Re Amerind Pty Ltd (receivers and managers apptd) (in liq)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT
CORPORATIONS LIST

S ECI 2015 000418

RE AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) MATHEW 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)	Plaintiffs
COMMONWEALTH DEPARTMENT OF EMPLOYMENT	Interested parties
CARTER HOLT HARVEY WOOD PRODUCTS (AUSTRALIA) PTY LTD
ALPINE MDF INDUSTRIES PTY LTD
BRENT MORGAN in his capacity as liquidator of AMERIND PTY LTD (RECEIVERS AND MANGERS APPOINTED) (IN LIQUIDATION)

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	26, 27, 28 and 29 September 2016; further written submissions received February 2017
DATE OF JUDGMENT:	23 March 2017
CASE MAY BE CITED AS:	Re Amerind Pty Ltd (receivers and managers apptd) (in liq)
MEDIUM NEUTRAL CITATION:	[2017] VSC 127	First revision: 24 March 2017

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CORPORATIONS LAW – Application by receivers for directions under s 424 of the Corporations Act 2001 (Cth) (Corporations Act) and the Court’s inherent jurisdiction – Where insolvent company is the trustee of a corporate trading trust – Where sole business of the trustee was carrying on the business of the trust – Whether receivers are justified in distributing the receivership surplus in accordance with the priority regimes in ss 433, 556, 560 of the Corporations Act – What is meant by ‘property of the company’ for the purposes of the priority regimes in ss 433, 556, 560 of the Corporations Act – Whether a trustee’s right of indemnity is a floating charge over the trust assets for the purposes of the priority regimes in ss 433, 556, 560 - Definition of ‘floating charge’ in s 51C of the Corporations Act.

CORPORATIONS LAW – Whether receivers obliged to pay preferential accrued employee entitlements incurred by the trustee in carrying out the trust out of trust assets under s 433 of the Corporations Act.

TRUSTS – Nature of the trustee’s right of indemnity – Nature of trust creditors right of subrogation – Whether trustee’s right of exoneration is ‘property of the company’ for the purposes of the priority regimes in the Corporations Act – Whether the property subject to the lien supporting the trustee’s right of exoneration is ‘property of the company’ for the purposes of the priority regimes in the Corporations Act – Whether the trustee’s right of indemnity or the property subject to the lien supporting the trustee’s right of indemnity is available to creditors generally, or is only available for creditors of the trust to meet trust liabilities.

SECURITIES – Whether assets are properly categorised as circulating assets for the purposes of the Personal Properties Securities Act 2009 (Cth) (PPSA) – Section 340 definition of circulating assets.

SECURITIES – Whether party with a secured interest under the PPSA gave consent for asset to be used in the course of everyday business – Whether a ‘retention of title’ clause in a principal agreement gives rise to separate security agreements on each delivery of goods under the principal agreement.

STATUTORY INTERPRETATION/STARE DECISIS – Meaning of one common law of Australia – Whether a court’s decision concerning the interpretation of state legislation is binding when interpreting in pari materia Commonwealth legislation when there are conflicting interpretations of the relevant term by state courts.

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APPEARANCES:	Counsel	Solicitors
For Mathew 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)	H N G Austin	Mills Oakley
For the Commonwealth Department of Employment	C T Moller	King Wood Mallesons
For Carter Holt Wood Products (Australia) Pty Ltd	M G R Gronow	Polezynski Lawyers
For Alpine MDF Industries Pty Ltd	D F McAloon	Lander &Rogers
For Brent Morgan in his capacity of liquidator of Amerind Pty Ltd (receivers and managers appointed) (in liquidation)	J L Evans with C R Brown	Williams Winter

TABLE OF CONTENTS

Introduction.......................................................................................................................... 1
Amerind’s business and credit facilities.......................................................................... 3
Appointment of administrators......................................................................................... 5
Issue 1 — Is the receivership surplus trust property?................................................... 8
Amerind as a trust company............................................................................................ 11
Issue 2 — Does the priority regime apply?................................................................... 13
Debenture........................................................................................................................... 24
Property of the company.................................................................................................. 26
The authorities on the right of indemnity...................................................................... 30
A question of statutory interpretation............................................................................ 77
Legislative history............................................................................................................. 79
Factors bearing on interpretation.................................................................................... 79
Different statutes................................................................................................................ 80
Interpretation of Commonwealth statutes..................................................................... 84
Acts in pari materia........................................................................................................... 85
Re-enactment of judicially interpreted words.............................................................. 88
Analysis............................................................................................................................... 89
Conclusion on statutory interpretation.......................................................................... 94
The common law............................................................................................................... 94
Whether right of indemnity is a circulating asset....................................................... 104
Issue 3 — If ss 433(3), 556 and 560 do apply............................................................... 109
Issue 3(a)........................................................................................................................... 109
Issue 3(b)........................................................................................................................... 110
Issue 3(c)............................................................................................................................ 110
Circulating assets............................................................................................................. 115
Amerind trade account................................................................................................... 115
Purchase price paid by bank......................................................................................... 120
Stock realisations............................................................................................................. 122
Tax refunds and sundry receipts.................................................................................. 123
Net loss from trading...................................................................................................... 124
The evidence of Mr Byrnes............................................................................................ 128
Issue 3(d)........................................................................................................................... 131
Issue 3(e)........................................................................................................................... 131
Issue 4................................................................................................................................ 132
Issue 5 — Claim by Alpine............................................................................................ 134
Issue 6................................................................................................................................ 142
Issue 7................................................................................................................................ 144
Marshalling issue............................................................................................................ 144
Conclusion........................................................................................................................ 145

HIS HONOUR:

Introduction

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, manufacturing and distributing decorative and architectural finishes.

Amerind had a number of facilities and accounts with the Bendigo and Adelaide Bank Limited (the bank). These facilities were secured by a range of securities.

On 6 March 2014, the bank sent a notice to Amerind demanding repayment of, and terminating, the existing facilities.

On 11 March 2014, the sole director of Amerind, Mr Naja David, resolved to appoint Brent Leigh Morgan, James Marc Imray and Geoffrey Philip Reidy of Rogers Reidy as the joint and several administrators to Amerind (the administrators), pursuant to s 436A of the Corporations Act 2001 (Cth) (Corporations Act). Also on 11 March 2014, the bank appointed Mathew James Byrnes and Andrew Stewart Reed Hewitt as receivers and managers of Amerind (the receivers).

On 13 August 2014, Amerind’s creditors resolved that the company be wound up, and the administrators were appointed as the liquidators.

The receivers traded on after their appointment and have realised the assets Amerind held on trust. The bank has been paid out through the realisation of debts due to Amerind, that had been assigned by Amerind to the bank as security. The bank recovered some $20 million.

After providing for what the receivers consider the retention of a just estimate of remuneration of the receivers, the net surplus from the receivers’ realisation of Amerind’s assets said to be available for distribution to creditors is some $1,619,018,[1] (the receivership surplus).
[1]MFI EX R1.

Pursuant to the orders of Sifris J dated 24 December 2015, the following parties filed an appearance with the Court indicating their intention to be heard in this proceeding regarding a possible claim or interest in the receivership surplus. These entities have been given leave to appear as interested parties:

(a) The Commonwealth Department of Employment (the Commonwealth), who paid accrued wages and entitlements to the former employees of the business under the Fair Entitlements Guarantee Scheme and now seeks to recover those moneys as a priority under ss 433 and 556 of the Corporations Act from the receivers. By virtue of s 560 of the Corporations Act, the Commonwealth has the same right of priority in respect of its advances that the employees who received the payments would have had under ss 433 and 556 of the Corporations Act.

(b) Carter Holt Harvey Wood Products Pty Ltd (CHH) claims to be a secured creditor of Amerind behind the bank and claims to be entitled to moneys from the receivership surplus. CHH argued that moneys claimed by the Commonwealth should be available to the unsecured creditors (as opposed to being available to meet the priority payments).

(c) Alpine MDF Industries Pty Ltd (Alpine) also claims to be a secured creditor under a ‘retention of title’ arrangement.

(d) Mrs Kathryn David, the former wife of Mr Naja David, also filed an appearance. Mrs David notified the Court that she did not intend to appear or make submissions at the hearing of the present application brought by the receivers, on the basis that the receivership surplus will be paid into Court, subject to the determination and payment of any priority amount to the Commonwealth and the receivers’ remuneration and expenses, and that she would appear at subsequent hearings concerning the distribution of any receivership surplus.

(e) The liquidator (Mr Morgan – the other two liquidators have resigned) of Amerind also has an interest in the distribution of the proceeds of the realisation of Amerind’s assets that are currently in the hands of the receivers.

The receivers also sought to recover certain costs out of the receivership surplus.

In this proceeding, the receivers seek directions on seven discrete issues concerning the distribution of the receivership surplus and on certain important issues arising in the receivership.

Amerind’s business and credit facilities

Amerind carried on, as trustee, the business of a manufacturer and distributor of decorative architectural finishes and panel products throughout Australia. Amerind purchased both raw stock, which it manufactured into finished produce, and finished stock, which it on-sold as a wholesaler to third parties. The products sold included commodity products such as particleboards, medium-density fibreboard, plywood and whiteboard.

Amerind’s head office was located in South Melbourne. The company operated from manufacturing sites throughout Australia. The manufacturing sites also operated as internal and external distribution centres. Amerind also had distribution centres located at various sites in Victoria, ACT, Queensland and Western Australia. At the appointment date of the receivers, on 11 March 2014, Amerind had 174 staff.

Prior to the receivers’ appointment, Amerind had the following finance facilities with the bank:

(a) a ‘commercial term facility’ with a facility limit of $3,000,000 (commercial term facility);

(b) a ‘trade finance facility – multi option’ with a facility limit of $4,000,000 (trade finance facility);

(c) a ‘debtor finance facility’ with a facility limit of $18,000,000 (‘pre-appointment debtor finance facility’).

The commercial term facility and the trade finance facility were subject to the bank’s ‘standard loan and security terms.’

Between 20 December 2012 and 6 March 2014, Amerind traded with the assistance of the pre-appointment debtor finance facility such that all of its accounts (ie book debts) were purchased by the bank. The bank maintained a separate pledge account for the purpose of the pre-appointment debtor finance facility, which allowed Amerind to view the funds available for drawdown under the pre-appointment debtor finance facility, at any given time.

The operation of the pre-appointment debtor facility was as follows. On a daily basis, Amerind ‘offered’ to sell the bank all of the accounts/book debts that it had generated since the last offer.[2] It did this by automatically uploading a schedule of all unpaid invoices raised by the company into the bank’s debtor finance online portal.
[2]It did this by automatically uploading a schedule of all unpaid invoices raised by Amerind onto the bank’s debtor finance online portal.

The bank, at its discretion, could accept or refuse to purchase all or some of the accounts. All of Amerind’s rights, title and interest in the accounts passed to the bank upon acceptance by the bank of Amerind’s offer. The bank could, at its discretion, give the account debtor written notice of the assignment to perfect its legal title to the account.

