Commonwealth of Australia v Matthew James Byrnes and Andrew Stewart Reed Hewitt in Their Capacity as Joint and Several Receivers and Managers of Amerind Pty Ltd (Receivers and Managers Appointed) (in Liquidation) &

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2017 0051

COMMONWEALTH OF AUSTRALIA	Applicant
V
MATTHEW JAMES BYRNES AND ANDREW STEWART REED HEWITT IN THEIR CAPACITY AS JOINT AND SEVERAL RECEIVERS AND MANAGERS OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS (According to the annexed schedule)	Respondents

S APCI 2017 0070

CARTER HOLT HARVEY WOODPRODUCTS AUSTRALIA PTY LTD	Applicant
V
COMMONWEALTH OF AUSTRALIA & ORS (According to the annexed schedule)	Respondents

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JUDGES:	FERGUSON CJ, WHELAN, KYROU, McLEISH and DODDS-STREETON JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	19 July 2017, 8 August 2017
DATE OF JUDGMENT:	28 February 2018
MEDIUM NEUTRAL CITATION:	[2018] VSCA 41
JUDGMENT APPEALED FROM:	(2017) 320 FLR 118; [2017] VSC 127 (Robson J).

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CORPORATIONS – External administration – Winding up and receivership – Distribution of surplus – Insolvent corporate trustee – Trustee’s right of indemnity by way of exoneration – Whether right of indemnity is ‘property of the company’ – Whether statutory priority regime applies – Re Enhill Pty Ltd [1983] 1 VR 561; Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99; Re Independent Contractor Services (Aust) Pty Ltd (in liq) [No 2] (2016) 305 FLR 222; Lane (Trustee), Re Lee (Bankrupt) v Deputy Commissioner of Taxation considered – Corporations Act 2001 (Cth) ss 433, 555, 556, 560, 561.

TRUSTS AND TRUSTEES – Insolvency – Insolvent corporate trustee – Right of indemnity in respect of trust assets – Nature of trustee’s interest – Nature of trust creditors’ rights of subrogation – In re Richardson; Ex parte The Governors of St Thomas’s Hospital [1911] 2 KB 705 and Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 considered.

CORPORATIONS – External administration – Winding up and receivership – Distribution of surplus – Company operated as trading trust – Application of priority regime in Corporations Act 2001 (Cth) s 433 – Where property of company includes trustee’s right of indemnity in respect of trust assets – Whether necessary for right of indemnity to be subject to circulating security interest – Whether right of indemnity subject to circulating security interest – Right of indemnity characterised by trust assets available to satisfy it – Trust assets subject to circulating security interest to be treated under priority regime – Corporations Act 2001 (Cth) ss 51C, 433(2)–(3), Personal Property Securities Act 2009 (Cth) ss 8(1), 340.

CORPORATIONS – External administration – Winding up and receivership – Distribution of surplus – Company operated as trading trust – Application of priority regime in Corporations Act 2001 (Cth) s 433 – Relevant date for ascertaining whether property subject to circulating security interest – Whether date of creation of security interest or date of receivers’ appointment – Corporations Act 2001 (Cth) s 433 – Re Forge Group Ltd (recs and mgrs apptd) (in liq) (2017) 118 ACSR 434; Re CMI Industrial Pty Ltd (in liq) [2016] 1 Qd R 241 considered.

SECURITIES – ‘Circulating asset’ – Whether property circulating asset under Personal Property Securities Act 2009 (Cth) s 340 – Relationship between sub ss (1)(a) and (b) – Meaning of ‘in any other case’ in sub-s (1)(b) – Whether sub-s (1)(b) applicable if property excluded as circulating asset under sub-ss (1)(a) and (2) – Whether sub-s (1)(b) applies to assets covered in sub-s (5) – Corporations Act 2001 (Cth) s 51C; Personal Property Securities Act 2009 (Cth) ss 31, 340, 341, 341A.

WORDS AND PHRASES – ‘property of the company’ – ‘circulating security interest’ – ‘circulating asset’ – ‘in any other case’.

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APPEARANCES:	Counsel	Solicitors
For the Applicant in S APCI 2017 0051 and the First Respondent in S APCI 2017 0070	On 19 July 2017: Mr J P Moore QC with Mr D R Chandler On 8 August 2017: Mr J P Moore QC	King & Wood Mallesons
For the Third Respondent in S APCI 2017 0051 and the Applicant in S APCI 2017 0070	On 19 July 2017: Mr C M Caleo QC with Mr M G R Gronow On 8 August 2017: Mr D J Williams QC with Mr M G R Gronow	Polczynski Lawyers
For the First Respondents in S APCI 2017 0051 and the Second Respondents in S APCI 2017 0070	On 19 July 2017: Mr H N G Austin QC On 8 August 2017: Mr S J Maiden	Mills Oakley

FERGUSON CJ
WHELAN JA
KYROU JA
MCLEISH JA
DODDS-STREETON JA:

Introduction

This proceeding concerns the operation of s 433 of the Corporations Act 2001 (Cth). Relevantly, s 433 provides that a receiver appointed on behalf of a debenture holder that is secured by a ‘circulating security interest’ must pay out of the property coming into his, her or its hands debts in accordance with the statutory priorities provided for by s 556 of the Corporations Act.

The issues now before this Court fall into two parts. The first part concerns the issue of how a corporate trustee’s right of indemnity from trust assets is to be dealt with in insolvency, and whether the insolvent corporate trustee’s right of indemnity is property of the company within the meaning of s 433. The second part concerns the issue of whether relevant assets fall within the ambit of property which is secured by a ‘circulating security interest’. The two parts are largely discrete.

Part 1: The insolvent corporate trustee’s right of indemnity

The facts

The facts relevant to the issues raised in this part are not in dispute. Amerind Pty Ltd (receivers and managers appointed) (in liquidation) (‘Amerind’) carried on a business solely in its capacity as trustee of the Panel Veneer Processes Trading Trust (‘the trust’). Amerind had secured facilities with the Bendigo and Adelaide Bank (‘the bank’).

On 11 March 2014, following a notice from the bank on 6 March 2014 demanding repayment and terminating the facilities, Amerind’s sole director appointed Brent Leigh Morgan, James Marc Imray and Geoffrey Philip Reidy of Rogers Reidy (‘the administrators’) as joint and several administrators to Amerind pursuant to s 436A of the Corporations Act. On 11 March 2014, the bank appointed Matthew James Byrnes and Andrew Stewart Reed Hewitt as receivers and managers (‘the receivers’).

The receivers continued to trade, operating Amerind’s business while there was sufficient stock in order to sell it as a going concern. On 14 April 2014, the receivers ceased to trade as usual and went into a ‘wind down mode’, realising the remaining stock. Having realised most of the assets, the receivers were in a position to retire. The administrators, who had a limited indemnity from the bank for their remuneration, costs and expenses, were granted an extension of the convening period. On 13 August 2014, at the second meeting of Amerind’s creditors, the creditors resolved that Amerind be wound up and that the administrators be appointed joint and several liquidators.

Amerind’s liability to the bank was repaid through the bank’s realisation of its securities.

The Commonwealth of Australia advanced accrued wages and entitlements totalling $3.8 million to Amerind’s former employees pursuant to a statutory scheme known as the Fair Entitlements Guarantee Scheme. The Commonwealth payments did not meet employee claims in full. Employee claims have priority under s 556 of the Corporations Act. Pursuant to s 560 of the Corporations Act the Commonwealth has the same rights to priority in a winding up as the employees would have had.

After providing for their own estimated remuneration, the receivers held a net surplus of $1,619,018 (‘the receivership surplus’).

The issues

The receivers sought directions on a number of questions, and the parties formulated an agreed list of issues.

The primary judge articulated the issues relevant to this part of the proceeding as follows:

(1)Are the receivers justified in proceeding on the basis that the receivership surplus (or any part of it) is properly characterised as trust property, that is property held on trust?[1]
(2)If the receivership surplus (or any part of it) is trust property, are the receivers justified in proceeding on the basis that the priority regime in ss 433(3), 556 and 560 of the Corporations Act applies to the proceeds of the various assets constituting the receivership surplus, insofar as those assets were, as at the date of the receivers’ appointment, also circulating assets of Amerind within the meaning of s 340 of the Personal Property Securities Act 2009 (Cth) (‘the PPSA’) and s 51C of the Corporations Act?[2]

[1](2017) 320 FLR 118 [38] (‘Reasons’).

[2]Reasons [55].

The Commonwealth contended, in substance, that the receivership surplus was not trust property and that it should be applied in accordance with the priority regime provided for by ss 433, 556 and 560 of the Corporations Act. Before the primary judge, the receivers supported that position. On the application for leave to appeal, the receivers did not take a position on this issue, and only sought to be heard on any relief or orders to be made.

The Commonwealth’s position was opposed by a creditor, Carter Holt Harvey Woodproducts Australia Pty Ltd (‘CHH’), which contended that the Commonwealth was not entitled to priority because s 433 did not apply.

The primary judge held that s 433 did not apply to the receivership surplus. The Commonwealth now seeks leave to appeal. The leave application was heard on the basis that if leave were granted the consequent appeal would be determined forthwith.

Amerind as trustee of the trust is entitled to be indemnified out of the trust assets for the liabilities it incurred as trustee. In this case all of the liabilities incurred by Amerind were incurred in its capacity as trustee, and all the assets held were assets of the trust. As the liabilities exceed the assets, the beneficiaries’ interest has been entirely supplanted by Amerind’s right of indemnity.

The issue of how a corporate trustee’s right of indemnity is to be dealt with upon a winding up, or where s 433 applies, is one of long standing controversy. Judgments of first instance and intermediate appellate courts have reached divergent conclusions. There have been High Court judgments on related issues which are significant.

In large part the relevant issue comes down to this: does the statutory insolvency regime apply to the distribution of assets which are subject to a right of indemnity held by an insolvent corporate trustee, and, if so, how, if at all, do trust principles apply in that situation?

Before attempting an analysis of the applicable authorities which are directly on point it is necessary to clarify the nature of trust liabilities, the nature of a trustee’s right of indemnity and creditors’ subrogation, to say something about the statutory insolvency regime, to address the nature of a preferential payment under the statutory insolvency regime (because that is critical to an understanding of a High Court judgment of significance in the context, Octavo Investments Pty Ltd v Knight[3]) and to then address Octavo and other relevant High Court authorities since Octavo in some detail.
[3](1979) 144 CLR 360 (‘Octavo’).

