Statutory priority of secured creditors and trustee insolvency: implications of Re Amerind appeal decision

By Philip Blaxill
Banking Financial Services Financial Services Royal Commission Restructuring & Insolvency

In brief

The recent unanimous Victorian Court of Appeal decision1 in an appeal from Re Amerind has been widely welcomed by insolvency practitioners and others, as it brought some clarity to the question of whether the statutory order of priority applies to trust creditors. However, not all aspects of the decision will be as widely welcomed. In particular, in favouring a previous controversial decision of the court suggesting that trust assets should be applied in paying non-trust creditors, the Court of Appeal has resurrected a longstanding debate. Trust creditors and beneficiaries will be concerned if it is followed. Further, though insolvency practitioners and statutory preferred creditors will be generally pleased by the court's adoption of a wide interpretation of what is a 'circulating security interest' for the purpose of determining statutory priorities, it will concern secured creditors. Partner Philip Blaxill, Senior Finance Counsel Diccon Loxton and Associate Lucas Tan reflect on the decision and its ramifications.

How does it affect you?

  • Where a company that is a trustee goes into liquidation, then trust assets available to the trustee to pay trust creditors are to be applied in the statutory order of priority. For example, certain employee entitlements will rank ahead of other creditors.

If a receiver is appointed by the holder of a circulating security interest granted by the trustee, the receiver must apply the proceeds of that circulating security interest in payment of statutory preferred creditors (though only to the extent those proceeds are available under the trustee's right of exoneration).

  • Though it did not have to decide the issue, the court favoured the view that trust assets available under that right should be applied among all creditors of the trustee company, and not just trust creditors. In doing so, it preferred a widely criticised previous decision, Re Enhill, over South Australian appellate authority. This view will bind lower courts in Victoria, and so different views may prevail in different parts of Australia.

Where it is followed, it will have a number of effects. It will mean that unsecured trust creditors, beneficiaries of the trust, and, to a degree, secured trust creditors, will bear a credit risk on the trustee company as, in the company's insolvency, trust assets will be applied in payment of its debts incurred in its personal capacity, or as trustee of other trusts, as well as the trust debts.

  • The above diminishes the practical value of the right of subrogation of an unsecured trust creditor – the only way the creditor has access to trust assets.
  • In a separate exercise, the court also examined the labyrinthine definitions of 'circulating security interest' and 'circulating asset' and generally adopted a wide view, rendering more assets likely to be circulating assets. Taking control with respect to certain current assets (for example, credit card receivables, ADI accounts, inventory and currency) and noting that 'control' in the register under the PPSA, do not prevent them being circulating security interests if the grantor is permitted to dispose of them in the ordinary course of business. Secured creditors will need to examine their documentation and procedures.

On the trust issues it should be noted that a Full Court of the Federal Court has reserved judgment in a case heard in August 2017 on similar issues. Watch this space for the decision in In the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016) (Killarnee).

The case: background

Amerind Pty Ltd was the trustee of a trading trust. It carried on business solely in that capacity, and so it held only trust assets and trust liabilities. As trustee, it owed money to a secured creditor, employees and various other unsecured creditors. The secured creditor, a bank, held a registered PPSA security interest over various assets, including ADI cash trade accounts, funds paid under a factoring arrangement, and tax refunds and other miscellaneous receivables.

Amerind subsequently encountered financial difficulties. The bank appointed receivers, the company went into liquidation and the Commonwealth paid the employees their accrued entitlements under the FEG Scheme. The receivers recovered a net surplus, holding proceeds after the secured debt was fully repaid.

A dispute arose between the Commonwealth and other unsecured creditors as to how the surplus should be distributed.

  • The Commonwealth claimed that it and employees should be paid in preference to the other creditors, in accordance with the statutory priority regime in s556 of the Corporations Act 2001 (Cth).
  • The other unsecured creditors claimed that the statutory priority regime did not apply, because the surplus was not the property of the company, but trust property. Instead, all the creditors (being trust creditors) should be paid equally.

The receivers sought directions from the court. At first instance, the trial judge found for the other unsecured creditors. The Commonwealth appealed.

The Court of Appeal decision

The Commonwealth succeeded. The statutory priority regime applied.

By way of background, s433 of the Corporations Act provides that, where a receiver takes possession of 'property of the company' subject to a 'circulating security interest', the receiver must pay certain entitlements to employees in preference to other unsecured creditors in accordance with the s556 statutory priority regime.

Section 560 provides that, if the company pays employees as a result of a third party advancing money for the purposes of making that payment, then the third party (here, the Commonwealth) has the same right of priority as the employees who received the payment.