The purchase price paid by the bank for each account was the full face value of the account. All accounts, however, were assigned a ‘reserve amount’ of between 15 and 100 per cent of the full face value. The purchase price for all assigned accounts, less the reserve amount, (the drawdown amount) was shown in the debtor finance ledger. The drawdown amount was available to Amerind and was paid by the bank into Amerind’s trade account at Amerind’s request.

Upon payment of the account (either in part or in full) the bank would make the reserve amount (in part or in full) available in the debtor finance ledger, which would be applied in reduction of other amounts owing to the bank and then paid to Amerind.

Upon termination of the pre-appointment debtor finance facility and payment of all amounts owing to the bank under the pre-appointment debtor finance facility, the bank was obliged to pay any residual reserve amount to Amerind.

Funds paid by debtors, in payment of the accounts, were paid into the debtor account. The bank conducted daily ‘sweeps’ of the debtor account so that all moneys held in the debtor account were reduced to nil each day. Although the debtor account was in Amerind’s name, Amerind had no access to funds in the debtor account.

Funds ‘swept’ away from the debtor account were retained by the bank. The bank accounted for amounts received in the debtor finance ledger and the drawdown amount was available to be paid by the bank in consideration for the accounts assigned. It was not possible on the appointment date to identify which portion of the drawdown amount available on that day was referrable to a specific account, because funds available for drawdown in the debtor finance ledger were not directly attributable to any particular account.

Most of the funds in the trade account at any given time were attributable to amounts drawn down by Amerind under the pre-appointment debtor finance facility. However, some other amounts were also credited to the trade account where Amerind’s customers paid for goods with cash or credit card, at the point of sale.

Appointment of administrators

As noted above, on 6 March 2014, the bank terminated the debtor finance facility and informed Amerind that all debtor collections were to be placed towards permanent debt reduction of the facility.

Later that day, the bank gave notice demanding repayment and terminating the pre-appointment facilities.

On 11 March 2014, the administrators were appointed to Amerind, pursuant to s 436A of the Corporations Act. Shortly thereafter, also on 11 March 2014,, the bank appointed the receivers to Amerind (the appointment date).

On or around the appointment date, the bank sent a ‘notice of assignment of accounts of the company’ to all of Amerind’s debtors.

On or around 11 March 2014, the bank granted the administrators a limited indemnity for their remuneration, costs and expenses of the administration of Amerind.

On and immediately following the appointment date, the receivers decided to continue to trade Amerind’s business. Mr Byrnes, as one of the receivers, deposes that it was the receivers’ view, given the nature of Amerind’s business and its assets, that trading the business, whilst seeking a purchaser for the business (and Amerind’s assets), would maximise the chances for a sale or partial sale of the business as a going concern. Mr Byrnes deposes that, in his experience, a sale as a going concern maximises the chance of receiving the best possible price for Amerind’s business and assets.

On 20 March 2014, to allow Amerind’s business to continue to trade and preserve its value in the short term, the receivers applied to the Court for directions that they were justified in selling or disposing of stock over which the bank had perfected a security interest in, but which Amerind does not, or may not own.

On 2 April 2014, the administrators sought and were granted an extension of the convening period under ss 439A(6) and 447A of the Corporations Act until 6 August 2014.[3]
[3]Orders of Efthim AsJ dated 2 April 2014.

On 15 April 2014, directions were made confirming that the receivers were justified and acting reasonably in dealing with the abovementioned stock in the ordinary course of business.

As at the appointment date, Amerind held the following main categories of assets: cash at bank, stock, property, plant and equipment (comprising vehicles machinery and other equipment) and reserve amounts, contingently owed to Amerind under the pre-appointment debtor finance facility.

Where there was sufficient stock on hand to complete a customer order, business was carried on as usual. Where there was insufficient stock on hand, additional stock was ordered to allow for the completion of approved customer orders. In addition, some high turnover items and items to finish raw stock were also purchased by the receivers.

On or about 14 April 2014, the receivers announced that Amerind would cease to trade on a ‘business as usual’ basis and would transition to a ‘wind down’ phase. Hereon, the focus of the receivers was to sell as much of the remaining stock as possible, close to the ordinary pricing, and once the fast moving stock had been disposed of at or above cost, some stock was sold as bulk sales or at auction during the wind-down period.

Mr Byrnes deposes that as a result of their trading activities, the receivers have realised stock and plant at higher values than he believes would have been achieved had the receivers not traded the business. He says that the receivers have also likely generated a gross profit from trading.

On 13 August 2014, the administrators convened the second meeting of Amerind’s creditors. At this meeting, Amerind’s creditors resolved that Amerind be wound up and the administrators were appointed as joint and several liquidators of Amerind.

The receivers are at the conclusion of their appointment. They have realised the vast majority of Amerind’s assets and, subject to the determination of the issues in this proceeding, will be in a position to retire. The issues for determination are set out below in turn.

Issue 1 — Is the receivership surplus trust property?

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?

None of the parties dispute that, at all material times, Amerind acted solely as the trustee of the Panel Veneer Processes Trading Trust. I consider it is only necessary to briefly refer to the evidence that supports the finding that Amerind so acted.

The trust was settled pursuant to a trust deed dated 22 December 1976. The trust deed states that the trustee would purchase, and thereafter carry on, the business previously carried on at 17 Charles Street, Brunswick by Panelveneer Processors Pty Ltd. The trust deed gives the trustee broad powers to do all things typically associated with carrying on a business.

A document titled ‘Panelveneer Processors Trading Trust Unitholders Deed’ indicates that Amerind conducted the business in its capacity as trustee. Amerind produced annual special purpose reports, end of year financial statements and annual reports for the trust. The audit of the special purpose finance report for the financial year ended 30 June 2000 states that Amerind acted in its capacity as trustee and ‘liabilities have been incurred on behalf of the trust in the company’s capacity as corporate trustee.’ Various minutes of meetings refer to the activities being undertaken by the trust in operating the company’s business.

The Australian Taxation Office (ATO) recorded Amerind as ‘the trustee for Panelveneer Processors Trading Trust’; and the branch code, issued by the ATO to the receivers for the purposes of lodging the company’s Business Activity Statements, was in respect of the trust’s ABN.

Certain other documents relating to Amerind either do not refer to the trust at all, or mention both Amerind and the trust. Some insurance policies issued to Amerind did not refer to the trust. Others were issued to Amerind in its capacity as trustee of the trust. Amerind’s constitution does not mention the trust. An unexecuted shareholders’ agreement refers only to Amerind acting in its own capacity. Two asset sale agreements list Amerind as a party, being the ‘Panelveneer Sale Agreement’ dated 22 December 1976 and the ‘Presswell Sale Agreement’ entered into in or around April 2000, without mentioning the trust. Various facsimiles from ‘Amerind Forest Products’ refer to the internal accounts of ‘Amerind Pty Ltd’ and ‘Panelveneer’ without reference to the trust.

Various hire purchase and lease agreements only refer to Amerind. Two contracts for the sale of real estate entered into by Amerind (one as vendor, the other as purchaser) only refer to Amerind (although there is advice from Amerind’s accountants that Amerind, as purchaser, should ‘use … a separate trust’ from the trust to purchase the property).

All leases of real estate located only mention Amerind in its own right. Employee records (contracts, tax file declarations, termination letters, PAYG summaries and similar documents) were not consistent in their referencing of Amerind in its own capacity, or as trustee to the trust. A deed of settlement entered into by Amerind to settle a County Court of Victoria proceeding makes no reference to the trust. For the most part, documents issued by suppliers to Amerind refer to Amerind only in that capacity — some documents do, however, make reference to the trust’s ABN.

Whether a company trades in its own right or as trustee of a trust largely depends on factors which are specific to the circumstances at hand.[4] There is no one determinative factor or set criteria. Courts have, however, taken into account the following matters:
[4]Re Interwest Hotels Pty Ltd (in liq) (1993) 12 ACSR 78, 84–85 (Eames J).

(a) the existence of constituent trust documents which establish a trust, including any draft trust documents which cross-reference one another;[5]
[5]Bastion v Gideon Investments Pty Ltd (in liq) (2000) 35 ACSR 466, 476 [51] (Austin J).

(b) whether accounts were maintained separately to the company’s operational expenditure accounts and/or the company’s own property;[6]
[6] In the Matter of ICS Real Estate Pty Ltd (in liquidation) & Anor [2014] NSWSC 479, [40] (Brereton J).

(c) whether the company’s name in its capacity as trustee was noted on key employment documents, such as letters of employment and tax file declarations;[7]
[7]Re National Personnel Pty Ltd (in liq) [2012] VSC 508, [34] (Robson J).

(d) whether invoices rendered by the company in question were issued by the company in its capacity as trustee of the trust;[8]
[8]In the matter of Rolcross Pty Ltd (in liquidation) [2012] NSWSC 846, [6] (Black J).

(e) whether company meeting minutes disclosed the existence of a trust,[9] or disclosed that the company was operating as a trust;[10]

(f) whether expenses were accounted as receipts of the company as trustee;[11] and

(g) whether records, contained in the general ledger of the company, recorded activity consistent with the operation of a trust, such as the issue of units.[12]

[9]Graf Holdings & Parer Holdings [1999] NSWSC 217, [4] (Austin J).

[10]Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550, 552 [9] (Brereton J).

[11]A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691, 712 [79] (Santow J).

[12]Graf Holdings & Parer Holdings [1999] NSWSC 217, [4] (Austin J).

Bearing these factors in mind, I find that Amerind traded solely in its capacity as trustee of the trust. Although the manner in which Amerind entered into agreements with third parties, including suppliers, lessors, insurers as well as Amerind’s employees, did not involve consistent disclosure that it acted in its capacity as trustee of the trust, the following findings are warranted:

(a) the trust was constituted for the purpose of acquiring and then carrying on the business, and the trust deed equipped Amerind with sufficient powers to enable it to carry out this function;

(b) Amerind’s financial records are consistent with it carrying on the business as trustee of the trust;

(c) Amerind’s minutes of meeting specifically refer to Amerind trading as trustee of the trust (and in some cases, make specific reference to Amerind acting solely in that capacity);

(d) ATO records (and Amerind’s lodgements with the ATO) reflect Amerind trading in its capacity as trustee of the trust; and

(e) Amerind entered into agreements with financiers which disclosed that it acted as trustee of the trust.

Finally, it is well understood in the commercial world that, for taxation and other reasons, businesses are regularly structured as trading trusts.

I am satisfied that it is appropriate to direct that the receivers are justified in proceeding on the basis that the receivership surplus is properly characterised as property of the trust.