We will then turn to the authorities prior to the primary judge’s decision addressing the relevant issues more directly, the primary judge’s decision, the submissions made on this application, and a further first instance judgment delivered since we heard argument on this application, being Lane (Trustee), Re Lee (Bankrupt) v Deputy Commissioner of Taxation.[4]
[4][2017] FCA 953 (‘Lane’). The parties were aware of the decision in Lane and alerted the Court to it. They did not seek to make further submissions.

Thus, this Part 1 proceeds under the following headings:

·Nature of trust liabilities
·Nature of the trustee’s right of indemnity and creditors’ subrogation.
·The statutory insolvency regime.
·Nature of a preference.
·Octavo.
·High Court decisions since Octavo.
·Cases on indemnity and insolvency before the primary judgment.
·Decision of the primary judge.
·Submissions on the application for leave to appeal.
·Lane.
·Analysis - Part 1.
·Conclusions - Part 1.

Nature of trust liabilities

A trustee who, in discharge of a trust, enters into business transactions is personally liable for any debts that are incurred in the course of those transactions.

Whilst reference is often made to ‘trust creditors’ and ‘trust debts’, there is no legal entity which is liable for any such debt other than the trustee, and such creditors have no debtor other than the trustee. They are not owed anything by ‘the trust’.

Subject to the terms of any instrument creating the trust, the trustee is entitled to be indemnified from the trust assets against liabilities properly incurred. The trustee has a charge or lien over the trust assets for the purpose of enforcing that indemnity. In some circumstances creditors of the trustee whose debts were incurred in discharge of the trust may be subrogated to the trustee’s rights.

Nature of the trustee’s right of indemnity and creditors’ subrogation

A trustee’s right of indemnity may take the form of recoupment or reimbursement for trust debts paid by the trustee, or exoneration in relation to trust debts not yet paid.

One classic statement articulating the trustee’s right of indemnity for obligations incurred in performance of the trust is that of Stirling J in Re Blundell; Blundell v Blundell[5] Stirling J said:

What is the right of indemnity? I apprehend that in equity, at all events, it is not a right of the trustee to be indemnified only after he has made the necessary payments to his solicitor, or to the auctioneer, or to the stockbroker — but that he is entitled to be indemnified, not merely against the payments actually made, but against his liability.[6]

[5](1888) 40 Ch D 370.

[6]Ibid 376–7. This passage was cited in the summary of the trustee’s right of indemnity set out in the consultation paper by the Trust Law Committee of the United Kingdom dated 7 March 1997.

Section 36(2) of the Trustee Act 1958 provides:

A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers.

In Vacuum Oil Co Pty Ltd v Wiltshire,[7] Dixon J described the right of indemnity and creditors’ rights of subrogation as follows:

The liabilities the executor incurs in carrying on the business are his personal debts and give the creditors to whom he has incurred them no direct right of recourse to the assets of the estate. But, if the executor has acted under some authority binding upon those who otherwise would be entitled to the assets, their claims are subject to his right to be indemnified out of the assets in respect of liabilities he has incurred in the proper performance of his duties or exercise of his powers. He has a lien over the assets which takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation. But the claims of creditors of the deceased, whose rights are, of course, independent of his will, cannot be postponed so as to rank behind this lien, except by their own act or conduct. Although the executor's creditors to whom he has become indebted in the course of carrying on the business have no direct claim upon the assets, because they deal with him on the footing of his personal liability, yet in equity they may be subrogated to his right of indemnity or lien. The principle is stated in a few words by Turner LJ in Ex parte Edmonds: — ‘The executor or trustee directed to carry on the business having the right to resort for his indemnity to the assets directed to be employed in carrying it on, the creditors of the trade are entitled to the benefit of that right, and thus become creditors of the fund to which the executor or trustee has a right to resort’.
But the creditors of the trade carried on by the executor must, as in all other cases of subrogation, depend upon his rights, and in that sense their claims upon the assets of the estate are indirect. This is well shown by the example of an executor who, through his wrongful act, has lost his right of indemnity or has disentitled himself to an indemnity except on terms of making good a loss to the estate. In such a case the creditors of his trade can have no better right.[8]

[7](1945) 72 CLR 319 (‘Vacuum Oil’).

[8]Ibid 335–6.

In the ordinary case a trustee’s right of indemnity does not require some particular authority ‘binding upon those who otherwise would be entitled to the assets’. Dixon J added that element to his description because of the particular facts in Vacuum Oil which concerned a deceased estate and which are not of present relevance.

The idea that creditors who had dealt with a trustee might have recourse other than to the personal liability of the trustee, that is, that they might have recourse to the assets of the trust, only emerged during the early part of the 19^th century. In 1802 in Worrall v Harford[9] Lord Eldon considered that a finding that creditors might have a claim upon the trust fund itself because the trustees were entitled to be indemnified for charges and expenses would be ‘a most mischievous determination’.[10] Then, two years later, in Ex parte Garland[11] Lord Eldon was prepared to accept that creditors of an executor who had used estate assets to trade had, in addition to the personal responsibility of the individual, ‘something very like a lien upon the estate embarked in the trade’.[12]
[9](1802) 8 Ves Jun 4; 32 ER 250.
[10]Ibid 9; 252.
[11](1804) 10 Ves Jun 111; 32 ER 786.
[12]Ibid 119; 789.

By the time Re Johnson; Shearman v Robinson[13] was decided in 1880 the capacity of trust creditors to be subrogated to the trustee’s right of indemnity was established, but it is important to note the basis upon which that right had evolved. Jessel MR referred to the trust creditor’s ‘first right’, which was the personal liability of the trustee, and his ‘second right’ which was a right to be put in the trustee’s place against the trust assets. Jessel MR said:

The second right is a mere corollary to those numerous cases in Equity in which persons are allowed to follow trust assets. The 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 ...[14]

[13](1880) 15 Ch D 548 (‘Re Johnson’).

[14]Ibid 552.

A little later, explaining the rule that the creditors could not have any better right than the trustee, Jessel MR said:

[T]he injustice to be avoided is the injustice of the cestui que trust walking off with the assets which have been earned by the use of the property of the creditor: but where the cestui que trust does not get that benefit, there is no injustice as between him and the creditors, and there is no reason for the Court interfering at the instance of the creditors to give them a larger right than that they bargained for, namely, their personal right against the trustee.[15]

[15]Ibid 555–6.

The circumstance of the beneficiary not getting the benefit, to which Jessel MR was referring, was a circumstance where the trustee had for some reason lost or compromised the right of indemnity. If the trustee had no right of indemnity because of a breach of trust or for some other reason, subrogation was not appropriate because the beneficiaries were not taking the benefit yielded to the trust estate by the obligations undertaken by the trustee without that trust estate appropriately bearing those obligations.

In Jennings v Mather[16] Kennedy J held that a trustee’s lien passed to his trustee in bankruptcy, so that the trustee in bankruptcy would defeat the claim of an execution creditor in relation to trust property on an interpleader. Kennedy J said:

Now, it seems to me that the carrying on of a business of this kind gave an equitable lien, and I cannot see why that lien should not have passed to the trustee in bankruptcy of the person carrying on such a business. No doubt the property of the trust estate cannot be said to be property divisible among the creditors, yet it is property over which the bankrupt had a lien. Every trade creditor who has a personal right in this case against Mather, and has the right to prove against Mather’s estate in the bankruptcy in respect of debts incurred by Mather in the course of carrying on this business, has also a right through Mather to a satisfaction of that lien which Mather had over what is in one sense, no doubt, trust property. It seems to me that the lien has passed to the trustee in bankruptcy, and I think that judgment should be given in his favour.[17]

[16][1901] 1 QB 108 (‘Jennings v Mather’).

[17]Ibid 117.

On appeal, the English Court of Appeal affirmed the judgment of Kennedy J.[18]
[18]Jennings v Mather [1902] 1 KB 1.

In Re Frith; Newton v Rolfe[19] Kekewich J described the unpaid trust creditor’s rights as follows:

The [unpaid trust creditor] has no right whatever against the estate, but he has a right to sue the trustee who has incurred the debt. If the trustee on his part has a clear account, and has a right of indemnity against the estate, the creditor is subrogated to that right, and for that purpose the creditor is allowed to intervene. He may sue the trustee, and he may claim the benefit of the indemnity to which the trustee is entitled out of the estate.[20]

[19][1902] 1 Ch 342.

[20]Ibid 345–6.

In Savage v Union Bank of Australia Ltd[21] the High Court (Griffith CJ, Barton and O’Connor JJ) expressly endorsed Kennedy J’s judgment in Jennings v Mather. The High Court held that the trustee’s lien vested, on the trustee’s insolvency, in the trustee’s trustee in bankruptcy and augmented the trustee’s insolvent estate. Griffith CJ explained that ‘[t]he goods themselves did not pass because they are trust assets, but the right of indemnity was a right which would pass…’ and become available to the trustee in bankruptcy.[22]
[21](1906) 3 CLR 1170 (‘Savage’).
[22]Ibid 1188.

In TheGovernors of St Thomas’s Hospital v Richardson,[23] the English Court of Appeal essentially adopted the same analysis as Kennedy J in Jennings v Mather. The Court of Appeal held that where a trustee held the legal estate to a lease that legal estate and the right to possession would vest in the insolvent trustee’s trustee in bankruptcy to secure the insolvent trustee’s right of indemnity.
[23][1910] 1 KB 271 (‘Governors of St Thomas’). It is important that this should not be confused with In re Richardson; Ex parte the Governors of St Thomas’s Hospital [1911] 2 KB 705 (see below).

In Governors of St Thomas Fletcher Moulton LJ pointed out that (in that case) the cestui que trust was bound to indemnify the trustee for the sums that he had to pay and that the trustee was entitled to retain and deduct those sums from the rents and profits of the trust property. He referred to the provision of the bankruptcy legislation which excluded from property divisible amongst creditors property held on trust for any other person. Fletcher Moulton LJ then said:

The meaning of the provision is therefore evident; it is that property held by the bankrupt does not go to form part of his divisible estate, if and so far as he holds it in trust for another person. But as far as the bankrupt has a beneficial interest in property it passes to his trustee to form part of his divisible estate, and this none the less because the balance of the property is held by the bankrupt in trust for others. The trustee in bankruptcy will take the same position in respect to the property as the bankrupt; he will hold it on the same trusts and be entitled to the same beneficial interest and no more.[24]

[24]Governors of St Thomas [1910] 1 KB 271, 278–9.