The statutory priority regime applied to Amerind's right of indemnity

A corporate trustee's rights over trust property include a right of indemnity being a right of recoupment allowing it to use trust assets to indemnify itself for trust debts it has paid, and a right of exoneration allowing it to use trust assets to pay trust debts.

The right of indemnity is a proprietary interest over trust assets ranking ahead of the rights of beneficiaries.

Trust creditors are entitled to be subrogated to that right, but such subrogation is a remedy not a right.

The court held that the above statutory priority applied to Amerind's right of exoneration as it was 'property of the company'.

For a corporate trustee, the 'property of the company' does include the proprietary rights of indemnity for recoupment and exoneration. These rights are available for distribution to creditors subject to the statutory priority regime.

The court preferred South Australian (Suco Gold)2 and Victorian (Re Enhill)3 appellate authority which suggested that in the case of a shortfall of trust assets over trust liabilities, proceeds of the exoneration right were to be applied first in paying employees and other priority creditors. The court further said that under various High Court decisions, the right of exoneration gave a beneficial interest in trust property ahead of the beneficiaries.

On this basis, the court overturned the decision at first instance and declined to follow a recent line of authority starting with the New South Wales Supreme Court decision of Independent Contractors4, where it was held that in the case of a shortfall, trust assets are applied equally among trust creditors, including employees.

As Amerind had only trust creditors, it was not necessary for the court to decide whether the proceeds of the right of exoneration were divisible among all creditors or trust creditors only, an issue on which authorities are divided. However, the court noted that it preferred the view propounded in Re Enhill, that trust assets could be applied to meet personal non-trust liabilities, not just trust creditors who are subrogated to them.

Amerind's right of indemnity was subject to a 'circulating security interest'

In order to determine whether Amerind's right of indemnity was subject to a 'circulating security interest', the court first considered its definition under the Corporations Act.

Section 51C of the Corporations Act defines 'circulating security interest' to include a PPSA security interest that has attached to a 'circulating asset' to which the grantor has title. Section 340 of the PPSA defines 'circulating asset' in the following way:

  • First, under s340(1)(a), an asset is a circulating asset if it falls within a defined list of assets in s340(5) (including an ADI account, currency, an account that is proceeds of inventory, or accounts arising from providing services in the ordinary course of business), and does not fall within particular exceptions in subsections (2) or (3) for when the secured party has control of the asset that is disclosed in a registration under the PPSA, or the security interest is perfected by possession.
  • Second, under s340(1)(b), 'in any other case' an asset is a circulating asset if the secured party has given the grantor express or implied authority for any transfer to be made, in the ordinary course of the grantor's business, free of the security interest.

Both paragraphs apply to assets listed in subsection (5). So, even if a security interest in such an asset satisfies the control and registration requirements in subsection (2), the asset can still be a circulating asset if the secured party has given authority to transfer as described in paragraph (1)(b).

In either case, whether an asset is circulating is determined at the time the receiver takes possession of the asset, rather than at the time the security interest was created. For this purpose, the court treats assets specifically identifiable at the time of appointment as being in the receiver's possession at that time.

For the interest under a trustee's right of indemnity, it is not necessary to establish that interest is itself a 'circulating asset'. Rather, the inquiry is directed to the underlying trust asset. Here, each underlying trust asset was a circulating asset.

The underlying assets were 'circulating assets'

Here, the security interest in question was the general security deed held by the bank, extending to all of Amerind's present and after-acquired property. The relevant underlying assets the subject of dispute were all held to be properly characterised as circulating assets:

Cash in a trade account held with the bank

The ADI cash trade accounts were circulating assets. They did not satisfy the first limb above, because while they were ADI accounts, at the time the receiver took possession the secured creditors had control of them which was disclosed in their registration. But they satisfied the second limb, because the secured creditors gave the trustee authority to deal with the accounts.

Funds advanced to purchase accounts that had been assigned to the bank under debtor finance facilities

The funds paid by the bank under a factoring arrangement were circulating assets, because they were an account that was the proceeds of inventory.

Section 31 of the PPSA defines 'proceeds' of collateral to include personal property directly or indirectly derived from a dealing with the collateral. The funds were indirectly derived from a dealing with inventory, in that the funds came from selling debts which were owed as payment for inventory. Though some of the funds were paid after the appointment, they all related to stock held pre-appointment.

The funds satisfied the first limb as the statement of control in the registration extended only to general intangibles (and more particularly, an ADI account and its proceeds) and expressly not inventory or its proceeds. The funds were circulating assets (as s340(2) was not satisfied), so it was unnecessary to consider the application of s340(1)(b) (ie the second limb) but the court commented that it was unlikely that the bank had given Amerind (and the receivers) authority to deal with the funds.