Amerind as a trust company

Amerind was appointed trustee of the Panel Veneer Processes Trading Trust. Amerind’s sole activity was to act as trustee. It had no assets of its own, save perhaps a nominal sum settled to establish the trust. The liabilities incurred were incurred by Amerind acting as trustee. The creditors that it had were therefore trust creditors. The company did not have its own money to meet trust liabilities and then seek to be reimbursed from the trust assets. Rather, the trustee sought to be indemnified, from the trust assets, for liabilities it incurred in carrying out the trust by using trust moneys to pay the trust creditor. The moneys paid by the trustee to the creditors remained trust money, although the liability was that of the trustee.

As will be discussed below, in those circumstances, the trustee had a right in equity to be indemnified (a right of exoneration as opposed to recoupment) from the trust assets for liabilities it incurred on behalf of the trust. That right of indemnity is supported by an equitable lien over all the trust assets, but is constrained to the limit of the liabilities that it secures. Creditors of the trust were entitled, in equity, to be subrogated to the rights of the trustee, and thus, with the aid of the court, exercise the trustee’s lien, and the right to be indemnified, against the trust assets. The moneys so recovered would be trust moneys.

The trust creditors were not in competition with other non-trust creditors of the trustee, as all the liabilities to creditors were incurred by the trustee acting as trustee.

The Commonwealth, liquidator, and the receivers claim that the trustee’s right of indemnity is ‘property of the company.’ As the cases below establish, the trust assets, at all times, remain trust assets. The trust assets may be used to indemnify creditors for liabilities incurred on behalf of the trust. The trust creditors themselves have equitable rights to be subrogated to the rights of the trustee to be indemnified from the trust assets. The trustee’s right of indemnity and related lien do not become ‘property of the company’ and are not available to meet other liabilities of the company. Rather, the right of indemnity and lien may only be used to satisfy liabilities incurred on behalf of the trust.

In the case of a company that acts solely as a trustee (such as Amerind), liabilities could be incurred by the trustee personally, for which the trustee would not be entitled to an indemnity from the trust assets, if, for example, the trustee acted improperly beyond its powers as a trustee. Such creditors would not be entitled to be subrogated to the trustee’s right of indemnity over the trust assets that it may otherwise have had. A trustee’s right of indemnity is conditional on the trustee’s account with the beneficiaries being clear, thus if a trustee is under an obligation to make good some loss or damage arising from a breach to the trust, such obligation would be deducted from the right of indemnity (and the related right of subrogation).

Issue 2 — Does the priority regime apply?

Turning to issue 2, the first question is 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) (PPSA) and s 51C of the Corporations Act?[13]
[13]Further Amended Originating Process, [9C]; Issue 2.

On those issues, the receivers and the Commonwealth made separate submissions but were in agreement that the priority regime should apply.

Regrettably, there are conflicting authorities on the issue of whether ss 433(3), 556 and 560 of the Corporations Act applies in the circumstances where the assets of a company are held on trust. The question of the nature of a trustee’s right of indemnity has been considered at the appellate level in ReEnhill Pty Ltd,[14] a decision of the Full Court of Victoria, and in Re Suco Gold Pty Ltd (in liquidation),[15] a decision of the Full Court of South Australia.
[14][1983] 1 VR 561 (‘Re Enhill’).
[15](1983) 33 SASR 99 (‘Re Suco Gold’).

More recently Brereton J of the Supreme Court of New South Wales, in Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2),[16] held that distributions of trust property were not subject to the relevant priority regime of the Corporations Act, as the regime only applied to property of the company and that the trustee’s right of indemnity is not property of the company available to all creditors.
[16](2016) 305 FLR 222 (‘Re Independent’).

In Re Independent, Brereton J considered the application of s 556 of the Corporations Act to the distribution of trust property, and a liquidator’s obligation to pay superannuation guarantee charge liabilities out of that trust property, in accordance with s 556(1)(e)(i) of the Act. His Honour held:[17]

….as to whether s 556 has any application in this context, the South Australian Full Court admittedly held in Re Suco Gold Pty Ltd that in respect of each trust of which the company in liquidation was trustee, liabilities were to be paid from the trust property in the order laid down in (SA) Companies Act 1962, s 292 – the predecessor of s 556. However, this is virtually universally accepted to be incorrect, although what is the correct position remains unclear. It is incorrect because s 556 is concerned only with the distribution of assets beneficially owned by a company and available for division between its general creditors.[18] The essential alternatives are (as Daryl Williams QC suggested) that where the equities are equal, the trust creditors have priority according to the order in which the claims arose, on the basis that as each claim arose it brought with it an interest, via subrogation, in the trustee’s lien over the trust assets;[19] or that the trust creditors’ claims rank pari passu (as suggested by the authors of Jacobs’ Law of Trusts,[20] and implicitly by McPherson J[21] and R P Meagher QC[22]).
In my judgment, the latter view is to be preferred. The trustee’s lien does not attach to any particular asset, nor secures any particular liability, but is in the nature of a floating charge over all the trust assets,[23] and secures the balance of the account as between the trustee and the beneficiary from time to time.[24] The creditors do not acquire any direct interest in trust assets, but have a right to be subrogated to the trustee’s equitable lien; theirs is a derivative right, so that if there is no balance due to the trustee from the beneficiary, the creditor can assert no claim against the assets.[25] The creditor’s right to be subrogated to the trustee’s indemnity thus does not make the creditor a secured creditor of the trust in the ordinary sense, but gives the creditor a right to enforce the trustee’s indemnity, only to the extent that the indemnity exists in the hands of the trustee. Where there are multiple creditors, they share that right. As the quantum of the indemnity fluctuates from time to time – as the trustee incurs debts to third parties, and incurs personal liability to the beneficiaries – as does the identity of the creditors – the better analogy is, as the authors of Jacobs’ suggest, cases of competing claims by beneficiaries of different trusts to trace into a mixed fund, which produces a ranking pari passu.[26] …
It follows that the company, as trustee, had, and its Liquidator now has, a right of indemnity from, and lien over, the trust assets, which has priority over the interest of the beneficiaries, for liabilities it incurred in acting as trustee. As all the company’s liabilities were incurred in its trustee capacity, all its creditors (including in particular the ATO in respect of superannuation guarantee charge and PAYGW penalty) are entitled to be subrogated to the Liquidator’s lien. The statutory priority referred to in s 556 does not apply in respect of trust assets, and the creditors share pari passu in the trust assets, after providing for the costs of administration including the Liquidator’s remuneration and expenses. But even if the statutory order of priority did apply, ICS’s superannuation guarantee charge liability would not, in the circumstances of this case, be entitled to priority under s 556(1)(e)(i), because the contractors, in respect of whom it is payable, were not “employees” of ICS for the purposes of s 556.

[17]Re Independent (2016) 305 FLR 222, 230-2 [23]-[25].

[18]Re Kayfords Ltd [1975] 1 WLR 279; B.H. McPherson, Law of Company Liquidation (4th ed), pp 305-6; Re Staff Benefits Pty Ltd [1979] 1 NSWLR 207; 4 ACLR 54; B.H McPherson, “The Insolvent Trading Trust”, in Finn (ed) Essays in Equity (1985), p 154; J D Heydon & M J Leeming, Jacobs’ Law of Trusts in Australia, 7th ed, [2115]; Bruton Holdings Pty Limited (in liq) v Commissioner of Taxation [2011] FCAFC 79; (2011) 193 FCR 442, [27]; H.A.J. Ford, Principles of the Law of Trusts [14.7310].

[19]D R Williams, “Winding Up Trading Trusts: Rights of Creditors and Beneficiaries” (1983) 57 ALJ 273, 276-7.

[20]J D Heydon & MJ Leeming, Jacobs’ Law of Trusts in Australia, 7th ed, [2115].

[21]B H McPherson, Law of Company Liquidation (4th ed), pp 305-6; B H McPherson, “The Insolvent Trading Trust”, in Finn (ed) Essays in Equity (1985), p 154.

[22]R P Meagher, “Insolvency of Trustees”, (1979) 53 ALJ 648, 653 (14).

[23]Stott v Milne (1884) 25 Ch D 710, 715; Dowse v Gorton [1891] AC 190; Jeffray v Webster (1895) 17 ALT 72; Octavo Investments v Knight, 367.

[24]Re Johnson (1880) 15 Ch D 548; Re Evans (1887) 34 Ch D 597, 601; Jennings v Mather [1901] 1 QB 108, 113-4; Re British Power Traction & Lighting Co Ltd [1910] 2 Ch 470.

[25]Re Johnson (1880) 15 Ch D 548, 552; Re Evans; Re Frith [1902] 1 Ch 342, 346; Re British Power Traction & Lighting Co Ltd [1910] 2 Ch 470.

[26]J D Heydon & M J Leeming, Jacobs’ Law of Trusts in Australia, 7th ed, [2115]; referring to Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 and Re Sutherland and French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361.

His Honour’s reasons, given in relation to s 556 of the Corporations Act, are relevant to s 433 (which applies to the receivers in this case), as s 433 incorporates, by reference, the priorities in s 556 of the Corporations Act:

Section 433 provides:

Property subject to circulating security interest--payment of certain debts to have priority
(2) This section applies where:

(a)       a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by a circulating security interest, or possession is taken or control is assumed, by or on behalf of the holders of any debentures of a company or registered body, of any property comprised in or subject to a circulating security interest; and
(b)       at the date of the appointment or of the taking of possession or assumption of control (in this section called the relevant date):
(i)        the company or registered body has not commenced to be wound up voluntarily; and
(ii)       the company or registered body has not been ordered to be wound up by the Court.

(3)       In the case of a company, the receiver or other person taking possession or assuming control of property of the company must pay, out of the property coming into his, her or its hands, the following debts or amounts in priority to any claim for principal or interest in respect of the debentures:
(a)       first, any amount that in a winding up is payable in priority to unsecured debts pursuant to section 562;
(b)       next, if an auditor of the company had applied to ASIC under subsection 329(6) for consent to his, her or its resignation as auditor and ASIC had refused that consent before the relevant date--the reasonable fees and expenses of the auditor incurred during the period beginning on the day of the refusal and ending on the relevant date;
(c) subject to subsections (6) and (7), next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h) or section 560.

