In a recent article published in the Insolvency Law Journal1, I discussed some of the difficulties encountered by liquidators and courts in trying to apply Chapter 5 of the Corporations Act to trustee companies. Liquidating a trustee company gives rise to an added layer of complexity in liquidations, with the liquidator obliged to follow not only the statutory regime, but to also comply with the equitable principles of trusts and potentially the trust deed itself. Trustee companies are the ‘square peg’ in the round hole of the Corporations Act.
Experience suggests that, particularly in smaller liquidations, insolvency practitioners frequently approach these liquidations without a full appreciation of the conceptual differences that apply to trustee companies, and without obtaining all the additional approvals or directions from the court that may be necessary for the liquidator to sell trust assets. This is not intended as a criticism, because the courts themselves do not entirely agree on the principles that apply, and the burden of understanding and complying with the law of trusts is often cost-prohibitive in smaller liquidations.
There is a critical and often-overlooked question that must be asked at the beginning of every winding up of a trustee company: is the company still a trustee? The answer to this question dictates the path that must be followed. Most trust deeds provide that the corporate trustee is automatically disqualified as trustee upon the appointment of a liquidator. Even if this is not the case, courts are readily prepared to use their discretionary powers to appoint a new trustee in place of the insolvent corporate trustee.
If the company has ceased to be trustee, this leads us to another frequently overlooked principle. The assets of the trust are not the assets of the retired corporate trustee. This means it is strongly arguable that the liquidator has no automatic right to retain or sell trust assets and an application must be made to the court to do so2. This stems from the idea that (assuming the company acted only as trustee and conducted no business in its own right) the only asset of the retired corporate trustee is the right of indemnification from the trust assets. This right of indemnity includes the former trustee’s own expenses as well as the claims of external creditors which arose in connection with the trust’s business. The right of indemnity is not, however, in the nature of a possessory right over the trust assets.
In contrast, if the company remains trustee, the liquidator’s statutory powers are overlaid with the obligation to act in accordance with the trust deed. A power of sale will usually be found within the trust deed; if not the court has the power to confer additional powers on a trustee. Given the complexities of complying with the trust deed, and the potential for tension between the terms of the trust deed and the provisions of the Corporations Act, I am firmly of the view that it is also worth a liquidator at least turning their mind to potentially asking the court to remove the company as trustee before finalising the affairs of the company.
All of the above leads to a whole range of interesting and complicated questions for the liquidator to grapple with. There are recent decisions which suggest that the statutory order of priorities (found in s 556 of the Corporations Act) does not apply to trustee companies3. If so, this has wide-ranging implications. For example, the liquidator’s costs and employee wages would not be paid out in priority to other unsecured creditors. It has also been held that the liquidator’s remuneration is to be determined, not by the Corporations Act, but rather in accordance with the court’s inherent jurisdiction over trustees4.
I have contended, in the Insolvency Law Journal article, that these decisions are not necessarily correct. But it does mean there is a great deal for a prudent liquidator to consider. If there is any doubt about the correct approach to follow, it is always wise to seek directions from the court – and of course appropriate legal advice.