Tax refunds and sundry receipts

The tax refunds were assets listed in s340(5), being currency. So were the other receipts, being accounts arising from providing services in the ordinary course of business, because they arose from overpaying tax while providing such services. They arose before the appointment. In the absence of a registration denoting control under s340(2), they were circulating assets.

Some context on the trust insolvency issues — the judicial controversies

The case deals with two issues at the intersection of trust law and corporate insolvency that have divided the courts. As one of those involved a difference between appellate opinion in Victoria and elsewhere, the court convened a panel of five judges rather than the usual three. The two issues were as follows.

Issue 1: Whether the proprietary right of exoneration out of trust assets can be 'property of a company' on a winding up (and subject to the statutory priorities on distribution among creditors)?

Here the court followed South Australian (Suco Gold)5 and Victorian (Re Enhill)6 appellate authority, in preference to a more recent line of cases authority starting with the New South Wales Supreme Court decision of Independent Contractors.7 It said that under various High Court decisions, the right of exoneration gave a beneficial interest in trust property ahead of the beneficiaries.

Issue 2: Whether the proceeds of that right of exoneration are required to be distributed among non-trust creditors as well as trust creditors?

The Victorian appellate case of Re Enhill said that they were. The South Australian appellate case of Suco Gold said that they could not. As the result of Re Enhill would be that trust assets could be applied to meet personal non-trust liabilities of the trustee (which would be a breach of trust), it was widely criticised. The authors of Jacobs on Trusts described it as 'clearly wrong'. Other state courts followed Suco Gold. The Victorian Court of Appeal, in subsequent cases, had declined to re-enter the issue.

Here, the Court of Appeal said it did not have to decide, but it preferred the Re Enhill view. In the meantime lower Victorian courts were bound by that view.

For some background discussion on these issues, and an analysis of the trustee's rights, see Diccon Loxton's recent article, 'In with the Old, Out with the New? The Rights of a Replaced Trustee Against its Successor, and the Characterisation of Trustees' Proprietary Rights of Indemnity' in the Australian Business Law Review.

Some ramifications of the court's views on trusts

Issue 1: 'Property of the company'
  • In a business run by an insolvent trustee as trustee, the employees of that business and other priority creditors have priority in the distribution of trust assets over other trust creditors.
  • There are various provisions of the Corporations Act relating to insolvency administration that apply to 'property of the company' or use similar concepts. Those provisions include the freeze on creditor action under the administration provisions and the new 'ipso facto' rules. Each such provision needs to be examined separately on its own, but when it is applied to trustees, it may be more likely that trust assets will be included to the extent of the right of exoneration.
  • There has been a divergence among courts as to whether or not, in the absence of an express trustee power to realise trust assets, a liquidator of trustee can use his or her statutory powers to realise them, without needing a court order. (This is one of the issues in Killarnee). Given the uncertainty, the common course adopted is for the liquidator to apply to the court to be appointed as a receiver and manager of the trust assets. In that capacity, he or she can dispose of the trust assets. A receiver appointed in that manner is not bound by s433, and so not bound by the statutory order of priority. Query whether he or she would then need to distribute the trust assets only among trust creditors and pari passu.
Issue 2: The proceeds of the right of exoneration applied among non-trust creditors

Until the issue is resolved by the High Court or followed by other state and federal courts, there may be different positions in different jurisdictions.

In the court's current view, if the liquidator of the trustee realises any trust assets to apply in payment of trust liabilities, then the proceeds to the extent of those liabilities must be distributed among all its creditors in statutory order, and not just among its trust creditors (see the example in the schedule). That shifts the risk profile for trust creditors:

  • Unsecured trust creditors bear the credit risk of the trustee company, even where the trust, if regarded as an entity, is solvent. Further, if the trustee is insolvent, to that extent, unsecured trust creditors may find the proceeds of trust assets being distributed among creditors of the trustee company as trustee of a different trust. For single purpose trustees, this is not such an issue.
  • If a trustee of a solvent trust pays a trust creditor out of trust assets while the trustee is insolvent, the trust creditor risks the payment being set aside as a voidable preference.
  • The practical value of the right of subrogation of an unsecured trust creditor would be diminished in the liquidation of the trustee, even where the trust is solvent.
  • Secured trust creditors of an insolvent trustee company would also be adversely affected. If they appoint a receiver, the receiver is obliged to apply the proceeds of a circulating security interest over trust assets in payment of priority creditors of the trustee company that are not trust creditors. For example, in the case of a professional trustee company, this would include its own employees, and the employees it engages as trustee of other trusts.
  • A string of cases have held that where a liquidator has been appointed to a trustee company, the liquidator is entitled to pay its fees and expenses out of trust assets, but only to the extent that they are incurred in relation to the company's role as trustee. Presumably, the court's view may result in a liquidator being able to pay all such fees and expenses from trust assets, whether or not they relate to its role as trustee.