Section 556 provides:

(1)       Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
(a)       first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business;
(b)       if the Court ordered the winding up—next, the costs in respect of the application for the order (including the applicant’s taxed costs payable under section 466);
(ba)     if:
(i)        during the period of 12 months ending when the winding up commenced, an application (the first application) was made under section 459P for the company to be wound up in insolvency; and
(ii)       when the first application was made, the company was not under administration; and
(iii)      the company began to be under administration at a time after the first application was made; and
(iv)      the first application was not withdrawn or dismissed before the administration began; and
(v)       the Court did not, in response to the first application, make an order under section 459A that the company be wound up in insolvency;
next, the costs in respect of the first application;

(c)       next, the debts for which paragraph 443D(a) or (aa) entitles an administrator of the company to be indemnified (even if the administration ended before the relevant date), except expenses covered by paragraph (a) of this subsection and deferred expenses;
(da)     if the Court ordered the winding up—next, costs and expenses that are payable under subsection 475(8) out of the company’s property;
(daa)   if the company resolved by special resolution that it be wound up voluntarily—next, costs and expenses that are payable under subsection 446C(8) out of the company’s property;
(db)     next, costs that form part of the expenses of the winding up because of subsection 539(6), or subsection 70‑15(5) (audit of administration books by ASIC) or section 90‑27 (review by another registered liquidator) of Schedule 2;
(dd)     next, any other expenses (except deferred expenses) properly incurred by a relevant authority;
(de)     next, the deferred expenses;
(df)     if a committee of inspection has been appointed for the purposes of the winding up—next, expenses incurred by a person as a member of the committee;
(e)       subject to subsection (1A)—next:
(i)        wages, superannuation contributions and superannuation guarantee charge payable by the company in respect of services rendered to the company by employees before the relevant date; or
(ii) liabilities to pay the amounts of estimates under Division 268 in Schedule 1 to the Taxation Administration Act 1953 of superannuation guarantee charge mentioned in subparagraph (i);

(f)       next, amounts due in respect of injury compensation, being compensation the liability for which arose before the relevant date;
(g)       subject to subsection (1B)—next, all amounts due:
(i)        on or before the relevant date; and
(ii)       because of an industrial instrument; and
(iii)      to, or in respect of, employees of the company; and
(iv)      in respect of leave of absence;

(h) subject to subsection (1C)—next, retrenchment payments payable to employees of the company.

(1AA) Paragraph (1)(a) does not apply to expenses:
(a) incurred by the administrator of a deed of company arrangement; and
(b) relating to a debt or claim admissible to proof under subsection 553(1A);
unless the administrator is personally liable for the expenses.
Superannuation guarantee charge

(1A)     The amount or total paid under paragraph (1)(e) to, or in respect of, an excluded employee of the company must be such that so much (if any) of it as is attributable to non-priority days does not exceed $2,000.
(1AB) For the purposes of paragraph (1)(e), if:
(a)       the company has a superannuation guarantee shortfall for a quarter; and
(b)       the shortfall relates to one or more employees; and
(c)       the quarter ends before the relevant date;
superannuation guarantee charge in respect of the quarter is taken to be payable by the company in respect of services rendered to the company by those employees before the relevant date.

(1AC) If:
(a)       the company has a superannuation guarantee shortfall for a quarter; and
(b)       the shortfall relates to one or more employees; and
(c)       the relevant date occurs during the quarter; and
(d)      the relevant date is not the first day of the quarter;
then:
(e)       for the purposes of paragraph (1)(e), so much of the superannuation guarantee charge in respect of the quarter as is attributable to the period before the relevant date is taken to be payable by the company in respect of services rendered to the company by those employees before the relevant date; and
(f)       the remainder of the superannuation guarantee charge in respect of the quarter is taken:
(i)        to be an expense referred to in paragraph (1)(a); and
(ii)       not to be an amount of superannuation guarantee charge referred in paragraph (1)(e).

(1AD) If:
(a)       the company has a superannuation guarantee shortfall for a quarter; and
(b)       the shortfall relates to one or more employees; and
(c)       the relevant date is the first day of the quarter;
the superannuation guarantee charge in respect of the quarter is taken:
(d)      to be an expense referred to in paragraph (1)(a); and
(e)       not to be an amount of superannuation guarantee charge referred in paragraph (1)(e).

(1AE) For the purposes of paragraph (1)(e), if:
(a)       the company has a superannuation guarantee shortfall for a quarter; and
(b)       the shortfall relates to one or more employees; and
(c)       the quarter begins after the relevant date; and
(d)      one or more payments were made by the company during the quarter on account of wages payable to those employees in respect of services rendered to the company by those employees before the relevant date; and
(e)       those payments were made as a result of an advance of money by a person after the relevant date for the purpose of making those payments;
then:
(f)       for the purposes of paragraph (1)(e), so much of the superannuation guarantee charge in respect of the quarter as is attributable to those payments is taken to be payable by the company in respect of services rendered to the company by those employees before the relevant date; and
(g)       the remainder of the superannuation guarantee charge in respect of the quarter is taken:
(i)        to be an expense referred to in paragraph (1)(a); and
(ii)       not to be an amount of superannuation guarantee charge referred in paragraph (1)(e).

(1AF)   If:
(a)       the company has a superannuation guarantee shortfall for a quarter; and
(b)       the shortfall relates to one or more employees; and
(c)       the relevant date occurs during the quarter; and
(d)      one or more payments were made by the company during the quarter on account of wages payable to those employees in respect of services rendered to the company by those employees before the relevant date; and
(e)       those payments were made as a result of an advance of money by a person after the relevant date for the purpose of making those payments;
then:
(f)       for the purposes of paragraph (1)(e), so much of the superannuation guarantee charge in respect of the quarter as is attributable to either or both of the following:
(i)        those payments;
(ii)       the period before the relevant date;

is taken to be payable by the company in respect of services rendered to the company by those employees before the relevant date; and
(g)       the remainder of the superannuation guarantee charge in respect of the quarter is taken:
(i)        to be an expense referred to in paragraph (1)(a); and
(ii)       not to be an amount of superannuation guarantee charge referred in paragraph (1)(e); and

(h) subsections (1AC) and (1AD) do not apply to the superannuation guarantee charge in respect of the quarter.

(1AG) Subsections (1AC) to (1AF) apply to a liability to pay the amount of an estimate of superannuation guarantee charge for a quarter in the same way as they apply to superannuation guarantee charge payable for the quarter.
Leave amounts

(1B) The amount or total paid under paragraph (1)(g) to, or in respect of, an excluded employee of the company must be such that so much (if any) of it as is attributable to non-priority days does not exceed $1,500.
Retrenchment payments

(1C) A payment under paragraph (1)(h) to an excluded employee of the company must not include an amount attributable to non-priority days.
Definitions

(2)       In this section:
company means a company that is being wound up.
deferred expenses, in relation to a company, means expenses properly incurred by a relevant authority, in so far as they consist of:
(a)       remuneration, or fees for services, payable to the relevant authority; or
(b)       expenses incurred by the relevant authority in respect of the supply of services to the relevant authority by:
(i)        a partnership of which the relevant authority is a member; or
(ii)       an employee of the relevant authority; or
(iii)      a member or employee of such a partnership; or

(c)       expenses incurred by the relevant authority in respect of the supply to the relevant authority of services that it is reasonable to expect could have instead been supplied by:
(i)        the relevant authority; or
(ii)       a partnership of which the relevant authority is a member; or
(iii)      an employee of the relevant authority; or
(iv)      a member or employee of such a partnership.

employee, in relation to a company, means a person:
(a)       who has been or is an employee of the company, whether remunerated by salary, wages, commission or otherwise; and
(b)       whose employment by the company commenced before the relevant date.
excluded employee, in relation to a company, means:
(a)       an employee of the company who has been:
(i)        at any time during the period of 12 months ending on the relevant date; or
(ii)       at any time since the relevant date;
or who is, a director of the company;

(b)       an employee of the company who has been:
(i)        at any time during the period of 12 months ending on the relevant date; or
(ii)       at any time since the relevant date;
or who is, the spouse of an employee of the kind referred to in paragraph (a); or

(c)       an employee of the company who is a relative (other than a spouse) of an employee of the kind referred to in paragraph (a).
non-priority day, in relation to an excluded employee of a company, means a day on which the employee was:
(a)       if paragraph (a) of the definition of excluded employee applies—a director of the company; or
(b)       if paragraph (b) of that definition applies—a spouse of an employee of the kind referred to in paragraph (a) of that definition; or
(c)       if paragraph (c) of that definition applies—a relative (other than a spouse) of an employee of the kind referred to in paragraph (a) of that definition;
even if the day was more than 12 months before the relevant date.
quarter has the same meaning as in the Superannuation Guarantee (Administration) Act 1992.
relevant authority, in relation to a company, means any of the following:
(a)       in any case—a liquidator or provisional liquidator of the company;
(c)       in any case—an administrator of the company, even if the administration ended before the winding up began;
(d)      in any case—an administrator of a deed of company arrangement executed by the company, even if the deed terminated before the winding up began.
retrenchment payment, in relation to an employee of a company, means an amount payable by the company to the employee, by virtue of an industrial instrument, in respect of the termination of the employee’s employment by the company, whether the amount becomes payable before, on or after the relevant date.
superannuation contribution, in relation to a company, means a contribution by the company to a fund or scheme for the purposes of making provision for, or obtaining, superannuation benefits (including defined benefits) for an employee of the company, or for dependants of such an employee.

Section 560 provides:

If:
(a)       a payment has been made by a company:
(i)        on account of wages; or
(ii)       on account of superannuation contributions (within the meaning of section 556); or
(iii)      in respect of leave of absence, or termination of employment, under an industrial instrument; and

(b)       the payment was made as a result of an advance of money by a person (whether before, on or after the relevant date) for the purpose of making the payment;
then:
(c)       the person by whom the money was advanced has the same rights under this Chapter as a creditor of the company; and
(d)      subject to paragraph (e), the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid as the person who received the payment would have had if the payment had not been made; and
(e)       the right of priority conferred by paragraph (d) is not to exceed the amount by which the sum in respect of which the person who received the payment would have been entitled to priority in the winding up has been diminished by reason of the payment.

If the decision in Re Independent correctly states the law in Australia, it would follow that distributions of trust property are not subject to the priorities in s 433(3) of the Act.

The receivers, the Commonwealth and liquidator all submitted that Re Independent should not be followed in this case and, I am bound to, and should, follow ReEnhill, a decision which supports the receivers’ contention.

CHH submitted that I should follow Re Independent, and in so doing I would not be departing from Re Enhill. It is submitted that insofar as Re Enhill says that the right of indemnity is a personal right of the trustee and asset of an insolvent corporate trustee available, it is available to pay costs and expenses of a liquidator, Brereton J says nothing inconsistent with that.[27]
[27]Transcript of hearing, Re Amerind Pty Ltd (receivers and managers apptd) (in liq), 27 September 2016, T173.

I will firstly consider the circumstances in which s 433 is enlivened and then set out the authorities that lead to the conclusion that the right of indemnity of the trustee does not constitute property of the company and that therefore the reasoning in Re Independent is preferable to Re Enhill and should be applied to the facts before me.

Debenture

In this case, the receivers were appointed on behalf of the bank, which in substance held debentures of Amerind that were secured by, inter alia, a circulating security interest, within the meaning of s 433(2). Therefore, subject to what is said below about the characterisation of Amerind’s assets and some of those assets being ‘circulating assets’, prima facie the receivers are subject to the obligations in s 433(3).