The same estate was subject to another decision of the English Court of Appeal in In re Richardson; Ex parte The Governors of St Thomas’s Hospital.[25] In that case the Court of Appeal held, in relation to the same lease, that the only use to which the trustee could put the right of indemnity, when he had not already paid the relevant debt, was ‘to pass the money on to the head creditor’. Fletcher Moulton LJ said:

That is exactly consistent with justice. It would not be right for a trustee to obtain money from this right to be indemnified against payments made to the head creditor when he not only has not made those payments but comes here to say that he does not intend so to do. Therefore I come to the conclusion that, as a general principle, an indemnity like this can be used by the trustee only for the purpose of bringing about payment to the head creditor of the claim against which he is indemnified.[26]

[25][1911] 2 KB 705 (‘In re Richardson’).

[26]Ibid 714.

Couzens-Hardy MR and Buckley LJ reached similar conclusions for different reasons. Couzens-Hardy MR said:

The trustee cannot be allowed to say ‘I will take the money recovered under my right of indemnity against the claim of St. Thomas’s Hospital and will apply it, not towards satisfying the claim of the hospital in the way which the indemnity implies, but as part of the general assets, and I will give no effect whatever to the indemnity except so far as the hospital come in and prove for their claim in the bankruptcy’. To allow that would be to allow a trustee to make a profit out of his position as trustee.[27]

Buckley LJ considered that if the money was not paid to the hospital ‘effect’ will not have been given to the indemnity obligation.[28]

[27]Ibid 711.

[28]Ibid 716–7.

Subsequently, in Re Law Guarantee Trust and Accident Society Ltd, Liverpool Mortgage Insurance Co’s Case[29] the Court of Appeal gave an explanation for its decision in In re Richardson.
[29][1914] 2 Ch 617 (‘Liverpool’).

In Liverpool, a guarantee society in liquidation had guaranteed payment of debentures issued by a company and had contracted with a mortgage insurer to guarantee a portion of the risk. There was default on the debentures prior to the liquidation. The insurer sought to limit its obligation to a proportion of the amount the insolvent society would pay as a dividend to creditors rather than the same proportion of the actual amount owing. In that context Buckley and Kennedy LJJ addressed the concept of indemnity. Buckley LJ said:

The equitable doctrine is that the party to be indemnified can call upon the party bound to indemnify him specifically to perform his obligation, and to pay him the full amount which the creditor is entitled to receive, and that whether having received it he applies it in payment of that creditor or not is a matter with which the party giving the indemnity is not concerned. In such a case, the party indemnified is entitled to receive 20s in the pound, and, having got it, to deal with it as he thinks proper. The case is otherwise where the party giving the indemnity is concerned with the application of the money which he pays. This was the case in In re Richardson. The wife who was bound to indemnify was there concerned in seeing that the money which she paid went to the lessor so as to relieve the property of which she was beneficial owner from the consequences of non-payment of rent and damages for breach of covenant.[30]

[30]Ibid 633. Professor Ford has described this distinction as ‘puzzling’ given that the lease had expired: Harold Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1, 23.

Kennedy LJ distinguished the case before him from In re Richardson on the ground that In re Richardson had not involved an insurer and a debenture holder, and because ‘[t]he company [the insurer] has no sort of interest in seeing how the money due from the company to the society is applied by the society’.[31]
[31]Liverpool [1914] 2 Ch 617, 641.

In Official Assignee v Jarvis[32] in the Court of Appeal of New Zealand, Salmond J addressed what Buckley LJ had said in Liverpool (without referring to In re Richardson itself). He said:

With respect to this question, contracts of indemnity are divisible into two classes. In one class of case the indemnifying party has an interest in the extinction of the liability to which the indemnity relates, and therefore in the application for that purpose of any money paid by him to the other party under the contract of indemnity. In the other class of case he has no such interest, and he is not concerned with the manner in which the indemnified party disposes of such money. This distinction is adverted to and illustrated by Buckley LJ, in the case of [Liverpool].[33]

[32][1923] NZLR 1009 (‘Jarvis’).

[33]Ibid 1018.

The trust creditors’ right of subrogation, initially recognised in the early 19^th century, is relevant when addressing the proper treatment on insolvency of the trustee’s right of indemnity by way of exoneration. But there is little detailed guidance in the early authorities on the practical operation of this right of subrogation, particularly where there are multiple trust creditors. If, as the High Court authorities to which we will turn indicate, the trustee’s right of indemnity is a proprietary interest, and if upon insolvency trust creditors are subrogated to that proprietary interest, their position could plausibly be characterised as akin to that of a secured creditor and be treated accordingly on insolvency. However, such treatment might not be seen as consistent with the genesis of the right of subrogation (to prevent the unjust enrichment of beneficiaries rather than to protect the creditors), and the recognition that the trust creditors’ right of subrogation is more akin to a remedy than a proprietary right.

The Court of Appeal of New South Wales considered the nature of subrogation in this context in Agusta Pty Ltd v Provident Capital Ltd.[34]
[34][2012] NSWCA 26 (‘Agusta’).

In Agusta, a corporate trustee entered an agreement with a company in the course of its activity as a trustee, and incurred a debt, for which the creditor subsequently obtained judgment. At the time of the agreement the trustee did not have title to certain land which later became trust property. The trustee acquired the land two months later. When the judgment creditor obtained a writ of execution to sell the land, beneficiaries resisted this and the sheriff did not proceed with the sale. Subsequently, the trustee transferred title to the relevant land to another corporate trustee. The primary judge held that this transfer was made with intent to defraud creditors in contravention of s 37A of the Conveyancing Act 1919 (NSW). He considered it relevant that the old trustee had failed to make any arrangement with the new trustee for indemnification out of trust assets to pay the judgment debt, or for the new trustee to pay the judgment debt.

On appeal, Barrett JA addressed the nature of the trustee’s interest in the land. He said:

The right of a trustee to be indemnified out of trust property is often described as a charge or lien: see, for example, [Vacuum Oil]; [Octavo]. In Chief Commissioner of Stamp Duties v Buckle, the High Court preferred to regard it as a proprietary right constituting a beneficial interest enjoying priority over the beneficial interests of the beneficiaries. It is anomalous to refer to a person having a charge or lien over property of which the person is the owner. And as was emphasised by the High Court subsequently in CPT Custodian Pty Ltd v Commissioner of State Revenue, the ‘trust fund’ enjoyed by the beneficiaries cannot be identified or quantified until the trustee’s superior beneficial interest has been quantified and satisfied. The trustee's right is inseparable from and co-extensive with the trustee's obligations, both those already discharged but not yet reimbursed and those incurred but not yet discharged.[35]

[35]Ibid [41] (citations omitted).

We will address the High Court authorities cited by Barrett JA in detail below.

Barrett JA stated that after the transfer of trust property to a new trustee, the original trustee’s preferred beneficial interest continues to subsist in the new trustee’s hands.[36]
[36]Ibid [44].

Barrett JA discussed Jennings v Mather, Savage, Octavo, and other authorities.

His Honour explained that generally equity will intervene to prevent a sale of trust property pursuant to a writ of execution. This was said to be because the trustee’s right of indemnity out of that property is in respect of all trust debts, and it would be destroyed if individual trust creditors were able to levy execution against the trust property.[37]
[37]Ibid [46]–[56].

His Honour stated:

When execution against trust property is in contemplation, the preoccupation of equity is thus with preservation of the beneficial interest of the trustee referable to all debts the trustee has incurred and for which the trustee is entitled to be indemnified out of the trust assets. Because of the existence of that equitable interest in trust assets and the fact that seizure and sale of trust property under a writ of execution will destroy it, equity will not countenance such seizure and sale.[38]

[38]Ibid [57] — this explanation is plausible and coherent, but it has to be said that it is not one found in the older authorities. Jennings v Mather, and similar older authorities, did not address the issue of multiple trust creditors in explaining equity’s refusal to permit execution against trust property.

Barrett JA held that it was not established that the judgment creditor in the case before him was the sole creditor of the trustee.[39]
[39]Ibid [77].

His Honour considered that the judgment creditor and other trust creditors were entitled, by subrogation, to the benefit of the trustee’s preferred beneficial interest. Equitable execution by way of the appointment of a receiver and sale of trust assets held by the trustee would have been available for the benefit of trust creditors.[40] After the trust assets had passed into the hands of the new trustee, the former trustee’s preferred beneficial interest (and the rights accruing to its creditors by subrogation) continued to exist in those assets and the same remedy could have been obtained in relation to the trust property in the new trustee’s hands.[41]
[40]Ibid [80].
[41]Ibid.

Barrett JA concluded (Agusta was the old trustee, Riva the new, and Provident the judgment creditor):

In summary, the alienation by Agusta to Riva did not alter the steps that Provident could effectively have taken to enforce against the Kings Park land the money judgment it had obtained against Agusta. Both before and after the alienation, execution at law was not open to trust creditors but they were entitled to assert Agusta’s preferred beneficial interest and thereby to obtain equitable execution through the sale of trust property by a receiver appointed by the court. The fact that Agusta’s preferred beneficial interest and the creditors’ rights of subrogation in relation to it subsisted in the trust assets after they became vested in the new trustee meant that it was not incumbent upon Agusta to obtain from Riva any particular undertaking to protect those creditors. The trust assets, when received by the new trustee, continued to have imposed upon them the entitlements derived by creditors from the former trustee’s preferred beneficial interest and this was so whether or not any such undertaking was sought from or given by the new trustee.[42]

[42]Ibid [83].

