CARTER HOLT HARVEY WOODPRODUCTS AUSTRALIA PTY. LTD. V. COMMONWEALTH: THE TRUE NATURE OF THE TRUSTEE'S RIGHT OF INDEMNITY.

• Date: 01 April 2020
• Author: Roberts, Marcus

CONTENTS I Introduction II Fundamental Principles and Defined Terms III The Statutory Regime IV Background A Octavo Investments Pty Ltd v Knight B Re Enhill Pty Ltd C Re Suco Gold Pty Ltd (in liq D Re Independent Contractor Services (Aust) Pty Ltd (in liq) [No 2 E Chief Commissioner of Stamp Duties (NSW) v Buckle V Re Amerind A The Facts B The Decision 1 Kiefel CJ, Keane and Edelman JJ 2 Bell, Gageler and Nettle JJ 3 Gordon J VI Commentary A The Nature of the Trustee's Right of Indemnity B The Right of a Retiring Trustee to Retain Possession of Trust Property as against a New Trustee VII Conclusion I INTRODUCTION

A trustee that incurs liabilities in the execution of its trust has a right to be indemnified against those liabilities from the trust assets. As Jessel MR put it, '[t]he trust assets having been devoted to carrying on the trade, it would not be right that the cestui que trust should get the benefit of the trade without paying the liabilities'. (1)

But what is the nature of that right? In Australia, where trading trusts are common, (2) the question is not academic. Indeed, when a corporate trustee is wound up in insolvency and the question is whether the trustee's right, or the interest conferred by that right, falls for distribution among the trustee's creditors under or outside the Corporations Act 2001 (Cth) ('Corporations Act'), the answer can dictate whether certain classes of creditors get everything or nothing.

Until recently, the law was in disarray. In Re Enhill Pty Ltd ('Re Enhill'), (3) the Full Court of the Supreme Court of Victoria held that the trustee's interest fell for distribution under the Companies Act 1961 (Vic) among all of the trustee's creditors. In Re Suco Gold Pty Ltd (in liq) ('Re Suco Gold'), (4) the Full Court of the Supreme Court of South Australia held that the trustee's interest fell for distribution under the Companies Act 1962 (SA) among the trustee's trust creditors only. In Re Independent Contractor Services (Aust) Pty Ltd (in liq) [No 2] ('Re Independent Contractor Services'), (5) Brereton J, sitting at first instance in the Supreme Court of New South Wales, held that the trustee's interest fell for distribution outside the Corporations Act. It is doubtful that the Acts were relevantly distinguishable.

In Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth ('Re Amerind'), (6) the High Court quelled the controversy, effectively endorsing Re Suco Gold. This note will explain the Court's reasoning, commenting on what it says about the nature of the trustee's right of indemnity more broadly, and what the decision means for the related and extant controversy as to whether a retiring trustee is required to deliver trust property to a new trustee, even if it has an outstanding right of indemnity.

Part II briefly states the fundamental principles concerning the liability of trustees and the right of indemnity, defining some terms used in this note. Part III describes the relevant statutory regime. Part IV summarises the key cases which preceded Re Amerind. Part V describes the High Court's decision in Re Amerind. For the sake of brevity, the first instance decision, (7) which followed Re Independent Contractor Services, and the decision of the Court of Appeal, (8) which affirmed Re Enhill, are passed over. Part VI provides commentary on the High Court's decision.

II FUNDAMENTAL PRINCIPLES AND DEFINED TERMS

It is trite law that trusts are not legal persons. Trusts cannot incur debts. Trustees are personally liable for debts incurred in the execution of their trusts, and their creditors are entitled to look to their personal assets for satisfaction of those debts. (9) In one sense, therefore, it is misleading to speak of 'trust debts' and 'trust creditors'. (10)

But where a trustee incurs a debt properly in the execution of its trust, the trustee is entitled to be indemnified against its liability from the trust assets. (11) If the trustee has discharged the liability from its own funds, it has a right of recoupment. Otherwise, it has a right of exoneration and is entitled to use trust assets directly in the discharge of the liability. (12)

A trustee with a right of indemnity is entitled to retain trust assets as against the beneficiaries, who, conversely, are not entitled to call for the property under the rule in Saunders v Vautier. (13) The right of indemnity exists where a trustee has incurred a debt properly in the execution of its trust. To describe such a debt, it is useful to use the term 'trust debt'. The persons to whom such debts are owed are usefully called 'trust creditors'. As long as it is borne in mind that these terms are a shorthand, their capacity to mislead is avoided.