One line of argument put forward on behalf of CHH[28] is that s 433 does not apply because the bank’s security is not a debenture, as required by s 433(1)(a), within the meaning of s 9 of the Corporations Act, by virtue of exception (a) to the definition of ‘debenture’.[29]
[28]Transcript of hearing, Re Amerind Pty Ltd (receivers and managers apptd) (in liq), 28 September 2016, T325, L11 – T326, L20.
[29]Section 9 of the Corporations Act provides that: ‘debenture of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a security interest over property of the body to secure repayment of the money. However, a debenture does not include: (a) an undertaking to repay money deposited with or lent to the body by a person if: (i) the person deposits or lends the money in the ordinary course of a business carried on by the person; and (ii) the body receives the money in the ordinary course of carrying on a business that neither comprises nor forms part of a business of borrowing money and providing finance …’

The Commonwealth submitted that to accept CHH’s argument would render s 433 ineffective and would be inconsistent with longstanding legislative intention. The term ‘debenture’ has been used in s 433, and its antecedent provisions, since 1897 as a means to protect preferential creditors to debtors whose business would not, in most cases, ‘comprise or form part of a business of borrowing money or providing finance.’[30] The Commonwealth submits that in order to uphold the legislative intent of the provision it is necessary to give ‘debenture’, as used in s 433, its ordinary meaning, being a document that either creates or acknowledges debt owed by a company.[31]
[30]Referring to the definition of ‘debenture’ in s 9 of the Corporations Act.
[31]Levy v Abercorris Slate & Slab Co (1888) 37 Ch D 260, 264; see also Handevel Pty Ltd v Comptroller of Stamps (Vic) (1985) 157 CLR 177, 195-6.

Section 9 of the Corporations Act provides that the definitions contained therein apply ‘unless the contrary intention appears.’[32] The Commonwealth says that as giving the meaning to debenture, as put forward by CHH, would defeat the legislative intention of s 433, there is a contrary intention appearing in this section. The receivers similarly submit that, if CHH is correct, then where a receiver is appointed by a bank to a non-bank borrower, the policy of the regime would be subverted, as s 433 would not apply, and employees would have no priority.
[32]Chapeau to s 9 of the Corporations Act. The Commonwealth also refers to In the Matter of the Application of the Fourth South Melbourne Building Society (1883) 9 VLR (E) 54; Transport Accident Commission v Treloar [1992] 1 VR 447, 449; Knightsbridge Estates Trust Ltd v Byrne [1940] AC 613, 621.

Further, it was submitted that to construe the provision as CHH submits, would create a perverse inconsistency with the regime that applies in the case of a liquidation and the regime that applies in the case of receivership, given that s 561, the complementary provision in the case of a liquidation, does not mention ‘debenture’. CCH’s construction of the provision would mean that in cases such as the present, where there is both a receivership and a liquidation, preferential creditors would receive priority under s 561 if the liquidators recovered the property, but not if it were the receivers.

The exception to the definition of a debenture in paragraph (a) can be traced back to 1989. The relevant Explanatory Memorandum stated that the exception was directed at exempting ordinary business loans from increased disclosure requirements, relating to debentures, and it is submitted by the Commonwealth, that it appears that its intersection with s 433 was overlooked. It is noted that in the 25 years since the exception was introduced, no court has adopted CHH’s construction of debenture.

The Commonwealth and receivers submit that the undesirable outcomes referred to above can be avoided by giving ‘debenture’ its ordinary meaning, applying the chapeau of s 9 and not the exceptions to the definition of ‘debenture’, including exception (a).

I accept that ‘debenture’ in s 433 should be given its ordinary meaning and the exclusion paragraph (a) to the definition of ‘debenture’ in s 9 does not apply to limit the meaning of debenture in s 433(1)(a).

As s 433(3) prima facie applies, the issue thus becomes whether that section and the priorities in s 556 referred to therein apply to property held on trust by the relevant company.

Property of the company

The reference to ‘property coming into his, her or its hands’ in s 433, is a reference to property of the company. This construction is supported by s 433(2), which confirms that the property referred to in s 433(3) is property of the company. Accordingly, s 433(3) is enlivened if the receiver takes possession of property of the company.

The receiver must pay out of the property of the company, coming into his, her or its hands, certain debts or amounts, in priority to any claim for principal or interest in respect of the debentures. The third priority category of debts or amounts, is that prescribed in 433(3)(c), that is, subject to sub-ss (6) and (7) of s 433, next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to ss 556(1) (e), (g) or (h) or 560 (in substance, employee entitlements such as accrued wages and leave).

As mentioned above, the issue of whether the right of indemnity of the trustee may constitute property of the company, has been subject to considerable judicial consideration and differing views. As discussed below, the better view is that where a company acts solely as a trustee and has no assets of its own, it does not.

Brereton J’s conclusion in Re Independent is in line with the authorities discussed below, that a trustee of a trading trust has a right of indemnity over the assets of the trust in respect of liabilities incurred on behalf of the trust. The trustee’s right of indemnity is supported by an equitable lien over all the trust assets and secures the balance of the account as between the trustee and beneficiary from time to time. The trustee’s creditors have a right to be subrogated to the trustee’s equitable lien. The right to be subrogated does not make the creditor a secured creditor of the trustee in the ordinary sense but gives the creditor a right to enforce the trustee’s indemnity, only to the extent that the indemnity exists in the hands of the trustee. Accordingly, the trustee’s right of indemnity itself is subject to the creditors’ equitable right of subrogation.

The receivers contend that the trustee’s right of indemnity over the trust assets constitutes property of the company available for distribution amongst all its creditors. CHH, on the other hand, contends that the receivers’ right of indemnity over the trust assets is not property of the company but is only available to meet the trust creditors.

The liquidators and the Commonwealth supported the submissions of the receivers that the trustee’s right of indemnity and corresponding lien was ‘property of the company’. The Commonwealth cites as authority Re Enhill, a decision of the Full Court of Victoria interpreting similar words as that in question in the present case in the Companies Act 1961 (Vic). Re Enhill found that the trustee’s right of indemnity was property of the company, available to all creditors upon liquidation of the company. As discussed below, Re Enhill has not been followed in the Federal Court or in other states of Australia. I have found it is not binding on me, contrary to the submissions of the Commonwealth, for reasons discussed below.

Secondly, the Commonwealth submits that relevant securities were taken over Amerind in its capacity as trustee. The Commonwealth submits that the ‘property’ subject to the circulating security interests, although trust property, was therefore subject to those security interests. The Commonwealth submits that ss 433(2) and 561 apply to ‘any property comprised in or subject to the circulating security interest.’ The Commonwealth submits that it matters not whether such property is also trust property; if it is subject to a circulating security interest, it falls within the sections.

Whether or not the right of indemnity can be appropriately classified as a circulating asset will be discussed below. In any event, I reject the submission that s 433(2) applies to trust property if it is subject to a circulating security interest. In my opinion, the provision is referring to an equitable or legal interest belonging to the company. In my opinion, it does not refer to a legal or equitable interest belonging to somebody else. For example, if the company held an asset as a bare trustee, and the trustee had no right to any indemnity over the trust asset, I hardly consider that another person’s property could be used to pay liabilities of the company that had not been incurred in carrying out its duties as trustee. In my opinion, the second ground does not take the Commonwealth’s position any further than the first ground.

The Commonwealth’s third ground is that ss 433(3) and 561 are concerned with payment out of property. ‘Property’ is defined broadly in s 9 of the Corporations Act to mean ‘any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action.’ The Commonwealth submits that there appears to be no dispute that the company had legal title to the assets subject to the circulating interests. The Commonwealth submits that it was therefore ‘property’ of the company for the purposes of ss 433(3) and 561.

The Commonwealth submits that the application of ss 433 and 561 to trust property finds support in the history and purpose of the provisions.

In my opinion, the ‘property’ referred to must be property of the company. To suggest that it covers property in the name of the company but that belongs to another person would be to overturn centuries of law recognising the distinction between the legal and beneficial ownership of assets.

In Re Suco Gold, a case concerning a trustee of two trusts, King CJ held that the liquidator was bound by the provisions of s 292 with respect to the payments of the company’s debts and must pay them in accordance with the order of priority set out in s 292. In other words, s 292 was enlivened by the existence of the liabilities owed by the trustee in liquidation. The assets available to meet those liabilities incurred by the trustee were limited to the trustee’s right of indemnity with respect to incurring those liabilities.

The Chief Justice said:[33]

To the extent that each priority debt has been incurred in the performance of a particular trust he should have recourse to the property of that trust for the purpose of paying it. If there is a residue of assets of a particular trust, that residue should be applied to the payment of other debts applicable to that trust. If there is a deficiency in the assets of a particular trust, the non-parity debts applicable to that trust would have to rank pari passu. The unpaid balance, would, of course, rank for dividend out of the general assets of the company, but as there are no such assets that is an academic consideration.

[33](1983) 33 SASR 99, 109–110.

King CJ held that the costs of the winding up were debts incurred by the trustee company in discharging its duties as trustee. Accordingly, this debt of the trust would be paid under s 292 in priority to other debts of the trustee from the trustee’s right of indemnity. These rules applied to each of the two trusts.

It is important to note that Brereton J has held that this part of the judgment of King CJ is not accepted as good law, as s 556, the successor of s 292, only applies to property of the company. Thus, to enliven s 556, the company in receivership must have property of the company and, as King CJ held, the right of indemnity is not property of the company.

King CJ rejected the proposition that the trustee’s right of indemnity was property of the company available to meet all creditors (as found in Re Enhill), but nevertheless held that s 292 of the Companies Act applied to determine the order in which the trustee paid its trust creditors from the trustee’s indemnity over the trust assets. As discussed above, Brereton J agreed with King CJ that the trustee’s right of indemnity was not personal property of the trustee, but disagreed that s 292 applied, as Brereton J said it only applied to ‘property of the company’, whereas King CJ held that it applied to determine the priority of payment of debts incurred by the trustee in carrying out its duties as trustee.

Jacobs J also held that the trustee’s right of indemnity was not personal property of the trustee but remained a trust asset (as was found by King CJ). Jacobs J also held that s 292 of the Companies Act 1962 (SA) applied to the payment of liabilities incurred by the trustee in carrying out its duties under the trust. Matheson J agreed with both King CJ and Jacobs J.

In my opinion, for the reasons discussed below, the proper course for me is to adopt the reasoning of Brereton J in Re Independent, being that s 556 of the Corporations Act only applies to property of the company and does not apply to trust assets, that the trustee’s right of indemnity is not property of the company, and that where there are multiple creditors of the trust, the creditors share pari passu in the right to be subrogated to the trustee’s equitable lien to enforce the trustee’s indemnity. Similar reasoning also applies to s 433.

The authorities on the right of indemnity

As already mentioned, the Commonwealth and receivers submit that the trustee’s right of indemnity is ‘property of the company.’

For the following reasons, I do not accept that the corporate trustee’s right of indemnity (and lien) is not property held in trust, but that it is the corporate trustee’s own beneficial ‘personal property.’ The right of indemnity is over trust assets. The indemnity must be used to meet trust liabilities. The indemnity is not an exclusive right of the trustee. It may be exercised by the trust creditors through the right of subrogation. The indemnity is a right to be indemnified against claims by trust creditors. That requires that the indemnity be used to meet trust liabilities. The indemnity is not a personal asset of the trustee. It is trust property.

