Liquidation of Company Trusts

The judgment of Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) [2016] NSWSC 106, delivered on 23 February 2016, held that a liquidator appointed to a company, which acts solely as the corporate trustee of a trust, must:

1. approach the Court to obtain approval of the liquidator’s remuneration and the liquidator’s disbursements (which the liquidator has a right of indemnity for in priority to trust creditor claims); and

2. distribute trust assets to creditors equally, including employee claims, with no special priority as set out in the statutory order of priority codified by section 556 of the Corporations Act 2001 (Cth).

The liquidator’s remuneration was calculated as a percentage of the realisations made for the benefit of creditors, and not on an hourly rate. This follows the judgment of AAA Financial Intelligence Ltd (in liquidation) (No 2) [2014] NSWSC 1270.

The effect of this decision may extend to other provisions of the Corporations Act, where companies that operate only as trustee of a trust, are placed into liquidation and administration.

For instance, are external administrators’ powers under the Corporations Act, when dealing with trust assets, limited or excluded? These include:

• Section 433 of the Corporations Act, relating to priority payments to employees under a receivership.

• Section 443D, being the administrator’s right of indemnity to the company’s property, which is subject to section 556 as qualified by section 443E of the Corporations Act.

• Section 477 of the Corporations Act, in respect of a company in liquidation, which operated only as a trustee of a trust. Does the liquidator need to approach the Court for approval to exercise the liquidator’s powers under sections 477(2) & (2A) of the Corporations Act?

• Section 556(1)(a) of the Corporations Act, relating to expenses incurred in preserving, realising or getting in property of the company, or in carrying on the company’s business. Do these expenses extend to trading expenses and insurance, which are now required to be approved by the Court, prior to the liquidator receiving reimbursement for those disbursements incurred?

• Section 560 of the Corporations Act, relating to priority payments to employees (wages, leave and redundancy) and the amounts that the Fair Entitlements Guarantee will be willing / required to pay and be reimbursed for from the trust assets.

• Section 561 of the Corporations Act, in respect of priority of employee’s claims over floating charges. Does this provision still have effect?

• Section 588FE of the Corporations Act relating to voidable transactions. Does the liquidator of a trustee company in liquidation need to approach the Court for directions as to whether the voidable transaction provisions apply?

• Section 596AA of the Corporations Act relating to employee entitlements, noting that employee entitlement with respect to trust assets may now be deemed to share equally with all other unsecured creditors of the trust.

Further, is a liquidator now required to submit, in their statutory reports to ASIC, information on the assets and liabilities of the trust, or only the company’s assets and liabilities, in its own right?

The same matters above would need to be considered by bankruptcy trustees of individuals, who were appointed as trustees of a trust, under the corresponding sections of the Bankruptcy Act.

At this time, liquidators will need to approach the Court for approval of remuneration and (reimbursement of) disbursements incurred pursuant to section 556(1)(a) of the Corporations Act, where the company was acting as a trustee.

We are awaiting further direction from the Courts, or legislative reform, in respect of the duties of a liquidator of a corporate trustee (and bankruptcy trustee of an individual) in respect of the above matters.

Please contact SRM Lawyers to answer any queries you have relating to corporate trustees under external administration.

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