Insolvent Corporate Trustees: Recent Decision Brings Clarity to Law on Distribution of Assets
Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq)  FCAFC 40
On Wednesday 21 March, the full Federal Court handed down its decision in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq)  FCAFC 40. This decision brings important clarity to the correct legal approach to take to the exercise of the right of exoneration by a liquidator of a company that acted as trustee of a trading trust.
A right of exoneration allows a trustee to draw directly from trust assets to discharge their duties as opposed to paying out of their own funds and seeking reimbursement. This is an important right as a trustee can be a $2 company. This right of indemnification is confined to liabilities and expenses that have been properly incurred in carrying out the trust.
This recent decision brings much needed clarity in the wake of almost 40 years of conflicting authorities since the High Court’s decision in Octavo Investments Pty Ltd v Knight  HCA 61; 144 CLR 360.
Among other things, the case decided that payment of employee entitlements maintains priority in a company liquidation even in the case where a company acts as corporate trustee of a trust.
As a result of the decision, liquidators of insolvent corporate trustees must follow the Corporations Act 2001 (Cth) statutory priorities when distributing assets. Read on for a more detailed analysis of the case:
Killarnee Civil & Concrete Contractors Pty Ltd (the Company) was incorporated in 1988. The Company carried on the business of construction until 2014 when its creditors resolved to wind it up under s 439C(c) of the Corporations Act 2001 (Cth). The Company conducted its business under the direction of a board of directors until Mr Jones and others were appointed as joint administrators.
At all times, the Company acted as trustee of the Thompson Family Trust (the Trust). The Company had a notional paid up capital of $2. It didn’t conduct business on its own account and no claim or liability had been incurred outside the proper discharge of the functions and duties of the Company as trustee of the Trust.
After their appointment, the administrators arranged for the Company to realise assets it held as the trustee of the Trust. As a result, the receipts of the administrators totalled almost $1 million.
The trust deed specified that the trustee would be disqualified from holding office if the trustee entered into liquidation. As a result, the Company ceased to hold office as trustee.
Prior to action by the liquidators to realise the assets held on trust, no parties took any action to appoint a new trustee or a receiver and manager, nor did anyone seek a judicial sale of the Trust’s assets. It was not until 2016 that deeds of variation were executed to attempt to replace the trustee.
In response to these developments, the liquidator of the Company brought an application in the Federal Court of Australia for directions and declarations under s 511 of the Corporations Act 2001 (Cth) and s 89 of the Trustees Act 1962 (WA).
The case posed and answered four key questions. Find below a summary of these key points (copied directly from judgement text):
Are the assets of the Thompson Family Trust (Trust) as at the time of the resolution to wind up the Company (including the proceeds of sale of those assets) (Trust Assets) assets in the winding up of Killarnee Civil & Concrete Contractors Pty Ltd (In Liquidation) ACN 085 230 586 (Company) so that the liquidator had the power under section 477 of the Corporations Act 2001 (Cth) to sell the Trust Assets?
Each member of the Court answered “no”.
Are either or both the proceeds of realisation of the Trust Assets and the Unfair Preference Proceeds to be applied by the Plaintiff in accordance with the priority regime established by sections 555, 556, 560 and 561 of the Corporations Act?
As to the unfair preference proceeds, each member of the Court answered “yes”, with the qualification set out in - of the reasons of the Chief Justice, agreed in by Justice Siopis at  and by Justice Farrell at .
As to the realisation of the Trust Assets, the Chief Justice and Justice Farrell answered “yes”, but for the different reasons set out in their reasons for judgment; and Justice Siopis answered “no”.
Should the Plaintiff be directed under s 511 of the Corporations Act to deal with either or both the proceeds of realisation of the Trust Assets and the Unfair Preference Proceeds as assets in the winding up of the Company?
The Chief Justice answered the question “yes as to both”; Justice Siopis answered the question “yes” as to unfair preference proceeds, but “no” as to the realisation of trust assets; and Justice Farrell answers to the effect that directions should be given in accordance with the answer to question 2, which is in substance the same answer as the Chief Justice.
Alternatively, should the Plaintiff be directed under s 511 of the Corporations Act that either or both the proceeds of realisation of the Trust Assets and the Unfair Preference Proceeds be distributed by the Plaintiff to unsecured creditors of the Trust pari passu after providing for the costs of administration (including the Administrators’ and Liquidators’ remuneration and expenses) only?
Each member of the Court answered “no”, but the Chief Justice and Justice Farrell reach that answered for reasons different to those of Justice Siopis.
To read the full judgement follow this link.