The cases discussed below indicate there are possibly four different lines of reasoning, which I briefly mention here, leading to the conclusion that where an insolvent trustee has a right of exoneration from the trust assets, that right does not form part of his personal estate, but must be exercised and applied for the benefit of the trust to reduce the proprietary right of creditors over the assets of the trust estate and to achieve a true indemnification of the trustee from claims of the trust creditors.

The authorities distinguish between a trustee’s right of recoupment: where the trustee has paid a trust liability with his own money and then seeks to be indemnified from the trust assets; and a right of exoneration: where the trustee has incurred the liability and looks to the trust estate for the means to pay the liability. In the former case, where the creditor has been paid with the trustee’s own money, the creditor has no rights against the trust estate, as he has been paid. In the latter case, the creditor is subrogated to the trustee’s right of indemnity against the trust assets, and if the creditor is not paid, may take proceedings to enforce the indemnity against the trust estate.

I emphasise that the present case is concerned with exoneration, and not recoupment. In the present case, the trustee has no assets of its own with which to pay the trust creditors. Further, I note that there was no allegation that there had been any breach of trust such that the liabilities incurred by the trustee giving rise to the indemnity were not properly incurred, nor that the trustee was under a current obligation to make good some loss or damage arising from a breach of trust.

The four different lines of reasoning overlap and support each other. They are as follows. First, in the case where the indemnifying party has an interest in the extinction of the liability to which the indemnity relates, such an indemnifier ‘is concerned in the discharge of those liabilities by the trustee so as to free the trust property from any charge thereon.’ In that case, the money the subject of the indemnity must be used to discharge the liability which caused or created the emergence of the indemnity.

Secondly, assets to which the trustee is entitled to under its right of indemnity are trust assets, and trust assets may not be used for any other purpose than the authorised purposes of the trust, which includes paying debts incurred on behalf of the trust but does not include paying private debts of the trustee.

Thirdly, the trustee’s right of indemnity, in the case of exoneration, is subject to the creditors’ right of subrogation, which is a proprietary right. Thus the trustee’s right of indemnity is not free from the proprietary interest of its creditors.

Fourthly, the trustee would not be freed of the claim giving rise to the indemnity if the trustee took assets of the trust under the purported right of indemnity to meet other personal expenditure of other non-trust liabilities and did not use the assets to be freed of the claims of the trust creditors.

I turn to the authorities. The authorities on the trustee’s right of indemnity usually start with Worrall v Harford,[34] where Lord Eldon the Lord Chancellor said:[35]

It is in the nature of the office of a trustee, whether expressed in the instrument, or not, that the trust property shall reimburse him all the charges and expences incurred in the execution of the trust. That is implied in every such deed. But it would be strange from that implication to conclude that the persons employed by them are therefore creditors of the trust fund.

[34](1802) 8 Ves 4; (1802) 32 ER 250.

[35]Worrall v Harford (1802) 32 ER 250, 252.

In In re Johnson,[36] Jessel MR held that where an executor of a deceased estate carried on business with assets of the estate, as authorised by the deceased, the creditors of the executor, (for debts incurred by the executor in carrying on the business of the deceased), were entitled to enforce the executor’s right of indemnity or lien against the trust assets to the extent of the liabilities incurred by the trustee. Jessel MR said that if the trustee’s right of indemnity or lien was limited through the trustee acting in some unauthorised way, then the creditor’s right to enforce the indemnity or lien would also be limited to the extent of the indemnity as reduced by the actions of the trustee.
[36][1880] 15 Ch D 548 (‘Re Johnson’).

Jessel MR recognised the right of the creditors to stand in the place of the executor and trustee and to claim the benefit of the right to the trustee’s indemnity or lien over the trust assets. Jessel MR held that the creditor’s right of subrogation is limited to the rights of the trustee. Accordingly, if the trustee has exercised his right of indemnity, then there is no further right of subrogation that a creditor of the trustee would retain. Thus, if the trustee exercised all his rights of indemnifying himself and used the moneys to pay some creditors and not another, then the creditor who was not paid would have no further rights of subrogation of the trustee’s right of indemnity as the right would have been exhausted.

Similarly in In re Evans; Evans v Evans,[37] the administratrix of an intestate, a dealer in building materials, carried on the intestate’s trade and bought cement for the purposes of the trade. The vendors recovered judgment against the administratrix for the price of the cement. The cement was sold along with other effects of the estate under an order in administration. The vendors of the cement applied in the administration action to have the proceeds of the sale applied in payment of their debt. Kay J refused this relief, but declared the vendors were entitled to a lien over the beneficial interest of the administratrix in the intestate’s estate. On appeal it was held that as between the vendors and the administratrix, the cement was the property of the administratrix, but as between the administratrix and the estate, the cement belonged to the estate subject to the right of the administratrix to be indemnified for the price, if she was not a debtor to the estate. It was held that the vendors could not have any higher claim than hers and were not entitled to anything more than the order gave them.
[37][1887] 34 Ch D 597 (‘Re Evans’).

Cotton LJ held that where an executor carried on the business of the deceased, the creditors of the executor did not have any direct claim against the deceased’s estate. His Lordship held that the creditor had no greater right than to be substituted to the right of the executor to indemnity.[38] His Lordship also confirmed that if the executor is otherwise liable to the estate, the right of indemnity may be lost. Lindley LJ said that the creditors had no more right against the goods they had supplied to the executor carrying on the business in equity than at law, ‘though they might obtain a right to stand in her shoes and be paid out of what was coming to her from the estate.’[39]
[38]Re Evans [1887] 34 Ch D 597, 601.
[39]Re Evans [1887] 34 Ch D 597, 602.

In In re Blundell, Blundell v Blundell,[40] the Court of Appeal held that a creditor of the person acting on behalf of the estate had an equity against the funds of the estate. Cotton LJ said:[41]

Creditors of the trustees in dealings carried on in pursuance of the trust are not cestuis que trust, but they have a right to the benefit of the right of the trustees to indemnity …

[40][1890] 44 Ch D 1 (‘Re Blundell’).

[41]Re Blundell [1890] 44 Ch D 1, 11.

The right of the creditor of a trustee to sue in equity to enforce a trustee’s right of indemnity was recognised by the House of Lords in Dowse v Gorton.[42] In Dowse v Gorton the appellants were the executors of Luke Turner. Luke Turner had sold a business to John Gorton on terms. John Gorton died before all instalments had been paid. The executors of John Gorton continued to carry on the business acquired from Luke Turner and another business owned by John Gorton. The executors of Luke Turner claimed that any right of indemnity that the executors of John Gorton had to be indemnified out of the estate assets was subject to the estate’s indebtedness for the unpaid instalments for the purchase of the business from Luke Turner.
[42][1891] AC 190.

Lord Macnaghten held that if, as in the case before him, the business had been properly continued the creditors, or if the creditors choose to treat it so, the executors were entitled to be indemnified, as against all liabilities properly incurred in carrying the business on. If the business had been improperly continued and the creditors choose to treat the continuance as improper, they may proceed, in the proper way, to make the executors accountable for the value of the assets in carrying on the business.[43] Lord Macnaghten also held that the indemnity of the executors was only limited by the amount of the assets which the testator has authorised the executors to employ in the business. He saw no reason why the indemnity should be limited to that portion of the assets which may have come into existence or changed its form since the testator’s death.[44]
[43]Dowse v Gorton [1891] AC 190, 206.
[44]Dowse v Gorton [1891] AC 190, 208.

In my experience and broadly speaking, ceasing to trade a company’s business has two potential negative impacts on the realisation of debtors: first, if a business ceases to trade upon appointment, debtors may delay or avoid making payment of outstanding amounts, citing claims for loss of business, disruption to supply, costs to resource to alternative suppliers, and potentially other claims that deplete the amounts owing to the business. Particularly in circumstances where there are no written contracts between the company and its customers, this situation can lead to disputes, non-payment, legal action, and similar distractions to the receivership that result in impairment to the outstanding debts. Second, such disputes and related issues can increase the time and costs incurred by the appointee and their staff in attempting to negotiate and recover these outstanding debts.
In the case of the Company, I consider that the trading on of the business did benefit the collection of its pre-appointment debtors. Initially, the collection of the debtors contributed to the secured debt being repaid to the Bank. Once that had occurred, it resulted in the realisation of the Reserve Amount as an asset of the Company. Had the Receivers not continued to trade the Company’s business post-appointment, I consider that the Reserve Amount realised would have been significantly less and that potentially there would have been no surplus at all realised from the collection of pre-appointment debtors reflected in the Reserve Amount. Such an outcome would have negatively impacted the net realisations available from circulating assets which the Receivers consider are subject to section 433 of the Act.
Stock on hand
…
Our decision to continue to trade the Company’s business following our appointment allowed for a portion of SOH, including raw materials and WIP, to be converted and sold through ordinary channels at better margins, rather than sold in a distressed situation in their current form (such as at a fire sale or auction).
SOH not sold during the Post-Appointment Trading Period was sold during the Wind-Down Trading Period, or by the Receivers’ agents, Grays, at the conclusion of that period. As detailed in the First Byrnes Affidavit, the sale of SOH at auction achieved an average realisation of 12.24 cents in the dollar. By way of example only, if all SOH had been sold at auction (following an immediate shut down of the Company’s business on appointment) and achieved a similar outcome, total realisations of SOH would have been approximately $1.3 million. It should be noted that this is an estimate of the gross realisations from the sale of SOH before allowing for the costs of realisation.
Appropriate apportionment of trading costs
Accordingly, the main effect of the Receivers’ decision to trade on the Company’s business is primarily reflected in the increased amount received by the Company on account of the Reserve Amount and the SOH, such realisations being reflected in the column subject to section 433, and had minimal effect on the amount realised for the Company’s PP&E and other non-circulating assets. For these reasons, I consider that the Receivers’ remuneration, costs and expenses have been appropriately allocated, including the reallocation of the amount referred to as the “net loss from trading” in the Updated Receivership Surplus Table to the realisations achieved from circulating assets which the Receivers consider are subject to section 433 of the Act.

I accept the evidence of Mr Byrnes. I am not satisfied that the allocation made by the receiver of the net loss from trading is not reasonable or appropriate in the circumstances.

Issue 3(d)

Issue 3(d) is not pursued.[284]
[284]Transcript of hearing, Re Amerind Pty Ltd (receivers and managers apptd) (in liq), 26 September 2016, T14.

Issue 3(e)

Issue 3(e) is as follows:

Is the receivers’ methodology for apportioning their remuneration, costs and expenses, etc. across the relevant asset pools reasonable and appropriate and thus justified?