As to the nature of subrogation, Barrett JA said:

The ‘right’ of subrogation might perhaps be better viewed as a ‘remedy’ of subrogation (P W Young, C Croft and M L Smith, On Equity (2009) at 868). That characterisation seems appropriate in a case such as the present where equity would allow creditors with an unsatisfied money judgment at law to bring proceedings in which the creditors, for their own benefit, asserted in respect of the trust property in the trustee's hands, the beneficial interest enjoyed by the trustee by virtue of the right of indemnity.
In Boscawen v Bajwa, in a passage approved by the High Court in Bofinger v Kingsway Group Ltd, Millett LJ described the foundation of subrogation as an equity that arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. In the situation under discussion, it is unconscionable for the trustee to retain for itself the preferred beneficial interest in trust assets when it is the unsatisfied debts of the trustee to the creditors that gives rise to that interest of the trustee. The trustee therefore cannot deny the right of the creditors to the benefit of preferred beneficial interest.
The trustee will be compelled to deal with the preferred beneficial interest for the benefit of the unpaid creditors and, in order to give a particular creditor the fruits of that beneficial interest, equity will appoint a receiver, thereby facilitating a sale of trust property and ensuring that the proceeds, having been brought under the control of the court, are, to the appropriate extent, put into the hands of the creditors entitled by subrogation rather than the hands of the trustee: see, for example, Levasseur v Mason & Barry; Re Potts; Re Marquis of Anglesey. The creditor thereby obtains equitable execution of the judgment.[43]

[43]Ibid [72]–[74] (citations omitted).

The conclusions to be drawn from this brief review of the trustee’s right of indemnity and creditors’ subrogation, which are significant to the issues we must decide, are these:

(1)There has been long standing, if not uniform, acceptance of the proposition that upon insolvency the trustee’s right of indemnity passes to the insolvent trustee’s insolvency administrator: Jennings v Mather; Savage; Governors of St Thomas.
(2)‘Trust creditors’ deal with the trustee on the footing of the trustee’s personal liability. They may be subrogated to the trustee’s right of indemnity, but any such subrogation cannot yield greater rights than the trustee itself has: Vacuum Oil.
(3)The right of subrogation is better characterised as a remedy: Agusta. It is based upon the unconscionability of liabilities incurred to augment trust assets not being met out of those assets: Agusta. Its goal, as revealed by the early cases, was not the protection of trust creditors, but rather the prevention of the unjust enrichment of beneficiaries: Re Johnson.
(4)In re Richardson suggests that the right of indemnity cannot be exercised so as to meet the claims of non-trust creditors. Liverpool, and the New Zealand decision in Jarvis would confine Inre Richardson to circumstances where the indemnifying party (the beneficiaries, in effect) is ‘concerned’ as to the application of the money.

Before turning to the relevant High Court authorities, it is necessary to say something about the statutory insolvency regime generally and about the nature of a preference.

The statutory insolvency regime

It has consistently been a primary objective of both individual and corporate insolvency legislation to promote the equitable treatment of unsecured creditors. The statutory regimes for achieving that goal have, throughout successive enactments, comprised a number of essential features. In general terms, the insolvent’s property is to be made available for the equal satisfaction of the creditors’ claims. This principle is now embodied in s 555 of the Corporations Act, 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.[44]

[44]Section 501 makes similar provisions in relation to voluntary windings up.

Immediately following s 555 is s 556, which provides that specified ‘debts and claims must be paid in priority to all other unsecured debts and claims’. Employee claims have long been accorded priority under this and previous equivalent provisions.

Secured creditors may recover their claims in full provided that the value of the security is adequate.

Property held by the insolvent on trust for beneficiaries is excluded from distribution to the creditors, expressly under bankruptcy legislation, and by undisputed analogy in the case of corporations. It is not property of the company.

The property for distribution to creditors of an insolvent individual vests in the trustee in bankruptcy (with specified exclusions). In the case of a corporation, ordinarily the property remains vested in the company, albeit under the liquidator’s control. Exceptionally, the Court may order that the property vest in the liquidator.

Existing proceedings, actions, attachments and executions against the insolvent, or in relation to the property available for distribution to creditors, are stayed and may be commenced or proceed only with the Court’s leave. The proceeds of executions, attachments etc, issued within a specified period prior to the commencement of insolvency, are recoverable by the trustee in bankruptcy or the liquidator. Antecedent transactions which unfairly prefer or advantage a particular creditor, or constitute a voluntary, uncommercial or fraudulent disposition made within a specified period prior to the commencement of insolvency, are voidable.

While the company’s unsecured creditors may participate in the rateable distribution of the insolvent’s property, amplified where relevant by the avoidance of particular antecedent transactions, and subject to the specified priorities, the creditor’s pre-existing rights to full satisfaction of their claims are transmuted on insolvency to a right to due administration in accordance with the statute. Subject to the specified priorities, equality is fundamental. As Owen J stated in Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd:

The property of an insolvent company is to be applied in satisfaction of liabilities equally, and the courts look askance at mechanisms which seek to reserve specific assets to settle particular liabilities.[45]

[45](1992) 8 WAR 42, 54.

In corporate insolvency, a longstanding provision has conferred priority on the claims of employees over the claims of the holder of a floating charge or circulating security. This provision now appears in s 433 of the Corporations Act.

Section 433 provides that a receiver who takes possession or assumes control of property of the company secured by a ‘circulating security interest’ must pay, out of the property coming into his, her or its hands, specified debts, in priority to any claim for principal and interest under the debentures. The specified debts include debts or amounts that have priority to other unsecured debts under s 556(1)(e), (g) or (h) or s 560 of the Corporations Act. These are the provisions which give priority to employee claims and to those who advance funds to meet them.

One manifestation of the general policy of insolvency law to treat all unsecured creditors equally is the statutory provisions which enable payments validly made to creditors in the period shortly before insolvency, which have the effect of giving that creditor a preference over other creditors, to be recovered.

Nature of a preference

Prior to the Corporate Law Reform Act 1992 (Cth) corporations legislation dealt with preferences by the incorporation of provisions governing preferences in bankruptcy legislation. In 1959 in Burns v Stapleton[46] the High Court described the effect of the then provision in bankruptcy legislation (s 95 of the Bankruptcy Act 1924-1955 (Cth)) as follows:

What the sub-section clearly intends to make void, where it applies, is the change which, if allowed to be effectual, would dislocate the statutory order of priorities amongst creditors.[47]

[46](1959) 102 CLR 97.

[47]Ibid 104.

In 1977 (when the applicable provision was s 122 of the Bankruptcy Act 1966 (Cth) incorporated into companies legislation by s 293 of the Companies Act 1961) the Full Court of the Supreme Court of Victoria quoted what had been said by the High Court in Burns v Stapleton and explained that if, upon analysis of the entire relevant transaction, there was no preferential effect, that is, the recipient was not better off, or the general body of creditors were not worse off, in the liquidation than they would have been if the impugned transaction had not been carried out, there can be no voidable preference.[48]
[48]Re A & J Lazzarotto Pty Ltd (in liq) v Harrison (Unreported, Full Court of the Supreme Court of Victoria, Young CJ, Lush and Fullagar JJ, 16 December 1977).

The High Court returned to the issue of the nature of a preference in 1997 in Sheahan v Carrier Air Conditioning Pty Ltd.[49] The relevant preference provision was still s 122(1) of the Bankruptcy Act 1966, incorporated into companies legislation by s 565(1) of the Corporations Law. The relevant issue in that case concerned payments made by a receiver out of funds realised from secured assets to two unsecured creditors of the insolvent company. The payments were made so as to procure the agreement of the unsecured creditors to continue working on a construction site. In relation to the nature of a preferential payment Brennan CJ said:

The purpose of s 122(1) is to recoup moneys of a bankrupt that have been paid preferentially in order to replenish the pool of assets which the creditors – that is, the general creditors – are entitled to share rateably. The language of s 122(1) – ‘preference, priority or advantage’ – shows that the section is concerned with the effect of payments made to a creditor payee who is in competition with other creditors for a share in the bankrupt’s estate. The only preference with which s 122(1) is concerned is a preference as between the payee and other general creditors who would otherwise be entitled to a share in the money paid.[50]

[49](1997) 189 CLR 407 (‘Sheahan v Carrier Air Conditioning’).

[50]Ibid 424.

Brennan CJ explained that if a general creditor received, with the consent of a chargee, a payment from a fund charged with the payment of a secured debt that would exhaust the fund, so that the fund would not have been available anyway for distribution to general creditors, there could be ‘no preference at the expense of other general creditors’.[51] That was the position in Sheahan v Carrier Air Conditioning.
[51]Ibid.

His Honour cited with approval observations of Young J in James v Commonwealth Bank of Australia[52] which were as follows:

Although there appears to be a dearth of authority on the point, section 122(1) is directed at a situation of the pool of assets being available to creditors generally, being detrimentally affected by a transaction in favour of one creditor. Accordingly, in my view, what one has to do is to consider the situation of the creditors generally before the transaction, and then look at the situation afterwards and see whether the other creditors, that is the general creditors, have been disadvantaged.
To my mind, cases such as Richardson v Commercial Banking Company of Sydney Ltd do focus consideration on the ultimate effect of the transaction with respect to the general creditors over and against the relevant creditor. Accordingly, in my view, if one can see that the position of the general creditors after the transaction was no worse than it was before the transaction then the transaction does not have the effect of giving a preference to one creditor over the others.[53]

[52](1995) 13 ACLC 1604.

[53]Sheahan v Carrier Air Conditioning (1997) 189 CLR 407, 425 (Brennan CJ), quoting James v Commonwealth Bank of Australia (1995) 13 ACLC 1604, 1607–8 (Young CJ) (emphasis added by Brennan CJ).

Brennan CJ found that there was no preferential effect because the relevant payments had been made from a fund which would never have been available for distribution to general creditors, as it was the proceeds of the realisation of secured assets. Thus, the effect of the payments made was not to prefer the payees to the general creditors but rather to prefer them to the secured creditor who would otherwise have been entitled to the funds that were paid.

Other members of the Court in Sheahan v Carrier Air Conditioning (Dawson, Gaudron and Gummow JJ, Kirby dissenting) decided that the relevant payments could not be preferences because the funds employed were in no sense the money of the company or money held to the order or disposition of the company.[54]
[54]Sheahan v Carrier Air Conditioning (1997) 189 CLR 407, 428.