Trading and investment trusts are extraordinarily common in the Australian commercial sphere. They are regarded in many ways as entities and in some cases similar to companies. But, crucially, they are not. The whole concept of a trust was not set up as a trading entity. The law applicable to the 'insolvency' of trusts (that is, where trust assets are insufficient to pay trust debts) is very unclear. There is no legislative regime. Though aspects of the decision are welcome in providing some clarity on one issue, it is an area that is in dire need of High Court intervention and ideally, some statutory reform.

Ramifications of the court's views on circulating security interests

  • Pre-PPSA, a charge that was originally a floating charge was regarded as a floating charge for statutory priority purposes even if it crystallised into a fixed charge. Now it is possible to have at least limited effective 'crystallisation' of a circulating security interest.
  • With respect to s340(5) assets (certain accounts, ADI accounts, inventory and currency), the value of taking control and registering control as contemplated under subsection (2) is diminished. Taking those steps does not prevent the relevant assets being circulating security interests if the grantor is permitted to dispose of them in the ordinary course of business.
  • The court generally took a wide view, rendering more assets likely to be circulating assets. In particular, 'currency' seems to include all receipts falling into the hands of the receiver from any source.

Secured creditors should examine their forms and procedures to account of the decision with a view to minimising the portion of assets that would be treated as circulating assets in a receivership. In each transaction, they need to consider carefully whether provisions in the transaction documents, or the secured creditors' subsequent conduct, give express or implied permission to deal with the assets, and, if so, when that permission applies. Examples of this include widely used disposal provisions in facility agreements and permissions to access bank accounts and deal with book debts.

An example of the consequences of Issue 2 (trust assets applied to non-trust liabilities)

Say a trustee of Trust A holds trust assets of $1.2 million, and unsecured trust debts of $1 million (so there are sufficient trust assets to cover trust liabilities). The trustee company has no other assets and $500,000 of unsecured debts (not as trustee) and goes into liquidation. The liquidator realises the trust assets raising $1.2 million. It has a right to apply $1 million of that in exoneration of its trust liabilities. If the court's preferred view is correct, then that $1 million must be applied equally among all creditors (trust and non-trust), giving the trust creditors $666,666.67 and the other creditors $333,333.33.

Presumably, the trustee may seek a 'second bite of the cherry' for the trustee's right of exoneration, for the unpaid balance of trust liabilities, giving the liquidator the remaining $200,000 to apply among creditors. It is unclear whether it would succeed but, if it did, it would result in a further $133,333.33 to trust creditors and $66,666.67 to non-trust creditors. The beneficiaries would get nothing. The result would be that $400,000 of trust assets are paid to personal (non-trust) creditors of the trustee company.

By contrast, if Suco Gold is correct, and trust assets are only applied to meet trust liabilities, the trust creditors get $1 million, the trust beneficiaries of Trust A would get $200,000, and the non-trust creditors nothing.

A similar position to the above would apply if the insolvent trustee company is also trustee of Trust B, in which capacity it holds no remaining assets, and the $500,000 of unsecured debts referred to above are owed by it as trustee of Trust B. If the court's view is correct, $333,333.33 or $400,000 would go to the creditors of the company as trustee of Trust B.


  1. Commonwealth v Byrnes and Hewitt [2018] VSCA 41 (an appeal from Re Amerind Pty Ltd (receivers and managers apptd) (in liq) (2017) 320 FLR 118).
  2. Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 104 (King CJ, Jacobs and Matheson JJ agreeing); Lane (Trustee), Re Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953 [32] (Derrington J).
  3. Re Enhill Pty Ltd [1983] 1 VR 561, 564 (Young CJ), 572 (Lush J).
  4. Re Independent Contractor Services (Aust) Pty Ltd (in liq) [No 2] [2016] NSWSC 106 [23]-[25] (Brereton J) and Woodgate, In the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583 [35] (Farrell J).
  5. Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 104 (King CJ, Jacobs and Matheson JJ agreeing); Lane (Trustee), Re Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953 [32] (Derrington J).
  6. Re Enhill Pty Ltd [1983] 1 VR 561, 564 (CJ), 572 (Lush J).
  7. Re Independent Contractor Services (Aust) Pty Ltd (in liq) [No 2] [2016] NSWSC 106 [23]-[25] (Brereton J) and Woodgate, In the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583 [35] (Farrell J).