are relatively common in corporate Australia, where a company acts as trustee of an underlying trust. The Trust Deed often contains ‘ipso facto’ provisions which determines and vacates the corporate entity’s appointment upon the entering into of liquidation. Upon its removal by an ipso facto determination (or like event) and unless or until it is replaced, a trustee is rendered a ‘bare trustee’ at law.

The powers of a bare trustee are generally limited to conveying the trust property to the beneficiaries of the trust upon demand. At its highest they contain an obligation to “get the trust property in, protect it, and vindicate the rights attaching to it [1]”. Whilst it is not settled, in my view this extends to not only trust assets, but also voidable transactions, notwithstanding they are otherwise considered actions personal to the liquidator.

Right of indemnity and exoneration

The trustees’ right of indemnity from the assets of a trust in relation to liabilities incurred in its capacity as trustee of a trust is conferred by agreement (within the trust deed itself) by law (as in the case of the Trustee Acts), in equity (implied by the trust relationship itself [2]), or a combination thereof. The trustees’ right of exoneration, to use trust property to pay liabilities incurred by it as trustee, is an extension of the right of indemnity – without the right of exoneration, the trustees’ right of indemnity would often be rendered nugatory.

Power of sale and appointment of receiver over trust assets

The tension that often arises in the context of a bare trustee and trust property is in relation to the exercise of a power of sale.

This can be best demonstrated in the following common circumstances:

  •  A trustee is corporate entity, and its office has been ipso facto determined upon the act of an insolvency event (such as the appointment of a liquidator);
  •  The liquidator has a power of sale under s477 of the Act in relation to company property;
  •  It is not immediately apparent whether identified property ought to be considered property of the company or property of the trust;
  •  The power of sale under the Act is at conflict with the limited powers rendered upon the trustee as a ‘bare trustee’; and
  •  The priority regime as to creditors in the Act is at odds with the operation of the Trust (such as the priority afforded to employee entitlements).

A common method of overcoming the above difficulties is to:

  1. apply to Court to appoint the liquidators as receivers over the assets of the Trust pursuant to s37(1) of the Supreme Court Act 1986 (Vic);
  2. apply to Court to seek orders to deal with the assets of the trust as liquidators pursuant to s63(1) of the Trustee Act 1958 (Vic); or
  3. vary the ipso facto clause of the trust deed to the effect that the corporate trustee retains its office in the event of insolvency.

Power to sell

With respect to making a court application, in light of the decision of Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20, it is now clear that the property of the company available to creditors includes so much of the trust assets that the trustee is entitled to pursuant to its right of indemnity, whether by exoneration or recoupment, which is to be distributed pursuant to the priority regimes contained within the Corporations Act 2001 (Cth).

If the company is insolvent and all its assets are trust assets, this means that all assets will be available to the trustee pursuant to its right of indemnity and exoneration. In the very recent decision of Re Waratah Group Pty Ltd (in liq) [2020] VSC 523, Justice Delany was presented with both sets of orders reflected in (1) and (2) sought in the alternative.

Whilst it was ultimately ordered that the liquidators be appointed receivers and managers in order to deal with the trust assets, His Honour noted that the two alternatives were “finely balanced”. This appears to be reflective of the current judicial trend which recognises that trust creditors and general creditors are to be treated the same (at least to the extent of the trustees right of indemnity, and provided the trustee acted all times as trustee of the trust), and given the regime of statutory priorities apply to both, either option (1) or (2) above will be available to the incumbent liquidator/s.

Power to collect and make distributions

What of assets that are not required to be sold, but are collected - such as voidable transactions and debtors? Whilst the powers of a bare trustee are limited, the trustee does retain a number of obligations, including to “get the trust property in, protect it, and vindicate the rights attaching to it”, as mentioned earlier.

As the right of indemnity exists without Court order, and that Carter Holt Harvey Woodproducts has clarified the general principles surrounding the distribution of trust property, in my view there is no requirement for a bare trustee Liquidator to apply to Court to authorise the taking of any action in relation to the collection of debtors or actions personal to the liquidator, or to subsequently distribute the proceeds of same in accordance with the statutory priorities (provided the trading trust has the same features as referred to in the above paragraph).

Trust Deed Variation

In the case of Carello, in the matter of Gembrook Investments Pty Ltd [2019] FCA 1143 and Carello, in the matter of Carello, in the matter of Caneland Holdings Pty Ltd [2019] FCA 1144, the Federal Court considered similar variations to a trust deed and alluded to the possibility that the variations were invalid, noting that the Court did not go so far as to make declarations to that effect.

Variations of these kind are often made at a time when insolvency of the Company was known. The extent of the amendment power is to be determined by the construction of the trust instrument,[3]  and consideration must be given as to whether the variation would amount to a fraud on the power. In Mercanti v Mercanti, [4] the Court of Appeal concluded that the power could only be exercised for the purpose for which it is conferred and not for any extraneous or ulterior purpose. The court further considered that equitable rules of fraud on the power may apply, however it did not explore this position further.

Given recent case law has for all intents and purposes aligned the interests of the general creditors and trust creditors in the context of trading trusts - at least as to the statutory priority regime of payments to creditors -these type of trust deed variations would not, in my view, be liable to be impugned.

However, the possibility should always be considered in each case and given the personal circumstances to each trading trust. It is important to note that variations to trust deeds require the consent of the ‘appointer’, which in certain cases may not be attainable.

If you are considering entering into a form of insolvency of a trading trust, or if you are an insolvency practitioner and have been appointed over a trading trust, it is essential that you have obtained the relevant legal advice pertaining to your circumstances. If you would like to discuss the above further and how this decision may impact your circumstances, please contact Ben Skinner on (03) 9099 8388 for an initial consultation.

[1] CGU Insurance Ltd v One.Tel Ltd (In liquidation) (2010) 242 CLR 174 at [36]

[2] Worrall v Harford (1802) 32 ER 250 at 252 (Eldon L) (Worrall v Harford).

[3]Byrnes v Kendle (2011) 243 CLR 253

[4] [2016] WASCA 206.

27/08/2020

Disclaimer

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on 1300 DSS LAW or epost@dsslaw.com.au.