When Brennan CJ said that the purpose of the subsection was to recoup monies for the ‘general creditors’ he cited in support of that statement an earlier decision of the High Court in NA Kratzmann Pty Ltd (in liq) v Tucker [No 2].[55] At the time Kratzmann v Tucker was decided the relevant provision was s 95 of the Bankruptcy Act, incorporated into corporations legislation by s 293 of the Companies Act 1961. In that case the High Court (McTiernan, Taylor and Menzies JJ) endorsed a conclusion reached by Bennett J in Re Yagerphone Ltd[56] to the effect that money recovered by a liquidator as a preference is to be distributed amongst the unsecured creditors of the company notwithstanding the existence of security over all of the company’s assets. The High Court explained that this was the case whether the charge had crystallised or not at the time the payment was made. The High Court said:

The position of a secured creditor who has a charge on specific property is, of course, not in question; such property in the hands of the trustee will still remain subject to the charge. But where security has been given by a bankrupt over all of his assets and a payment to a creditor is made by him out of moneys subject to the charge and the payment is, as against the trustee, subsequently declared void as a preference the moneys paid, when recovered, will not be subject to the charge. In such a case it may be said that although the moneys paid as a preference were at the time of payment subject to the charge, the moneys recovered by the trustee are not the same moneys and that they do not, by virtue of payment to the trustee, become moneys of the bankrupt or in any way subject to the charge; when recovered they become the moneys of the trustee and his title to them does not depend upon his succession to any title which the bankrupt had.[57]

[55](1968) 123 CLR 295 (‘Kratzmann v Tucker’).

[56][1935] 1 Ch 392.

[57]Kratzman v Tucker (1968) 123 CLR 295, 300–1.

The characteristics of a preferential payment are important when one addresses the significance of the High Court decision in Octavo, to which we now turn. In Octavo the High Court held that payments by a trustee to a trust creditor in exercise of the right of exoneration were recoverable by the trustee’s liquidators as preferences. On the basis of the authorities discussed this must mean that the impugned payments:

(a) had dislocated the statutory order of priorities amongst creditors; and

(b) had had a preferential effect by a comparison between the position as a result of the impugned payments and the position under the statutory regime.

The authorities cited also state that preferences:

(a) are recoverable to enable rateable sharing amongst ‘general creditors’, who ‘would otherwise be entitled to a share in the money paid’;[58] and

(b) if recovered, are to be distributed amongst unsecured creditors.

[58]Sheahan v Carrier Air Conditioning (1997) 189 CLR 407, 424.

Those authorities do not address the position of an insolvent corporate trustee. Octavo, to which we now turn, did concern alleged preferential payments by an insolvent corporate trustee.
Octavo

In Octavo, Coastline Distributors Pty Ltd (‘Coastline’), a corporate trustee for five corporate beneficiaries, had traded in its capacity as a trustee. Its operations were financed by bankers; by advances from Octavo Investments Pty Ltd (‘Octavo’), a related company with common directors; and advances from the five corporate beneficiaries. Its enterprise was ultimately unsuccessful and Coastline was wound up in insolvency pursuant to a creditor’s petition. Coastline’s liquidators brought proceedings in the Supreme Court of Queensland pursuant to s 293 of the Companies Act 1961–1975 (Qld), incorporating s 122 of the Bankruptcy Act 1966, to recover payments totalling $49,750, which Coastline had made to Octavo within six months prior to the commencement of winding up.

At first instance, Connolly J declared that the payments Coastline made to Octavo were void against the liquidators as a preference. His Honour ordered Octavo to repay the moneys. The Full Court of the Supreme Court of Queensland subsequently dismissed Octavo’s appeal from those orders.

Octavo appealed to the High Court. It contended that the payments would not have been void or voidable against Coastline’s trustee in bankruptcy, had the company been an individual, because all of Coastline’s property was trust property. It was therefore not property divisible among the creditors of the bankrupt, nor would legal title to the property have vested in the trustee in bankruptcy.

Octavo submitted, in the alternative, that s 122 did not apply because the payments made to it were from Coastline’s trust funds and hence were not made ‘from its own money’, as required by s 122(1); and that the liquidator’s substantive complaint was Coastline’s loss of its indemnity which was not ‘property’ within the meaning of s 122.

In the High Court the plurality (Stephen, Mason, Aickin and Wilson JJ) affirmed general principles relating to ‘the bankruptcy of a trading trustee’, including the trustee’s personal liability for debts incurred in business transactions, and the indemnity for enforcement of which the trustee possesses a lien or charge over the trust assets.[59]
[59]Octavo (1979) 144 CLR 360, 367.

The plurality noted that the trustee’s charge applied to the whole range of assets in the trustee’s possession, save for those assets which the trustee was not authorised to use in carrying on the business.

The plurality stated that where a trustee had such an indemnity two classes of person had a beneficial interest in the trust assets. They were:

[F]irst, the cestuis que trust, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied.[60]

[60]Ibid (citations omitted).

The plurality described the interest of the trustee’s creditors as follows:

The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution but in the event of the trustee’s bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee.[61]

[61]Ibid (citations omitted).

Their Honours stated:

These principles lead naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of the bankrupt divisible amongst his creditors. The definitions of both ‘property’ and ‘property of the bankrupt’ in s 5 of the Bankruptcy Act are apt to include such a beneficial interest.[62]

[62]Ibid 367–8 (citations omitted).

Their Honours then considered s 293 of the Companies Act and s 122 of the Bankruptcy Act within ‘the framework of principle’ they had outlined.

In that context, they rejected Octavo’s contention that s 122 of the Bankruptcy Act applied only to payments made ‘from [the debtor’s] own money’, holding that the phrase merely formed part of the description of the person making the payment, rather than qualifying the transaction. Moreover, the plurality stated:

Even if we are mistaken in this conclusion, the words ‘from his own money’ may well be satisfied if a trustee makes payments to a creditor out of trust assets in respect of which he has not only the legal estate but also a beneficial interest to secure his right to an indemnity.[63]

[63]Ibid 369.

The plurality rejected Octavo’s submission that what the liquidators were really seeking to have declared void was the surrender of Coastline’s charge over the money paid to Octavo. Their Honours stated:

In reality the truth is otherwise. Section 122 applies, amongst other transactions, to a payment made by a prospective bankrupt to a creditor which has the effect of giving that creditor a preference, priority or advantage over other creditors. If the present payments had not been made by Coastline to Octavo then the liquidator of Coastline would have had access to the charge over those moneys for the benefit of all its creditors. The payments therefore were to the prejudice of the creditors generally and it is those payments which attract s 122. [64]

[64]Ibid.

The plurality also rejected Octavo’s central argument that the money Coastline had paid to Octavo was trust property and hence would not have been property divisible amongst Coastline’s creditors. Their Honours stated that:

Property which is an asset of a trading estate carried on by a trustee is properly described as trust property. However, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee’s interest in the trust property amounts to a proprietary interest, and is sufficient to render the bald description of the property as ‘trust property’ inadequate. It is no longer property held solely in the interests of the beneficiaries of the trust and the trustee’s interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors of the trust trading operation should the trustee become bankrupt.
The fact that the trust property itself cannot be taken in execution by the creditors of the trustee is not to the point. Those creditors are nevertheless subrogated to the rights of the trustee in relation to that property, and in the event of the trustee becoming bankrupt, it is those rights which are to be realized in their favour.[65]

[65]Ibid 369–70.

Their Honours found it unnecessary to determine whether legal title to the trust property charged in favour of a bankrupt trustee would have vested in the trustee in bankruptcy. They stated:

We take the view that the passing to the trustee in bankruptcy of the trustee’s beneficial interest in the trust estate, even if that is all that passes, is sufficient to attract the operation of s 122 of the Bankruptcy Act. Once it is recognized that a trustee may enjoy a right of indemnity over trust property in respect of liabilities incurred by him in the administration of the trust, it follows that the creditors of a trust business may have resort to the assets of the trust to the extent of the liabilities incurred by the trustee. Section 122 is apt in the case of an individual trading trustee to render void as against the trustee in bankruptcy a payment out of the trust property in circumstances which have the effect of giving the payee a preference, priority or advantage over other creditors.[66]

[66]Ibid 371.

The plurality acknowledged that, in contrast to the effect of individual bankruptcy, when a company was wound up the liquidator did not acquire title to its property in the absence of a specific order.

In Octavo, the corporate trustee’s right of indemnity for liabilities incurred in performance of the trading trust took the form of the right of exoneration, rather than recoupment. It was not disputed that Coastline held no property in its own right and that, subject to any effect of the right of indemnity, ‘all the property in the hands of Coastline was trust property’.[67]
[67]Ibid 365.

The plurality in Octavo did not refer to In re Richardson, or to the distinction between rights of recoupment and exoneration, at any point in their extensive analysis of the nature of the trustee’s right, and the charge or right of lien securing it, whether generally or upon the trustee’s insolvency.

Octavo establishes that an insolvent trustee’s right of indemnity against trust property, whether for exoneration or recoupment, for liabilities properly incurred in the performance of the trust, confers on the trustee a proprietary interest in the trust property. That proprietary interest passes on insolvency to the trustee in bankruptcy under the Bankruptcy Act, and, where the insolvent trustee is a company, it is an asset to which the company’s liquidator has access for the benefit of the trustee’s creditors.

The question then arises, which creditors? On this issue the judgment gives conflicting guidance.

First, the plurality made apparently inconsistent statements on the question whether the proceeds of a trustee’s right of indemnity would, on insolvency, be confined to trust creditors or whether the trustee’s non-trust creditors (if any) could share in the distribution. At some points in their reasons, the plurality’s observations suggest that only trust creditors could share in the distribution of the proceeds of the right of indemnity against trust assets. At other points, the plurality’s observations suggest that the proceeds would be available ‘for all of [Coastline’s] creditors’ and for ‘the creditors generally’. The fact that Coastline appeared to have only trust creditors may suggest that the reference to ‘all creditors’ or ‘creditors generally’ were, in context, also a reference to trust creditors.

Secondly, the High Court was directly concerned with the avoidance of a preference rather than with the distribution of property of the company to creditors. The Court did not state the basis on which the property would be distributed, or refer to the statutory order of priorities. However, as already seen, the avoidance of preferences and the division of the property of the company among creditors are not unrelated issues. Given the nature of preferences as earlier described, it is difficult to identify the basis on which the company’s property constituted by the money recovered as voidable preferences could properly be distributed on insolvency other than in accordance with the statutory scheme.

It seems to us that Octavo not only establishes that the right of exoneration is property which passes to the trustee in bankruptcy or the liquidator, but also that the respective statutory regimes must apply to the disposition of that property. The decision does not, however, provide clear guidance on whether distribution is confined to trust creditors. It was not an issue which arose for determination.

