Commonwealth of Australia v Matthew James Byrnes and Andrew Stewart Reed Hewitt in their capacity as joint and several Receivers and Managers of Amerind Pty Ltd (Rcvrs and Mgrs Apptd) (in Liq) & Ors  VSCA 41 (the Amerind Appeal Decision)
Employees of insolvent trading trusts are the real winners in a recent decision of the Victorian Supreme Court of Appeal. The Amerind Appeal Decision set aside the trial judge’s finding that employees of insolvent trading trusts were not entitled to prove as priority creditors in the winding up of an insolvent corporate trustee.
Amerind Pty Ltd (Rcvrs and Mgrs Apptd) (in Liq) (Amerind) was the corporate trustee of a trading trust. During its winding up a question arose as to whether the proceeds of realisations made by its receivers and managers should be distributed in accordance with the priority regime contained in the Corporations Act 2001 (Cth) (Corporations Act) or in accordance with trust law. The outcome for certain creditors (in particular, employee creditors) would be vastly different depending on which set of rules was applied. Employees would receive far less if trust law, rather than the Corporations Act, was to be applied to the winding up of a corporate trustee employer. Although some employees may be eligible to receive payments in respect of their unpaid employee entitlements under the Department of Jobs and Small Business’ Fair Entitlements Guarantee Scheme (FEG Scheme), the FEG Scheme is subject to eligibility requirements and is limited in respect of certain entitlements. Accordingly, the FEG Scheme does not provide a full indemnity to employees.
This issue is not new. It resurfaced in spectacular fashion in early 2016 with Justice Brereton’s decision in Re Independent Contractor Services (Aust) Pty Ltd ACN 119 186 971 (in liquidation) (No 2)  NSWSC 106 (ICS Decision). In the ICS Decision, the NSW Supreme Court found amongst other things that trust creditors were required to be paid pari passu, without reference to the priority regime in the Corporations Act, in the event that there were insufficient trust assets to satisfy all claims in full.
Insolvency professionals have been waiting to hear whether the priority regime found in the Corporations Act should be applied to the distribution of trust assets. The trial judge in Amerind followed the ICS Decision and held that the priority regime did not apply. The Court of Appeal discussed the competing authorities concerning the nature of a corporate trustee’s right of indemnity and rejected the trial judge’s finding that a corporate trustee’s right of indemnity was not property of the company. It instead held that the priority regime in the Corporations Act did apply to amounts realised from the trustee’s right to be indemnified and exonerated out of trust assets. This means that instead of being required to line up with ordinary unsecured creditors (as they would if trust law was applied), employees of insolvent trading trusts are entitled to the usual priority afforded to them by sections 433, 556 and 561 of the Corporations Act.
This decision appears to be a sensible one, although arguably that is a matter of perspective. Employees in a general sense are at a significant disadvantage as against their employer and in terms of their understanding of (and entitlement to information about) a company’s financial health and structure. Many employees would not be aware whether the corporate structure through which they are employed is a trust, a company trading in its own right or something else entirely. The Amerind Appeal Decision confirms that employees of corporate trading trusts will not be disadvantaged in insolvency scenarios when compared to employees of companies that trade in their own right.
If you have any questions or concerns regarding this recent decision or any other matters please do not hesitate to contact Matthew Carmody of the McInnes Wilson Lawyers Dispute Resolution Team.