Services

The winding up of a trading trust: Still no clearer - 18 November 2016

In my post on 17 June 2016, I discussed the ramifications of Justice Brereton’s controversial decision in Independent Contractor Services (Aust) Pty Ltd (in liq) [2016] NSWSC 106.

You will recall that, to the surprise of the insolvency industry, Justice Brereton has held that, when winding up a company that is the trustee of a trust, a liquidator should not make distributions to creditors in accordance with the scheme of priorities prescribed by section 556 of the Corporations Act 2001.  Rather, all unsecured creditors are entitled to claim equally in accordance with the general law of trusts.

Since then, Justice Riordan in the Victorian Supreme Court has handed down the decision in Freelance Global Limited (in liq) v Bensted [2016] VSC 181.

His Honour’s judgment does not specifically refer to the earlier decision in Independent Contractor Services, although the print on Justice Brereton’s judgment would barely have been dry at the time of the hearing before Justice Riordan.

However, Justice Riordan’s decision is consistent with the “old view” that a liquidation of a company is a liquidation of a company (even if it happens to be the trustee of a trust) such that distributions are to be made in accordance with the section 556 priority scheme.

At point (c) and (d) of paragraph [82] of the judgment, Riordan J held, relevantly, as follows:

“…I note the following:

 (c)       As the liquidators of Freelance Global, the Liquidators were required to discharge the pre-liquidation liabilities that had been incurred (albeit as trustee) in the order of priority set out in s 566 of the Corporations Act.

(d)        The payment of the pre-liquidation debts in accordance with s 566 of the Corporations Act requires that a liquidator be appointed.  The appointment of a liquidator necessarily involves the incurring of cost and expenses and the section provides that these are to be paid in priority ‘to other unsecured debts’.  Accordingly, it is ‘reasonable to regard the [costs and expenses of the winding up] as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee’s indemnity’. …”

Riordan J referred to, respectively, the decisions of Campbell J in Re French Caledonia Travel Service (2003) 59 NSWLR 361 and  King CJ in Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 as authority for these two propositions.

The position is now even less clear. Does a Queensland Judge or a Western Australian Judge follow the “old view” or Justice Brereton’s “new view”? What does a liquidator do when faced with these issues in practice?

As yet there is no recent appellate Court decision, no Queensland decision and no Western Australian decision on point.

ARITA has established a working committee to address this uncertainty. This is commendable, given that this is an issue that frequently arises in the day to day rough and tumble world of planet insolvency.   

We really need urgent statutory reform on this point.

For the moment, practitioners in Queensland and Western Australia should protect themselves by seeking directions from the Court before making any distributions to creditors of a company acting as a trustee. 

I remain unconvinced that the “new view” is sound in principle. However, I think that the position will become clearer in the next few months as Australian Courts (particularly those at an appellate level outside New South Wales) are called upon to critically assess the intellectual underpinning of Justice Brereton’s decision.  Will it stand the test of time? 

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