The decision in Octavo attracted early academic criticism from the most eminent of sources. Professor HAJ Ford[68] considered that In re Richardson had correctly held that the rights of exoneration and recoupment required a fundamentally different treatment on insolvency. Professor Ford stated that ‘[t]he decision [in Octavo] is based on the proposition that a trustee who has a right to exoneration has a proprietary interest’, which, Professor Ford considered, was questionable or unsound, because ‘[w]ith respect, [the trustee] has no more than a power over the trust property which, as argued earlier, is a fiduciary power, at least in cases where the beneficiary has an interest in seeing that the trust creditor is paid’.[69] Ford pointed out that although the right to exercise a power itself could fall within the definition of ‘property’ in s 116(1)(b) of the Bankruptcy Act, a power which the trustee was to exercise for the benefit of beneficiaries as well as himself would not do so. Ford concluded that Octavo ‘seems to be a hard case making bad law’, probably to avoid the unsatisfactory prospect that a particular trust creditor could otherwise have been preferred.
[68]Harold Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1.
[69]Ibid 26.

Robin Brett writing in the Australian Tax Review in March 1982 expressed the opinion that Professor Ford’s criticisms were largely valid. As to the issue of for whose benefit the preference had been recovered, Brett said:

It should be said at the outset that in the case of a trustee who has carried on business on his own account as well as in his capacity as trustee it is beyond question that his right of exoneration cannot be used by his trustee in bankruptcy for the benefit of the creditors to whom he incurred liabilities on his own account.[70]

[70]Robin Brett, ‘Trusts and Creditors’ Rights: Octavo Investments Pty Ltd v Knight’ (1982) 11(1) Australian Tax Review, 7.

Brett cited In re Richardson for that proposition and then observed that in his view this had been ‘accepted’ by the High Court in Octavo. As already seen, In re Richardson may not be as clear an authority as is suggested. The High Court did not refer to In re Richardson nor to the distinction between rights of exoneration and recoupment. Any ‘acceptance’ of the proposition for which In re Richardson is said to stand was not explicit.

More recently, Ong,[71] frankly designates the High Court’s decision ‘inaccurate’. He concludes that due to its ‘disappointing’ and fundamentally mistaken omission to acknowledge and apply the established distinction between exoneration and recoupment, the plurality made inaccurately wide statements, which unduly restricted the respective entitlements of both trust and non-trust creditors. Ong acknowledges, that, at one point at least, the plurality seem to suggest that the trustee’s charge securing the right of indemnity enures for the benefit of all its creditors. Ong considers that to be contrary to the fundamental, purpose-restricted nature of that right. Ong states that on the basis of the established principles articulated in In re Richardson, the High Court should have clearly endorsed the trust creditors’ unique access to the right of indemnity in its exoneration aspect.
[71]Denis Ong, Ong on Subrogation (Federation Press, 2014) 33–8.

Despite the academic criticism of Octavo’s omission to acknowledge or apply the distinction between rights of reimbursement and exoneration, and other suggested deficiencies in its analysis, the High Court has not, in subsequent decisions, expressed disagreement with, or doubted the correctness of, the decision or reasoning in Octavo. Rather, it has cited Octavo’s analysis of the character of the trustee’s right with approval.

High Court decisions since Octavo

In Chief Commissioner of Stamp Duties (NSW) v Buckle[72] the High Court, in contrast to Octavo, expressly recognised the traditional distinction between rights of exoneration and recoupment. The Court nevertheless affirmed that the trustee’s right of indemnity in either manifestation conferred on the trustee a beneficial proprietary right in the trust assets.
[72](1998) 192 CLR 226 (‘Buckle’).

Buckle concerned the operation of s 66 of the Stamp Duties Act 1920 (NSW). Section 66 provided, in its relevant part, that a conveyance of property made without consideration in money or money’s worth was to be charged with ad valorem duty on the greater of ‘the unencumbered value of the property’ or the amount or value of all encumbrances subject to which the property was conveyed.

In Buckle, a supplemental deed varied a deed of settlement under a discretionary trust so as to vest trust property in nominated beneficiaries as tenants in common on a specified date, if a power of appointment had not been exercised beforehand. Prior to the variation, the interests of the relevant beneficiaries were contingent on their being alive on the specified date (failing the exercise of the power of appointment). The trust property included land which had been developed and purchased by the trustee with two loans, one of which was unsecured, while the other was secured by the trust property. The Chief Commissioner of Stamp Duties assessed the supplemental deed for duty as a conveyance (within the definition in the Act) on the basis that the unencumbered value of the property conveyed was the unencumbered value of the assets comprising the trust fund at the date of execution of the supplemental deed.

The High Court held that the supplemental deed did constitute a conveyance within the meaning of the Act which vested interests in the beneficiaries. It held, however, that those interests were not the entire beneficial interests of the trust fund, but lesser interests, the value of which reflected the vicissitudes inherent in the structure established by the deed of settlement. The stamp duty chargeable was accordingly minimal.

In the above context, the High Court considered the nature of the trustee’s right of indemnity and whether it constituted an ‘encumbrance’ on the beneficiaries’ interest.

The Court (Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ) cited and affirmed traditional statements of the circumstances in which the trustee’s right to indemnity, whether of reimbursement or exoneration, arose. They adopted the following statement from Scott on Trusts:

Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration.[73]

[73]Buckle (1998) 192 CLR 226, 245 [47] (Brennan CJ, Toohey, Gaudron and Gummow JJ), quoting Austin W Scott and William F Fratcher, Scott on Trusts (Little, Brown and Company, 4^th ed, 1988) vol 3A, 345 [246].

The Court then analysed the way the right to indemnity operated in the case before it, citing a number of authorities, most notably Octavo. The Court said (where Octavo is cited the relevant passage is underlined):

Until the right to reimbursement or exoneration has been satisfied, ‘it is impossible to say what the trust fund is’. The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the ‘property’ to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not ‘trust assets’ or ‘trust property’ in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries.
The entitlement to reimbursement and exoneration was identified by Lindley LJ as ‘the price paid by cestuis que trust for the gratuitous and onerous services of trustees’. The right of the trustee has been described as a first charge upon the assets vested in the trustee, as one upon the ‘trust assets’, and as conferring upon the trustee an ‘interest in the trust property [which] amounts to a proprietary interest’.
However, the starting point in the class of case under consideration is that the assets held by the trustee are ‘no longer property held solely in the interests of the beneficiaries of the trust’. The term ‘trust assets’ may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not ‘encumbered’ by the trustee’s right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment ‘takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation’. A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the ‘trust assets’ which may be enforced in the same way as any other equitable charge. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by s 66(1) of the Act. In valuing the interests of beneficiaries which are conveyed by an instrument, there is no encumbrance which the Act requires to be disregarded.
Accordingly, we agree with the following treatment of the matter by Sheller JA [in Buckle (1995) 38 NSWLR 574, 586]:
‘If it be right, as in my opinion it is, that the trustee has a beneficial interest in the trust assets to the extent of its right to be indemnified out of those assets against personal liabilities incurred in the performance of the trust and that interest will be preferred to the beneficial interests of the cestuis que trust, the consequence is that the interest conveyed has no value. This does not depend in any way upon treating the interest as encumbered. It flows from the fact that the trustee has a preferred beneficial interest in the trust fund’.[74]

[74]Buckle (1998) 192 CLR 226, 246–7 [48]–[51] (citations omitted).

In CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic),[75] the High Court (Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ) stated that the classic nineteenth century formulation of the rule in Saunders v Vautier[76] did not consider the significance of the right of the trustee under general law to reimbursement or exoneration for the discharge of liabilities incurred in the administration of the trust.[77] In CPT, trustees of certain unit trusts had an unsatisfied right of indemnity, so the unit holders were entitled only to an undetermined and uncertain surplus (if any) in the fund, thus excluding the rule in Saunders v Vautier. The High Court adopted the analysis in Buckle, holding that ‘[u]ntil satisfaction of rights of reimbursement or exoneration, it was impossible to say what the trust fund in question was’.[78]
[75](2005) 224 CLR 98 (‘CPT’).
[76](1841) 4 Beav 115; 49 ER 282. To the effect that an adult beneficiary (or beneficiaries) who is (or are) absolutely entitled may require transfer to the trust property to them.
[77]CPT (2005) 224 CLR 98, 120 [50].
[78]Ibid 121 [51] (citations omitted).

Subsequently, in Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation,[79] the High Court (French CJ, Gummow, Hayne, Heydon and Bell JJ) again affirmed that, as stated in Buckle, a trustee, independently of any provisions in the trust deed, ‘has rights of recoupment or exoneration in respect of all obligations incurred by it in that administration’.[80] Consistently with Octavo, Buckle and CPT, the High Court in Bruton characterised the trustee’s right of indemnity as a proprietary interest in the trust assets, irrespective of whether it took the form of recoupment or exoneration, stating: ‘These rights were supported by a lien over the whole of the trust assets which amounted to a proprietary interest therein [Buckle cited] and they survived the appellant’s loss of office as trustee’.[81]
[79](2009) 239 CLR 346 (‘Bruton’).
[80]Ibid 358 [43].
[81]Ibid 358-9 [43] (citations omitted).

In Bruton, prior to the commencement of a winding up by a creditors’ resolution under s 439C of the Corporations Act, Bruton, a trustee company, deposited money with a law firm to provide for litigation services. The Commissioner of Taxation had issued a tax assessment to the trustee company. After the passing of the resolution for winding up, the Commissioner of Taxation lodged a proof of debt in the winding up. The Commissioner also issued a notice under s 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the ‘Administration Act’) requiring the law firm to pay to the Commissioner the money Bruton had deposited.

The ‘ultimate question’ on appeal to the High Court was whether the law firm was obliged to pay the Commissioner the amount demanded by the s 260-5 notice from the sum standing to the credit of the company in the firm’s trust bank account. The High Court held that the Commissioner’s notice did not constitute a valid attachment.

The High Court identified the critical issue on appeal as being whether, after the resolution for the winding up of Bruton was passed:

the property of that company, which, subject to ‘preferential payments’ must be applied in the manner prescribed by ss 501 and 555 of the Corporations Act, could be diminished by the subsequent engagement of s 260-5 in Schedule 1 to the Administration Act.[82]

[82]Ibid 351 [9] (citations omitted).

The High Court held that the Commissioner’s general power to issue a notice under s 260–5 was not available if a liquidator had been appointed to the company, as, in that circumstance, only more particular provisions of s 260–45 of the Administration Act were engaged. The High Court held, on analysis of the relevant provisions of Schedule 1 to the Administration Act, that the provisions of s 260–45 (dealing with the collection and recovery of tax liabilities of companies from liquidators) disclosed a specific regime which, in cases where it applied, excluded the more general provisions (of which s 260–5 was an example) which might otherwise be engaged.[83] But the High Court also dealt with another issue which is relevant to the issues raised before us.
[83]Ibid 353 [17].