The receivers referred to Waters v Widdows,[285] which held that the receiver was entitled to deduct their remuneration, costs and expenses in priority over the payment of the employee entitlements payable in the context of s 331 of the Companies (Victoria) Code. As Nicholson J noted, the authorities examined by him went back at least 75 years in respect of similarly worded sections of legislation governing employee entitlements in both Australia and England. Those authorities supported his Honour’s conclusion that the receiver’s costs could be paid in priority to the employee entitlements.[286]
[285][1984] VR 503.
[286]His Honour also considered the position of the extent of employee entitlements under the equivalent of s 561 of the Act (ie where liquidation precedes receivership) and held that the costs, charges and expenses (including the receiver’s remuneration) would have priority over the employee entitlements payable by reason of s 561.

Nicholson J also considered how the receiver’s costs, expenses and remuneration were to be allocated across the circulating and non-circulating asset pools. His Honour noted that the correct approach was to apply the costs to the relevant fund realised by the costs expended and, in the case of expenses and charges that could not be apportioned, to allocate them pro rata between the funds. Nicholson J accepted the evidence and estimates provided by the receiver as to the work performed and found that the costs should be apportioned in the manner envisaged by the receiver.[287]
[287][1984] VR 503, 521–2.

The receivers in the present case seek a direction that they are justified in proceeding on the basis that the methodology employed by them in apportioning their remuneration, costs and expenses (including their just estimate of their remaining future remuneration, costs and expenses) across the relevant asset pools is reasonable and appropriate having regard to the nature of the assets realised and the allocation process undertaken by the receivers consequent upon the characterisation of the relevant assets as being circulating assets or otherwise.

No party raised any issue about the methodology applied by the receivers.

If s 433(3) of the Act applies, the receivers are justified in apportioning their remuneration, costs and expenses etc, across the relevant asset pools as they have done in exhibit R1.

Issue 4

Issue 4: In the alternative to questions 2 and 3, if the receivers are justified in proceeding on the basis that the priority regime in ss 433(3), 556 and 560 of the Act does not apply (whether because (i) the receiverships surplus is trust property to which s 556 does not apply, or (ii) the receivers are not bound to comply with s 433(3) in light of the subsequent liquidation of the company), should the receivers proceed on the basis that they ought simply pay the receivership surplus (less their remuneration, costs and expenses, etc) into court to be subject to the competing claims of the various interested parties?

The receivers submit that once the receivership has progressed to the point where a receiver has paid, or retains sufficient funds to pay, all debts for which they are personally liable and have paid out the debt owed to the appointor, any surplus assets held by the receivers are held on trust for any subsequent party and — to the extent of available assets — the debtor company. They submit that if there is any doubt about the entitlement, priority or quantum of the claims of the subsequent mortgagees or charges, the receivers should set aside the surplus funds as trust moneys in an interest-bearing account until the entitlements have been determined or, alternatively, pay the funds into court. The receivers refer to and rely on Expo International Pty Ltd v Chant.[288]
[288][1979] 2 NSWLR 820 (‘Expo v Chant’).

The liquidator agrees that once the receivers have completed their duties under the Corporations Act and secured their own costs and expenses they should retire and pay any surplus funds into court, pending determination of the asserted conflicting interests in the surplus.

The liquidator submits that the claims made by other parties to the surplus funds, which may include CHH and Amrimear Pty Ltd (in liquidation), Naja David and Kathryn David should then be dealt with by the court under the usual funds in court procedure.

The liquidator intends to make submissions in that later proceeding that all surplus funds should come into the liquidation and be distributed in the usual manner pursuant to s 566 of the Corporations Act.

I have found that the assets of the company are trust assets. The receivers may be able to claim costs out of the trust assets on the Universal Distributors basis, or on the basis that the receivers have assumed the position of trustee, or otherwise. I did not hear any argument on this issue. Although I note that the parties did not oppose the receivers be paid their reasonable costs and expenses, subject to s 425(8) of the Corporations Act. I propose to not give a direction on this issue until I have heard submissions by the parties.

Accordingly, I find that the receivers are justified in proceeding on the basis that they ought to pay the receivership surplus into court to be subject to the competing claims of the various interested parties after the issue of costs is resolved. I reserve the issue of whether the receivers are justified in retaining remuneration, costs and expenses out of the trust moneys.

Issue 5 — Claim by Alpine

Issue 5 is as follows:

As to how receivers should approach the security interest claimed by Alpine over part of the Receivership Surplus:
(a) Are the receivers justified in proceeding on the basis that the security interest claimed by Alpine vested in the company under s 588FL of the Corporations Act such that any amount of proceeds referable to the claimed security interest is ‘property of the company’ for the purposes of s 433(3), it being the case that:
(i) if the proceeds are ‘property of the company’, they will be susceptible to the operation of s 433(3) and will form part of the circulating assets which the receivers may, subject to the answers to questions 2, 3 and 4 above, be required to apply to employee entitlements before paying any remaining amount into Court;
(ii) if the proceeds are not ‘property of the company’, they will not be susceptible to the operation of s 433(3) and will form part of the amount paid into Court;

(b) If the proceeds are not ‘property of the company’, how should the receivers approach the value of Alpine’s claim, both generally and in light of the tracing/identification issues detailed in [127] of the First Byrnes Affidavit?

Did the security interest of Alpine vest?

Alpine is a manufacturer and supplier of medium-density fibreboard, which was supplied to Amerind. Alpine had an agreement with Amerind that Alpine would accept orders from Amerind that provided that title to the goods would not pass to Amerind until all amounts owing to Alpine by Amerind for the product delivered to Amerind had been paid.

The original agreement provided that a contract would be deemed to have been made upon receipt by Alpine of an oral or written order from Amerind for product and acceptance of that order by Alpine.

On 16 May 2012, Amerind agreed to a variation to the original agreement (to reflect, inter alia, the introduction of the PPSA). The agreement was sent by Alpine with a covering letter, which stated that ‘[a]ll orders placed by your business on and from your receipt of this letter will be governed by the terms as amended by this letter.’ The amended terms, amended the original terms to insert inter alia a retention of title clause.

Amerind agreed that Alpine had a security interest in the product delivered, attaching at the time Amerind took possession of the product. The parties agreed that those terms constituted a security agreement for the purposes of the PPSA.

Alpine registered its amended agreement under PPSA on 10 March 2014, the day before the receivers were appointed by the bank.

Section 588FL(2) of the Corporations Act relevantly provides that, when an administrator has been appointed, any PPSA security interest which was registered after the latest of:

(a) six months before the ‘critical time’ (being the date the administrators were appointed); or

(b) 20 business days ‘after the security agreement that gave rise to the security interest came into force’; or

(c) such later time as the court may fix under s 588FM,

vests in the company.[289]

[289]Re Cardinia Nominees Pty Ltd [2013] NSWSC 32, [11]; Re Black Opal IP Pty Ltd (subject to Deed of Company Arrangement) [2013] NSWSC 1225, [6]; Re Appleyard Capital Pty Ltd; 123 Sweden AB v Appleyard Capital Pty Ltd (2014) 101 ACSR 629, 633 [8] (Brereton J); Re Transurban CCT Pty Ltd [2014] NSWSC 1909, [7] (Brereton J). ‘Vests’ means in essence that the security interest is ‘extinguished’ see: Carrafa v DokaFormwork Pty Ltd (2014) 104 ACSR 163, 173 [59] (Sifris J).

The relevant ‘critical time’ here is the day the receivers were appointed, the appointment date.

Alpine claims that it holds security in the goods the subject of orders made by Amerind and accepted by Alpine in the period of 20 days prior to the registration of its security with the PPSA.

Here, the issue is when Alpine’s security interest came into force. Alpine contends that the security interest came into force every time an order was placed and remained in force until all money owing by Amerind was paid to Alpine. Thus, Alpine submits that there were multiple security agreements, each coming into force when an order agreement was made.

The receivers and the liquidator contend that the security agreement came into force on 16 May 2012, when the parties signed the amendment to the original agreement made in 2003, and only then.

‘Security agreement’ is defined in the PPSA under s 10 as: (a) an agreement or act by which a security interest is created, arises or is provided for; or (b) writing evidencing such an agreement or act.

The dispute is about the construction of Alpine’s credit application. If, as Alpine submits, multiple security agreements that gave rise to a security interest were made upon each order being accepted, then Alpine claims to have held security over the goods supplied by Alpine and on sold by the receivers, and that Alpine is therefore entitled the proceeds of sale of those goods, up to the value of the contractual sale price.

Within the 20 business days before 10 March 2014 (being the date Alpine registered its security interest), Alpine accepted and fulfilled orders from Amerind by supplying goods to Amerind. Alpine submits that these orders constituted security agreements and that security interests that arose within this 20-day period did not vest in Amerind on the appointment of administrators.

Alpine accepts that only the orders accepted within the 20-day period would be secured; no equivalent security interest is asserted in respect of goods supplied by Alpine to Amerind in the period prior to 10 February 2014.

Alpine accepts that the relevant orders are for the value of $159,161.11.

The receivers submit that only one security agreement came into force and that was in 2012. As it was not registered at least six months before the critical time (the appointment date), the security has vested in Amerind and is extinguished. In which case Alpine would be an unsecured creditor for the amount of $159,161.11, and any other moneys owed to Alpine that are not claimed to be secured.

The receivers submit that the agreements in question are analogous with those in Central Cleaning Supplies (Australia) Pty Ltd v Elkerton.[290] In that case, a supplier of cleaning equipment (Central) supplied equipment to a customer (Swan) between September 2009 and May 2013, and for each supply of equipment, the supplier invoiced the customer and each invoice included a retention of title clause. The customer went into liquidation in May 2013 and the supplier sought to enforce its retention of title clause in the invoices and reclaim the equipment the subject of unpaid invoices. The supplier had not registered on the PPSR, and thus, had not perfected its security interests. The supplier’s claim to recover the equipment could only succeed if its interest in the relevant equipment was covered by the transitional provisions of the PPSA, which were designed to protect security interests that had been created, or provided for, before 30 January 2012. The question was whether the supplier’s security interest in the equipment supplied after 30 January 2012 was ‘provided for’ by an arrangement entered into between the parties for the supply of equipment on 30-day credit.
[290](2015) 321 ALR 181.

The Court of Appeal held that the terms on which the supplier agreed to provide credit to the customer included provision for the retention of title clause as a standard term of each future supply of equipment. In that case, the credit application submitted by the customer on 3 September 2009 relevantly provided as follows:[291]

The supply of goods by the seller is governed by the Seller’s Standard Terms and Conditions as in force from time to time. The Standard Terms and Conditions override any terms and conditions of purchase used by the Customer.

[291](2015) 321 ALR 181, 183 [9].

Central subsequently supplied cleaning equipment to Swan, each transaction being covered by a specific invoice. Each of the invoices included the same retention of title clause. The first invoice before the court was dated 4 September 2009, the day after the credit application was signed. The procedure for purchasing equipment was: (i) Swan ordered equipment by sending a purchase order to Central, specifying the equipment required; (ii) Central delivered the equipment within approximately four weeks of receiving the purchase order; (iii) after delivery, Central would render an invoice to Swan.

