Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth

• Jurisdiction: Australia Federal only
• Court: High Court
• Judge: Kiefel CJ,Keane,Edelman JJ.,Gordon J.
• Judgment Date: 19 June 2019
• Neutral Citation: [2019] HCA 20
• Docket Number: M137/2018
• Date: 19 June 2019

Carter Holt Harvey Woodproducts Australia Pty Ltd

Appellant

and

The Commonwealth of Australia & Ors

Respondents

[2019] HCA 20

Kiefel CJ, Bell, Gageler, Keane, Nettle, Gordon and Edelman JJ

M137/2018

HIGH COURT OF AUSTRALIA

Corporations — External administration — Receivers and other controllers of property — Priority debts — Where corporation carrying on business solely as trustee created circulating security interest over trust assets in favour of bank — Where receivers and managers appointed by bank realised trust assets and satisfied obligations to bank — Whether surplus proceeds required to be paid in accordance with Corporations Act 2001 (Cth), s 433 — Whether corporation's right of indemnity is property of the company “comprised in or subject to a circulating security interest” within meaning of s 433 — Whether trust assets themselves are such “property of the company” — Whether statutory order of priorities for payment of debts applicable to distribution of surplus proceeds from trust assets among trust creditors — Whether proceeds from exercise of insolvent corporate trustee's right of exoneration to be applied only in satisfaction of trust liabilities to which it relates.

Trusts — Trustees — Right of indemnity — Whether trustee's right of indemnity confers beneficial interest in trust assets — Whether such interest is “property” within meaning of Corporations Act, s 9.

Words and phrases — “beneficial interest”, “circulating asset”, “circulating security interest”, “floating charge”, “insolvent corporate trustee”, “payment of creditors out of property”, “power of exoneration”, “PPSA security interest”, “priority payments”, “property”, “property comprised in or subject to a circulating security interest”, “property held by the bankrupt on trust”, “property of the company”, “right of exoneration”, “right of indemnity”, “taking possession or assuming control of property”, “trust asset”, “trust liabilities”.

Corporations Act 2001 (Cth), ss 9, 51, 51C, 433, 555, 556, 560.

Personal Property Securities Act 2009 (Cth), ss 10, 12, 340.

Representation

D J Williams QC for the appellant (instructed by Polczynski Lawyers)

J P Moore QC with J A G McComish for the first respondent (instructed by King & Wood Mallesons)

No appearance for the second respondents

Submitting appearance for the third respondent

ORDER

Appeal dismissed with costs.

Kiefel CJ, Keane and Edelman JJ.

Introduction

1 In 1988, the Australian Law Reform Commission observed that although the trading trust had been used extensively for more than a decade, “the companies legislation makes little or no provision for corporate trustees which become insolvent” 1. That observation remains true today 2. The issue that arises on this appeal, which was foreseen nearly four decades ago 3, essentially concerns whether creditors who would be priority creditors of an insolvent company are priority creditors when that company trades as the trustee of a trading trust.

2 The context in which the question arises is one where, for more than a century, employees have had priority in the distribution of property by liquidators over the holders of a floating charge 4 or, as it is now described, a circulating security interest 5. The issue on this appeal is whether the relevant provision in relation to receivers in s 433 of the Corporations Act 2001 (Cth), duplicating those in relation to liquidators 6, gives the same priority to employees of a trading trust over other creditors of a trading trust. In other words, do employees of a company that is in receivership or insolvency have no statutory priority if that company happens to have been trading as the trustee of a trading trust and holding its assets on trust?

3 The primary judge (Robson J) effectively answered this question “yes”, essentially on the basis that assets held on trust are not the property of the company. The Court of Appeal of the Supreme Court of Victoria (Ferguson CJ, Whelan, Kyrou, McLeish and Dodds-Streeton JJA) effectively answered this question “no”, with reliance upon the right of indemnity that a trustee company has to use trust assets for its own benefit and exonerate itself from its liability to trust creditors. For the reasons that follow, the answer given by the Court of Appeal was correct and the appeal must be dismissed.

Background

4 Amerind Pty Ltd (“Amerind”) carried on a business as the trustee for a trading trust, the Panel Veneer Processes Trading Trust. It traded solely as trustee of that trust. It had various debt facilities with the Bendigo and Adelaide Bank (“the Bank”) which were secured by a range of securities. One of those was a debtor finance facility by which the Bank was entitled to purchase Amerind's book debts.