Section 500(1) of the Corporations Act provided:

Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void.

The Commissioner submitted that s 500(1) of the Corporations Act could not apply to render void any attachment represented by the s 260–5 notice because the company had no ‘property’ within the meaning of the subsection, as the Commissioner was likely to be the only creditor and Bruton’s right of indemnity was only for exoneration. The Commissioner claimed to be subrogated to the exercise of that right.

The High Court stated:

It is unnecessary to rule upon those submissions. This is for several reasons. The first is that for the reasons given above which concern the construction of the Administration Act, the remedy available to the Commissioner on the facts of this case was that under the regime for liquidations (s 260-45), not the garnishee regime provided by s 260-5. Secondly, the Commissioner takes inconsistent positions in making the above submissions. The garnishee regime, in its terms, only applies if the third party owes money to the taxpayer (s 260-5(2), (3)), yet the Commissioner denies that the third party, the appellant, had any ‘property’ within the broad meaning of ‘property’ for the operation of s 500(1) of the Corporations Act. [84]

Under both the pre-appointment debtor finance facility and the post-appointment debtor finance facility (‘the debtor finance facilities’) the bank agreed to advance funds to Amerind to purchase the accounts assigned to the bank under the debtor finance facilities. The funds were advanced in two tranches:

(p) a ‘drawdown amount’, being an initial amount (up to 85% of the value of the account) advanced under each facility; and

(q) a ‘reserve amount’, being the remainder of the funds that were to be advanced to Amerind, subject to certain conditions.

Whereas amounts payable by the bank to Amerind under the pre-appointment debtor finance facility had been paid into the trade account, amounts received under the post-appointment debtor finance facility were instead paid into an account opened by the receivers after their appointment (‘the receivership account’). As under the pre-appointment debtor finance facility, all receipts from assigned book debts were paid into the debtor account, which was ‘swept’ to a nil balance daily by the bank.[262]
[262]It was not contended that the debtor account was a circulating asset.

After their appointment, the receivers collected $2,528,896 on account of the reserve amount under the pre-appointment debtor finance facility (net of bank interest, fees and charges). CHH submitted that these amounts were deposited into the trade account, but the Commonwealth (without contesting that assertion) contended that the evidence did not reveal into which account this money was paid.

The receivers also received $2,978,351 on account of the reserve amount under the post-appointment debtor finance facility (again net of bank interest, fees and charges). They also held an amount of $1,624,158 on account of the drawdown amount under the post-appointment debtor finance facility. As mentioned, these amounts were paid into the receivership account.

The receivers had classified the drawdown amount and the two reserve amounts as circulating assets. CHH disputed this classification at trial.

Reasons of the trial judge: characterisation of the purchase price paid by the bank

The trial judge accepted submissions by the receivers to the effect that the drawdown amount and the reserve amounts made available to Amerind after the appointment date were amounts paid to Amerind by the bank, on account of both stock sold before the receivers’ appointment and stock on hand as at the appointment date but sold thereafter. These amounts were, in substance, the identifiable and/or traceable proceeds of sale of stock, raw material and finished goods held by the company prior to and as at the appointment date and, as such, deemed to be circulating assets under s 340(5)(b) that were subject to s 433.[263]
[263]Reasons [452]-[455].

The judge went on to hold that the time at which to characterise the relevant asset was on the appointment of receivers, not after. That is when possession or control within s 433(2)(a) occurs, which is why the property caught by that provision is limited to assets identifiable at that time. The judge relied on CMI in this regard.[264] It appears that the judge regarded CMI as deciding that the amounts in question were, to the extent that they represented assets not possessed by the receivers at the time of their appointment, not subject to s 433 of the Corporations Act. Otherwise, s 433 was applicable.[265] In either case, it appears, the judge treated the amounts as circulating assets. He did not directly address the question whether s 340(2) applied.

Submissions of CHH: characterisation of the purchase price paid by the bank

[264]Reasons [453], citing CMI [2016] 1 Qd R 241, 252 [45]–[46].

[265]This conclusion is consistent with the receivers’ case, which the judge said he accepted, in that the receivers treated amounts received in respect of stock held as at the appointment date as circulating assets subject to s 433 and amounts received in respect of stock acquired by the receivers after their appointment as circulating assets not subject to s 433.

CHH submitted on the appeal that the post-appointment amounts had been received after control was asserted by the receivers and the necessary registration was in place, so that s 340(2) was satisfied. Alternatively, s 340(1)(b) was not satisfied because, after the receivership, it could not be said that the amounts could be transferred in the ordinary course of business. It is convenient to consider the evidentiary basis of these submissions later in these reasons.

These submissions avoided dealing directly with the question whether the amounts in question were to be dealt with under s 340(1)(a) or (b) or whether they were covered by s 340(5). Counsel for CHH accepted that neither of the relevant accounts was an ADI account, so that the application of s 340(5) turned on whether the accounts were the ‘proceeds of inventory’ under s 340(5)(b).

In that regard, CHH contended in its written submissions that those amounts were not, as the trial judge had found,[266] ‘in substance the traceable proceeds of sale of stock, raw materials and finished goods held by the company prior to and as at the date of appointment’ with the result that they were covered by s 340(5)(b). Rather, they were new advances made by the bank to Amerind. Its primary submission was therefore that the amounts received after the receivers were appointed were not covered by s 340(5) and fell to be considered under s 340(1)(b), which provision they did not satisfy.
[266]Reasons [452], [455].

CHH made similar submissions in respect of the reserve amount under the pre-appointment debtor finance facility. However, that amount differed because CHH submitted that it was held in the trade account considered above, which was an ADI account. On that basis, it was said to be in the same position as the other moneys held in that account.

Submissions of the Commonwealth: characterisation of the purchase price paid by the bank

The Commonwealth said that the purchase price paid by the bank after 11 March 2014 resulted from the sale of stock that was in existence and held by Amerind prior to the appointment date. First, under the pre-appointment debtor finance facility, Amerind sold stock, debtors were generated, those debts had been factored to the bank and Amerind was awaiting payment for the sale of those debts. The Commonwealth submitted that the amount thus payable by the bank was an account that was the proceeds of inventory within s 340(5)(b). It relied on the wide definition of ‘proceeds’ in s 31 of the PPSA, to which we shall return below.

Secondly, the Commonwealth submitted that, under the post-appointment debtor finance facility, stock on hand at the appointment date was sold, the debts were factored to the bank, and the bank paid for the purchase of those debts. The Commonwealth submitted that stock, as ‘inventory’ under s 340(5)(e) of the PPSA, was a circulating asset and that the receivers used the post-appointment debtor finance facility to convert that stock into cash.

The Commonwealth submitted that the suggestion by CHH that amounts paid by the bank for post-appointment debts were ‘new advances’ made by the bank to Amerind mischaracterised the arrangements. The Commonwealth said that the bank did not ‘advance’ money to Amerind in the sense of making a loan and expecting repayment; instead, the bank purchased from Amerind book debts and paid consideration for those debts. The amounts in question all related to book debts that arose from the sale of stock that Amerind held prior to the appointment date. According to the Commonwealth, the process involved Amerind converting pre-appointment stock into cash; the mere conversion of a pre-appointment circulating asset from one form to another was said not to alter its character as a circulating asset for the purposes of s 433 of the Corporations Act.

Next, the Commonwealth submitted that s 340(2) did not operate to take the purchase price paid by the bank outside the class of circulating assets in s 340(1)(a) of the PPSA. That was because, irrespective of any issue of actual control, the bank had not disclosed control of the accounts in its registration.

To the extent that it might be necessary to consider, the Commonwealth rejected CHH’s contention that s 340(1)(b) of the PPSA was not satisfied in relation to the purchase price paid by the bank because the bank did not give Amerind authority to deal with that property, in the ordinary course of its business, free of the bank’s security interest. The Commonwealth argued that this submission was incorrect because up until the appointment date, Amerind was free under the general security deed to use the funds as it wished, and that did not change after the appointment date.

Submissions of the receivers: characterisation of the purchase price paid by the bank

The receivers submitted that the reserve amount was (a) personal property over which Amerind had granted a security interest to the bank,[267] (b) an account that arose from the bank providing funds under the debtor finance facilities,[268] and (c) an account that was the proceeds of inventory.[269] Accordingly, the receivers submitted, the reserve amount was a circulating asset for the purposes of s 340(1)(a) of the PPSA. The receivers contended that the exception in s 340(2) did not apply to the reserve amount because the bank’s registration over the reserve amount did not disclose that it had control over that property.
[267]PPSA s 340(1).
[268]PPSA s 340(5)(a).
[269]PPSA s 340(5)(b).

Analysis: characterisation of the purchase price paid by the bank

The purchase price paid by the bank raises the following questions:

(a) Were any of the amounts an ADI account within s 340(5)(c)?

(b) Were any of the amounts the proceeds of inventory within s 340(5)(b)?

(c) If so, in respect of any amount, was there an effective registration at the time of the receivers’ appointment disclosing control of that amount within s 340(2)?

(d) If not (or in any event), in respect of any amount, had the bank given Amerind authority for any transfer of the amount in the ordinary course of Amerind’s business, free of the bank’s security interest, within s 340(1)(b)?

In addressing these questions, it is necessary to commence, for the reasons stated earlier, by reference to the circumstances at the time of the receivers’ appointment. At that time, the receivers took possession both of Amerind’s contingent right to receive outstanding reserve amounts under the pre-appointment debtor finance facility when the debts that had been sold to the bank were paid by the various debtors, and of Amerind’s existing stock.

The first issue may be dealt with shortly. CHH submitted that the amounts received under the pre-appointment debtor finance facility were paid into the trade account. But no evidence was produced for that statement, including after the Commonwealth drew attention to the lack of such evidence. The affidavit of Mr Byrnes referred somewhat ambiguously to the post-appointment debtor finance facility having operated ‘in much the same way’ as the pre-appointment debtor finance facility but noting that, ‘following a request by the Receivers’, the drawdown amounts and any reserve amounts payable to Amerind were credited to the receivership account instead of the trade account. This evidence, of one the receivers, falls well short of stating that amounts continued to be paid into the trade account after the receivership. Elsewhere in his affidavit, Mr Byrnes does not distinguish the receivers’ receipt of amounts under the two facilities. This tends to suggest, if anything, that the amounts were all paid into the receivership account.