Although the credit application referred to Central’s standard terms and conditions, there was no evidence as to what those terms were at the time of the credit application. Instead, Central relied on the retention of title clause on the separate invoices issued after the credit application, which used the words ‘goods the subject of this sale.’[292]
[292](2015) 321 ALR 181, 187 [26].

The Court noted that Central would only be able to enforce the retention of title clause with respect to an item of equipment supplied after the commencement date of the PPSA if Swan’s credit application was (or gave rise to) a ‘transitional security agreement’, that is, an agreement made before the commencement date which ‘provided for the granting of’ the security interest in that equipment when it was later supplied.[293]
[293](2015) 321 ALR 181, 184 [11].

The Court considered the meaning of s 308 of the PPSA[294] (which relates to transitional security interests), but includes the words ‘a security agreement in force before the commencement time.’ It held that ‘security agreement’ was not defined by reference to a transaction but is defined as ‘an agreement’ or ‘an act’ by which a security interest ‘is created, arises or is provided for.’
[294]Section 308 of the PPSA defines ‘transitional security interest’ to mean ‘a security interest provided for by a transitional security agreement’.

The Court noted references in the extrinsic material relating to the PPSA to the mechanism of a contract expressly providing for the ongoing supply of goods being a security agreement which ‘provides for the granting of [the security interests].’[295] Ultimately, the Court held that the credit application was simply an application by which Swan signified its intention to create legal relations with Central on those terms, but until the Swan’s offer was accepted, no such relations would come into existence.[296] A contract came into force when Central accepted the offer by making its first supply of goods, after the credit application was made.[297]
[295](2015) 321 ALR 181, 186 [20]–[22].
[296](2015) 321 ALR 181, 188 [30].
[297](2015) 321 ALR 181, 188 [32].

The Court concluded:[298]
[298](2015) 321 ALR 181, 189–90 [34]–[36], [39], [40] (citations omitted; emphasis in original).

On this analysis, the first supply of equipment operated to establish a supply agreement between Central and Swan. In accordance with the express terms of the credit application, the agreement governed all future supplies of equipment.
Importantly for present purposes, that first supply of equipment was a supply on Central’s ”Standard Terms and Conditions”, that is, the conditions set out in the invoice including the ROT clause. The evidence showed, incontrovertibly, that those were Central’s standard terms. They appeared in identical terms on every supply invoice before the court.
It is immaterial that the credit application form did not set out Central’s ”Standard Terms and Conditions”. On ordinary principles, Swan’s signing of the credit application bound it to accept those terms and conditions for all future supplies of equipment. Clause 2 of the “Credit Application Terms” (set out above) could not have been clearer in that regard.
...

It is clear that, in its terms, each ROT clause had application only to the invoiced goods the subject of the particular supply. The result of the contractual analysis, however, is that:
•        Swan’s application for credit included an undertaking to be bound, in respect of every supply of equipment, by Central’s standard terms of supply;
•         the ROT clause was in existence, as a standard term of supply, at the date on which the credit agreement became binding on Swan, being the date on which Swan received the first invoice for equipment supplied; and
•         under that agreement, Swan accepted that all future supplies of equipment would be governed by that standard term (which would be expressed in each case to relate to the particular equipment supplied).

On this view, an agreement came into force — at the time of the first supply of equipment — which did “provide for the grant of” a security interest in relation to all future supplies of equipment. That agreement was a “transitional security agreement”, and each of the security interests granted in respect of equipment supplied subsequently was a “transitional security interest”. Central is therefore able to enforce the ROT clauses notwithstanding the absence of registration.

The Court held that the security agreement was not defined by each sale, but rather by the one agreement establishing the terms which applied to subsequent separate sales. In other words, the security agreement was created once, not every time a sale was made under the umbrella of the security agreement.

Therefore, on this analysis, the agreement which ‘gave rise’ to the security interest claimed by Alpine ‘came into force’ when Amerind accepted, and Alpine commenced supply on the basis that all future supplies would be subject to the retention of title terms in the amended terms.

Elkerton stands for the proposition that an agreement which imposes retention of title terms in respect of future supplies is an agreement by which a security interest is provided for irrespective of individual dealings with orders and invoices. Here, the amended terms imposed the retention of title terms directly and immediately following their acceptance by Amerind upon all future supplies. They are the relevant ‘security agreement’ and are the ‘source’[299] of the claimed security interest.
[299]Re Carpenter International Pty Ltd (2016) 307 FLR 37, 56 [81].

It is submitted by the receivers and the liquidator that a further reason why this analysis should prevail is the decision of Cameron J in Re Carpenter International Pty Ltd.[300] Cameron J was required to consider the expression ‘the security agreement that gave rise to the security interest’ in s 588FL, where: (i) a security interest provided for in a written sale agreement signed by the vendor was later assigned to the vendor agent when the vendor agent paid the vendor the purchase price owed by the buyer (which later went into administration); and (ii) the assignee registered outside 20 business days of the original written agreement. Her Honour held that the original written sale contract was the ‘security agreement which gave rise to the security interest’, not the subsequent act of the vendor agent’s payment/assignment.
[300](2016) 307 FLR 37.

Alpine submits that there is a key difference between its agreement and that in Elkerton. Alpine’s agreement with Amerind provided for a separate agreement dealing with security each time an order was made and accepted, as is provided for in clause 3.1 of the original terms, with its stipulation that, ‘a contract will be deemed to have been made upon receipt by Alpine of an oral or written order from a customer … for Product and acceptance of that order by Alpine ...’, which ‘deems’ a contract to be made upon Alpine’s acceptance of an order.

It is further submitted that Elkerton is of little assistance, as in that case the enquiry was directed to whether the relevant security agreement ‘provided for’ a security interest, whereas s 588FL of the Corporations Act is concerned with a security agreement that ‘gave rise’ to the security interest.

Section 588FL of the Corporations Act refers to when a security agreement ‘came into force’, not when a security agreement was ‘entered into’ or ‘executed’. The operation of clause 3.1, which is not addressed in the plaintiffs’ outline, is key to resolving the question of the date upon which Alpine’s security agreement(s) ‘came into force’. In particular, the effect of clause 3.1 is that a security agreement that gave rise to a security interest ‘came into force’ each time Alpine accepted an order from Amerind in the 20-day period; or alternatively, a discrete security agreement incorporating the original terms (as amended) came into force each time Alpine accepted an order from Amerind in the 20-day period.

Conversely, the liquidator submits that Alpine’s retention of title clause (constituted by clause 7.1 of the amended terms) was in the form of an ‘all amounts’ owing clause, rather than as in Elkerton, a clause which only provided for a security interest to exist over the goods supplied under each invoice until the amount the subject of that invoice was paid. In contrast to Elkerton, where a separate security interest came into existence with each invoice, in the present case, the liquidator submits that the security interest would come into existence, at latest, with the first supply of goods by Alpine pursuant to the amended terms of the agreement, and that security interest will have continued to exist until all amounts ever owing under all invoices were paid. Accordingly, the amount secured by the security interest might vary upward and downward as Amerind made payments to Alpine.

I accept the receivers’ and liquidator’s submissions. I find that the security interest was created in about May 2012 and, therefore, needed to have been registered at least six months before the critical date under s 588FL(2)(b)(i).

The receivers are not justified in treating Alpine as a secured creditor as the security interest of Alpine vested under s 588FL of the Corporations Act and accordingly the proceeds should form part of the amount (the receivership surplus) to be paid into Court.

Issue 6

Issue 6: As a matter of procedure, should the court receive certain evidence in the form of summaries pursuant to s 50 of the Evidence Act 2008 (Vic), given the oppressive volume and complexity of the underlying material?[301]
[301]Further Amended Originating Process, [10].

The receivers seek a direction pursuant to s 50(1) of the Evidence Act 2008 (Vic) that they may adduce the evidence of the contents of the source documents in the form of the summaries[302] set out in spreadsheets which are as follows:
[302]Further Amended Originating Process, [10]; Issue 6.

(a) exhibits ‘MJB-22’, ‘MJB-26’, ‘MJB-32’ and Table 1 in paragraph 79 of the First Byrnes Affidavit;

(b) exhibit ‘MJB-48’ to the Second Byrnes Affidavit;

(c) exhibit ‘MJB-58’ to the Third Byrnes Affidavit;

(d) exhibit ‘MJB-69’ to the Fourth Byrnes Affidavit; and

(e) exhibit ‘ACB-4’ to the Second Borland Affidavit.

Section 50 of the Evidence Act2008 (Vic) provides as follows:

Proof of voluminous or complex documents
(1)       The court may, on the application of a party, direct that the party may adduce evidence of the contents of 2 or more documents in question in the form of a summary if the court is satisfied that it would not otherwise be possible conveniently to examine the evidence because of the volume or complexity of the documents in question.
(2)       The court may only make such a direction if the party seeking to adduce the evidence the form of a summary has¾
(1)       served on each other party a copy of the summary that discloses the name and address of the person who prepared the summary; and
(2)       given each other party a reasonable opportunity to examine or copy the documents in question.

In Thackray v Gunns Plantations Ltd,[303] Davies J held that s 50 is intended to achieve the purpose of permitting summary evidence if the court is satisfied of two matters:

(1) it would not otherwise be possible conveniently to examine the evidence because of the volume or complexity of the documents; and
(2) a reasonable opportunity had been given to any other party to the litigation to examine or copy the documents in question.

[303](2011) 85 ACSR 144, 164 [65], [66].

In compliance with the above requirements, the receivers sent written notice of their use of summaries to the interested parties setting out the volume and complexity of the source documents, the author of the summary documents, provided copies of key source documents, and provided a means for examining the source documents.

CHH expressly states that it has no objection to such a direction in respect of the summary documents[304] and no other party has made any objection in its submissions.
[304]CHH Outline of Submissions, [51], 26 August 2016.

I am satisfied that s 50 is enlivened, and in my discretion, I will make the direction sought.

Issue 7

Issue 7: What is the appropriate apportionment of the receivers’ remuneration, costs and expenses of the proceeding?

It is expected that the receivers’ costs of the proceeding would be encompassed in the amount set aside for their just estimate of future remuneration, costs and expenses. The same process of apportionment pro rata in respect of the remuneration costs and expenses of the receivership proper would apply.

No party has suggested such an order should not be made in the receivers’ favour.

In the event that s 433 is not enlivened, as I have so found, I did not hear submissions on this issue. I will defer giving a direction until I have heard further submissions.

Marshalling issue

I will hear the issue at a date to be fixed after appropriate directions are given to prepare the issue for trial.

Conclusion

I direct that the plaintiffs bring in minutes of orders. I will hear the parties on costs and the other issues I have left open for submissions, on a date to be fixed.

[2017] VSC 127

23 March 2017