5 On 11 March 2014, Amerind's sole director appointed administrators (“the Administrators”) to Amerind pursuant to s 436A of the Corporations Act. On the same day, the Bank then appointed receivers and managers (“the Receivers”) to Amerind. The Bank, which had earlier demanded payment from Amerind, exercised rights under its debtor finance facility and gave written notice to Amerind's debtors, thereby perfecting a legal assignment of their debts from Amerind to the Bank.

6 The Receivers were appointed to a business with assets that included cash at bank, stock, plant and equipment, and reserve amounts contingently owed to Amerind under the Bank's debtor finance facility. For about a month after their appointment the Receivers continued to trade on a “business as usual” basis whilst seeking a purchaser for the business. On 14 April 2014, the Receivers began a wind down phase in which they realised the vast majority of the stock, including stock which was the subject of a security interest of the Bank.

7 On 13 August 2014, at the second meeting of Amerind's creditors, the creditors resolved that Amerind be wound up in insolvency. The Administrators were appointed as joint and several liquidators of Amerind. By this time, the Receivers had realised most of Amerind's assets and were in a position to retire. Additionally, all of the Bank's secured debt had been discharged and that discharge was not, and is not, contested. The Bank's discharge was by means that included payment of almost $21 million from the debts that had been assigned to it under its security. The Receivers had a receivership surplus of $1,619,018. However, before they could retire, the Receivers were confronted with competing claims in relation to that surplus. Two of the competing claims to the receivership surplus that were in issue at trial are the subject of this appeal.

8 One claim in relation to the receivership surplus was by the first respondent to this appeal, the Commonwealth of Australia. Under a statutory scheme known as the Fair Entitlements Guarantee Scheme, the Commonwealth had paid $3.8 million in accrued wages and entitlements to former employees of Amerind. By s 560 of the Corporations Act, the Commonwealth had the same priority entitlement as those employees who were entitled to payment as a priority under ss 433 and 556 of the Corporations Act. The competing claim to the surplus was by the appellant, Carter Holt Harvey Woodproducts Australia Pty Ltd (“Carter Holt”), a creditor of Amerind, which submitted that s 433 of the Corporations Act did not afford priority to the Commonwealth.

9 The second respondents to this appeal are the Receivers. Since the receivership surplus has already been diminished by the costs of the Receivers' ongoing appointment including the costs of this litigation, and because the Receivers had already had substantial input into the orders of the primary judge (supported by Carter Holt) and the Court of Appeal (supported by the Commonwealth), the Receivers did not seek to make any submissions in this Court on the merits of the competing claims.

Section 433 of the Corporations Act

10 The provision with which this appeal is centrally concerned is s 433 of the Corporations Act. That section is the modern iteration of a provision that has existed in various forms in insolvency legislation since at least 1897 7. Its first iteration arose after the development in the 1870s of a new form of security, the floating charge 8. As Lord Millett observed of that history 9:

“Valuable as the new form of security was, it was not without its critics. One of its consequences was that it enabled the holder of the charge to withdraw all or most of the assets of an insolvent company from the scope of a liquidation and leave the liquidator with little more than an empty shell and unable to pay preferential creditors. Provision for the preferential payment of certain classes of debts had been introduced in bankruptcy in 1825 and was extended to the winding up of companies by section 1(1)(g) of the Preferential Payments in Bankruptcy Act 1888. Section 107 of the Preferential Payments in Bankruptcy Amendment Act 1897 now made the preferential debts payable out of the proceeds of a floating charge in priority to the debt secured by the charge.”

11 With one exception, s 433 has been expressed in essentially the same form since 1982 10. The exception is a change in terminology in 2012 11. Prior to 2012, s 433 of the Corporations Act had the effect that a receiver who was appointed on behalf of the holders of any debentures of a company that were secured by a floating charge was required to pay “out of the property coming into his, her or its hands” certain debts, including employee claims, in priority to any claim for principal or interest in respect of the debentures. The section, with its century-old antecedents, prevented “[t]he debenture holder, by virtue of his (crystallised) floating charge, scoop[ing] the pool” 12.

12 The change in 2012 was the consequence of the replacement by the Personal Property Securities Act 2009 (Cth) of the concept of a...