For that reason, CHH’s submission that the reserve amounts paid under the pre-appointment debtor finance facility were an ADI account lacks an evidentiary basis and cannot be accepted.

The next question is whether the amounts were the ‘proceeds of inventory’. The Commonwealth relied on the definition of ‘proceeds’ in s 31 of the PPSA. That definition relevantly provides:

31 Meaning of proceeds
(1)In this Act:
proceeds of collateral to which a security interest is (or is to be) attached means identifiable or traceable personal property of the following types, subject to subsections (2) and (3):
(a)personal property that is derived directly or indirectly from a dealing with the collateral (or proceeds of the collateral);
…

Whether proceeds are traceable
(2)Proceeds are traceable whether or not there is a fiduciary relationship between the person who has a security interest in the proceeds … and the person who has rights in or has dealt with the proceeds.

Restriction to proceeds in which grantor has a transferable interest
(3)However, personal property is proceeds only if:
(a)either:
(i)the grantor has an interest in the proceeds; or
(ii)the grantor has the power to transfer rights in the proceeds to the secured party (or to a person nominated by the secured party); and

(b)the interest in the proceeds does not arise because of the operation of paragraph 140(2)(f).
Note:Paragraph 140(2)(f) provides for the distribution of an amount or proceeds to the grantor upon the enforcement of a security interest.

…

Turning first to the reserve amount received under the pre-appointment debtor finance facility, the Commonwealth relied on the fact that, at the time of the receivers’ appointment, Amerind was entitled to be paid the reserve amount in respect of each debt as and when the debt was paid. The receivers took possession of Amerind’s rights to payment. It was submitted that the reserve amount subsequently received pursuant to that right was derived directly or indirectly from prior dealings with the stock, which constituted collateral so as to satisfy s 31(1)(a) and (3) of the PPSA. At the same time, the stock constituted inventory and the reserve amounts were the ‘proceeds’ of that inventory.

CHH, by way of reply, contended that s 31(3)(a) of the PPSA was not satisfied. It was said that Amerind did not have an interest in the proceeds, or any power to transfer rights in them to the bank because it had sold the debts to the bank.

In our opinion the Commonwealth’s submissions are correct. The notion of ‘proceeds’ is broadly defined. The reserve amounts were in effect the final instalment of the amount received from selling the debts owed to Amerind as a result of selling its inventory. That suffices to establish the indirect derivation required by the definition. The submission that s 31(3)(a) is not met should be rejected. The ‘proceeds’ in question are the very proceeds of dealing with the debts, so the analysis is not advanced by identifying that the debts have been sold to the bank. Amerind had an interest in the proceeds of that sale and the power to transfer rights in them to the bank.

The position in respect of the amounts received under the post-appointment debtor finance facility is no different. In this instance, the receivers took possession of the inventory themselves and made arrangements for its sale and for the factoring of the resulting debts. Again, the amounts thereby received were derived, directly or indirectly, from dealing in the inventory and constituted proceeds of that inventory. CHH’s submission that the amounts received were the result of ‘new advances’ by the bank after the appointment date does not suggest any contrary conclusion. The submission mischaracterises the arrangement, by which the bank purchased the debts rather than making any advance to Amerind. The fact that the arrangement was entered into after the appointment date does not deny the fact that it concerned inventory held by the receivers on that date.

It follows that the amounts in question are all circulating assets unless s 340(2) applies. In that context, CHH relied on the email of 6 March 2014 from the bank to Amerind in which the bank advised that the debtor finance facility no longer had funds available to be drawn down and all debtor collections were to be ‘placed towards permanent debt reduction of the facility’.[270] The bank went on to state its ‘expectation that any assets of the company will be dealt with in the ordinary course of business’. CHH submitted that this communication evidenced that the bank had control of the reserve amount outstanding under the pre-appointment debtor finance facility, within the meaning of s 340(2). CHH made no corresponding submission regarding control of the amounts received under the post-appointment debtor finance facility.
[270]See [344](a) above.

CHH’s submission in this regard depended on the ordinary meaning of the word ‘control’ rather than the extended meaning of that term as defined under the PPSA. The Commonwealth did not contend that there was no control manifested over the reserve amounts to be received under the pre-appointment debtor finance facility in the circumstances revealed by the email. Plainly enough, Amerind had no choice but to deploy those amounts in reduction of its indebtedness to the bank.

Issue was taken, however, in relation to the question of registration. The Commonwealth submitted that the bank’s registration of its security interest did not disclose the above control. The registration in question, as at the date of the receivers’ appointment, stated that there was control in respect of a security interest for which the collateral was of the class ‘Intangible property — General intangible’, more particularly of the description ‘ADI Account with Bendigo and Adelaide Bank’. It extended to ‘proceeds’ (all present and after acquired property) but expressly not to ‘inventory’. It is evident that this registration did not disclose control either of the inventory of Amerind or of the amounts which Amerind was entitled to receive by way of reserve amounts following upon the factoring of its debts. The amounts to be received in connection with the factoring arrangements were not, as we have noted, paid into the relevant ADI account.

It follows that the exclusion in s 340(2) is not satisfied and the purchase price paid by the bank was a circulating asset.

In light of that conclusion, it is unnecessary to consider the application of s 340(1)(b) of the PPSA. It suffices to state that the evidence referred to above shows that the bank had not given Amerind authority to deal with the reserve amounts it would receive under the pre-appointment debtor finance facility free of the bank’s security interest. It might be thought unlikely that the bank afforded any greater latitude to the receivers under the post-appointment debtor finance facility, but that issue need not be explored further.

The notice of contention accordingly fails in so far as it seeks to have the purchase price paid by the bank classified as not being a circulating asset.

Third class of asset in dispute: miscellaneous receipts

The final class of assets the subject of CHH’s notice of contention consisted of ‘pre-appointment tax refunds’ and ‘other general receipts’ (collectively, ‘the miscellaneous receipts’). The receivers classified the miscellaneous receipts as circulating assets. CHH disputed this classification at trial. The trial judge accepted the submissions of the receivers and the Commonwealth.[271]
[271]Reasons [464].

CHH submitted that the miscellaneous receipts were not circulating assets, even though they might be ‘currency’ within the meaning of s 340(5)(d) of the PPSA, because they were assets that were not ‘on hand’ as at the appointment date. CHH submitted that the receipts were always under the control of the bank rather than Amerind and that s 340(2) was attracted. It contended, alternatively, that the receipts did not fall within s 340(1)(b) because Amerind was never authorised to transfer them free of the bank’s security, in the ordinary course of its business.

The Commonwealth submitted that the test under s 433(3) of the Corporations Act is not whether the assets in question were ‘on hand’. It argued that the principle in CMI[272] is that the property ‘coming into’ the hands of the receivers must be property that falls within s 433(2)(a) of the Corporations Act, namely property that is an asset identifiable at the appointment date.[273] According to the Commonwealth, the receipts were so identifiable at the appointment date. For example, the tax refunds represented an entitlement that Amerind had prior to the appointment date.
[272][2016] 1 Qd R 241.
[273]Ibid 252–3 [50]–[51].

The Commonwealth’s submissions should be accepted. As explained earlier in these reasons, the critical question is what property was in the possession of the receivers upon their appointment, not whether property is ‘on hand’. Here, Amerind was owed money by the Commissioner of Taxation as a result of overpayments of tax before the appointment date. The unchallenged evidence of Mr Byrnes was that the other receipts were all derived from circumstances and transactions that arose before the appointment date. As such, they were accounts arising from providing services in the ordinary course of business, within s 340(5)(a) of the PPSA and therefore circulating assets. In the absence of registration, no question of control under s 340(2) arises.

Amounts were claimed under this heading in respect of interest. No ground was suggested, and none appears, for treating interest any differently. The judge was right to treat all these amounts as circulating assets.

Conclusion: notice of contention

The notice of contention should accordingly be dismissed.

Application for leave to cross-appeal

In light of the conclusions we have reached on the appeal, the judge’s decision must be set aside. It follows that the costs discretion will fall to be re-exercised and that there is no utility in granting leave to CHH to cross-appeal, which it seeks in respect of the costs order made at trial. Leave to cross-appeal is therefore refused.

Conclusion — Orders

The judge ordered, relevantly, that the receivers were not justified in proceeding on the basis that the priority regime in the Corporations Act applied to the proceeds of the various assets constituting the receivership surplus, in so far as those assets were, as at the date of the receivers’ appointment, also circulating assets. That order must be set aside in light of Part 1 of these reasons. However, the Commonwealth and the receivers differed as to the appropriate relief that should follow.

The Commonwealth sought an order declaring and directing that the receivers were justified in proceeding on the basis that the priority regime applies to the assets in question. The receivers submitted that the precise form of order depended on what orders were made in the interim as to the treatment of the funds in issue. In addition, directions would be needed to reflect conclusions reached by the trial judge that would become relevant if the conclusion as to the application of the priority regime were to be set aside, and it was suggested that such directions should be made as part of the appeal in order to avoid the costs of remitter to the trial judge.

In the circumstances, it is preferable that the parties be invited to prepare appropriate orders giving effect to the above reasons.

SCHEDULE OF PARTIES

S APCI 2017 0051

BETWEEN

COMMONWEALTH OF AUSTRALIA	Applicant
And
MATTHEW JAMES BYRNES AND ANDREW STEWART REED HEWITT IN THEIR CAPACITY AS JOINT AND SEVERAL RECEIVERS AND MANAGERS OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)	First Respondents
BRENT MORGAN IN HIS CAPACITY AS LIQUIDATOR OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)	Second Respondent
CARTER HOLT HARVEY WOODPRODUCTS AUSTRALIA PTY LTD	Third Respondent

S APCI 2017 0070

BETWEEN

CARTER HOLT HARVEY WOODPRODUCTS AUSTRALIA PTY LTD	Applicant
And
COMMONWEALTH OF AUSTRALIA	First Respondent
MATTHEW JAMES BYRNES AND ANDREW STEWART REED HEWITT IN THEIR CAPACITY AS JOINT AND SEVERAL RECEIVERS AND MANAGERS OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)	Second Respondents
BRENT MORGAN IN HIS CAPACITY AS LIQUIDATOR OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)	Third Respondent

[2018] VSCA 41

28 February 2018