28 February 2018

Priority for Employment Entitlements in an Insolvency Protected: Statutory Priority Regimes Apply to Trading Trusts

This article was written by Natalie Tatasciore and Rhea Thrift. 

Since the decision of the Supreme Court of New South Wales in Re Independent [2016] NSWSC 106, there has been doubt about whether receivers and liquidators should apply the statutory priorities afforded to employee entitlements in sections 433, 561 and 556 of the Corporations Act 2001 (Cth) (Act) when distributing the assets of companies who have conducted their businesses as trusts.

Today, a five member bench of the Victorian Court of Appeal in Commonwealth v Byrnes and Hewitt [2018] VSCA 41 (Re Amerind) has unanimously held that they should. In doing so, they have protected employment entitlements in an insolvency and, in turn, the founding premises of the Commonwealth Government’s Fair Entitlements Guarantee Scheme (FEG Scheme).

The Court of Appeal has held that a corporate trustee’s right to be indemnified out of trust assets is ‘property of the company’ and receivers and liquidators who recover assets from the trust pursuant to that right of indemnity must apply those assets in accordance with the statutory priority regime prescribed by the Act. This regime requires a receiver with obligations under section 433 of the Act to make certain payments to employees for their prescribed employment entitlements before they make any distributions to the secured creditor. Similarly, the regime imposes obligations on liquidators under sections 561 and 556 of the Act to make prescribed payments to employees for their employment entitlements in priority to other unsecured creditors. The fact that the funds that the receiver or liquidator are distributing are funds that have been realised from “trust assets” pursuant to the right of indemnity does not upset this priority regime. Employees are entitled to more than a pari passu distribution. Re Amerind overturns a series of first instance decisions in this regard. 

Facts

Amerind Pty Ltd (Amerind) operated as a corporate trustee of a trading trust. In 2014, Amerind became insolvent and receivers were appointed to Amerind. Amerind was eventually placed into liquidation. The Commonwealth of Australia paid the employee entitlements of Amerind through the FEG Scheme. It then sought to be repaid in priority out of the circulating assets coming into the hands of the appointed receivers pursuant to section 433 of the Act.

Section 433 provides that where a receiver has been appointed to ‘property of the company’, the receiver must pay certain debts, including certain prescribed employee entitlements, in priority to the secured or other creditors, out of property that comprises a ‘circulating security interest’.

The issue before the Court was whether the trustee’s right of indemnity out of trust assets was ‘property of the company’.

A five judge bench of the Victorian Court of Appeal in Re Amerind held that the trustee’s right of indemnity was ‘property of the company’ and hence the statutory priority regime applied to the distribution of the assets of corporate trustees. The priority of employees to the proceeds of certain assets subject to a circulating security interest under section 433 of the Act is preserved, as is their priority over unsecured creditors to assets generally in a liquidation.

PPSA

The decision in Re Amerind has also provided some clarity as to the definition of a ‘circulating asset’ under the Personal Property Securities Act (PPSA).

Section 340(1) of the PPSA defines ‘circulating asset’. Personal property is a circulating asset where:

  • it is a type of asset listed in section 340(5) (generally, certain types of accounts, inventory, currency or a negotiable instrument) and an exception in section 340(2) or (3) (relating to either a PPSR registration that discloses the secured party has control of the asset or possession of goods); or
  • in any other case where the secured party has given express or implied authority for the transfer of the personal property to be made, in the ordinary course of the grantor’s business, free of the security interest.

The Court in Re Amerind held that the relevant asset to be assessed for the purpose of applying section 433 to a corporate trustee is the assets making up the trust (and in Re Amerind this was the subject of the bank’s general security deed) and subject to the right of indemnity, not the right of indemnity itself. Whether an asset is a circulating asset is to be determined at the time the receiver takes possession of the asset, rather than at the time the security interest was created.

An asset will be a circulating asset if it falls into either limb of section 340(1), even if it would not be a circulating asset under the other limb. In Re Amerind this meant that the trade account held by Amerind was a circulating asset as even though the bank had registered a PPS registration stating it had control over the account, as it had given Amerind authority to deal with this account in the ordinary course of its business.

Take Away Points

The key take away points from Re Amerind for insolvency professionals are:

  • the priority regime provided for in the Act will apply to assets recovered through a corporate trustee’s right of indemnity;
  • It is important to take account of both limbs of section 340(1) of the PPSA in determining whether an asset is a circulating asset, and regard must be had to whether in practice a grantor had the authority to deal with the asset in the ordinary course of its business.

The Commonwealth Department of Employment was the Applicant before the Court of Appeal in Re Amerind. King & Wood Mallesons acted for the Department. 

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