The terms 'trust assets' and 'trust property' can also be misleading. To most people, the natural meaning of these terms is the res held by the trustee on trust. Sometimes, however, the terms are used to mean 'the property to which the beneficiaries are entitled in equity', (14) which, as will be seen, is not the same thing. In this note, the former meaning is intended unless otherwise expressed.

Finally, the cases reveal confusion over whether the trustee's right of indemnity is itself property (15) or whether the right of indemnity is not property but rather 'generates' (16) or 'confers' (17) a proprietary interest in the trust assets. The High Court has confirmed that it is the latter and this note proceeds on that basis, (18) using the term 'trustee's interest' as a shorthand for the interest just described.

III THE STATUTORY REGIME

Before considering the cases that form the background for the High Court's decision in Re Amerind, it is useful to set out the relevant provisions in the statutory insolvency regime in the Corporations Act. The cases deal with equivalent regimes in predecessors to the Corporations Act.

The starting point is s 555, which provides:

Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately. 'Property of the company' is undefined, but 'property' is defined as

any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description [including] a thing in action ... (19) Unlike the Bankruptcy Act 1966 (Cth) ('Bankruptcy Act'), (20) the Corporations Act does not expressly exclude from the operation of s 555 property held by a company on trust. It is accepted, however, that the Bankruptcy Act exclusion applies 'by undisputed analogy'. (21) Of course, this begs the question whether the exclusion applies to the res held by the trustee on trust or 'the property to which the beneficiaries are entitled in equity'. (22)

The default rule in s 555 is qualified by s 556, which provides that certain debts have priority in the winding-up of a company. These include, relevantly, winding-up costs (23) and employee entitlements. (24)

Relevantly to the decision in Re Amerind, s 556 is picked up by s 433, which provides, broadly, that where a receiver, acting on behalf of the holders of debentures of a company, takes possession of 'property [ie property of the company] comprised in or subject to a circulating security interest', (25) the receiver must pay 'out of the property coming into his, her or its hands' certain debts referred to in s 556 'in priority to any claim for principal or interest in respect of the debentures'. (26) 'Circulating security interest' means, inter alia, a security interest within the meaning of the Personal Property 19 20 21 22 23 24 25 26 Securities Act 2009 (Cth). (27) The central question in Re Amerind was whether s 433 applied.

IV BACKGROUND

This part provides important context by describing five cases decided before Re Amerind. It does so in more detail than is customary in a case note because, when considering Re Amerind, it helps to understand both the controversy that existed before the decision and the reflections on the nature of the trustee's right of indemnity contained in the cases.

A Octavo Investments Pty Ltd v Knight

The fountainhead of Australia's jurisprudence on the trustee's right of indemnity is Octavo Investments Pty Ltd v Knight ('Octavo'). (28) The facts were as follows. (29) Coastline Distributors Pty Ltd conducted business solely as trustee of a trading trust. Its business did not go well. Two years after it commenced trading, it was wound up. Except for nominal paid-up capital, Coastline's only assets were trust assets. In the six months before it was wound up, Coastline had made payments totalling $49,750 to Octavo Investments Pty Ltd. The liquidators of Coastline sought to recover these payments as unfair preference payments.

Section 293(1) of the Companies Act 1961 (Qld) provided that transfers that would be void or voidable against a bankrupt were void or voidable against a company 'in like manner'. Section 122(1) of the Bankruptcy Act provided that a transfer by a bankrupt in favour of a creditor within the six-month period before the commencement of the person's bankruptcy 'having the effect of giving that creditor a preference, priority or advantage over other creditors' was void.

As Octavo put its case, the main question was whether the money paid by Coastline to Octavo was 'trust property' that would not in any event have been distributable among Coastline's creditors if Coastline had been an individual trustee. (30) If it was, so it was said, the payment did not have the effect of giving Octavo a preference over other creditors. 27 28 29 30

The main judgment was delivered by Stephen, Mason, Aickin and Wilson JJ. In short, their Honours held: (1) where a trustee has a right of indemnity, the trustee has an 'interest in the trust property [that] amounts to a proprietary interest'; and (2) if the trustee becomes bankrupt, that interest passes to the trustee's trustee...