Hurry Up and Wait – Liquidator in holding pattern while Re Amerind decided

This week’s TGIF considers In the matter of MJM(WA) Enterprises Pty Ltd (in liq) [2018] NSWSC 944, where the Court approved a liquidator’s remuneration but deferred decisions about trust distributions until after the Re Amerind litigation finishes.

What happened?

The company operated two barbershops in Perth as trustee for a family trust before liquidators were appointed in May 2017.

The company traded solely in its capacity as trustee, such that all of its assets were trust assets and all its liabilities were liabilities incurred in the course of acting as trustee.

In the course of the liquidation, it had become clear that there were a number of potential claims against a former director in respect of insolvent trading, director loans and undervalue asset sales.

Creditors were pushing for the liquidator to investigate those claims through examinations, but the liquidator needed his remuneration approved because that remuneration was to come from trust assets rather than a specific entitlement under the Corporations Act 2001 (Cth).

Work now, paid now

First, the liquidator sought orders that the Court fix and approve his remuneration (around $36,000 for historic work and an additional $45,000 up to completion of the liquidation), which had been approved by creditors.

Brereton J approved the remuneration, holding that in the context of the liquidation, the remuneration was reasonable and not disproportionate.

Trouble giving it away

However, the question then arose as to what the liquidator was to do with the balance of the trust assets after his remuneration had been paid.

The liquidator faced the same question about distribution of trust property that arose in the Re Amerind litigation: are assets held on trust “property of” the insolvent corporate trustee, such that the liquidator must distribute those assets in accordance with the statutory priority regime in s 556 of the Corporations Act 2001 (Cth)?

We covered the most recent instalment in the Re Amerind litigation – the Victorian Court of Appeal’s judgment in Commonwealth v Byrnes – in a two-part TGIF series. As a quick refresher:

• At first instance[1], the trial judge held that trust assets were not “property of the company” and so the statutory priority regime did not apply.
• On appeal[2], the Court of Appeal reversed that decision, holding that where a trustee carries on business solely as a trustee, trust property realised pursuant to the trustee’s right of indemnity must be distributed according to the statutory priority regime.

Notably, the trial judge in Re Amerind (Robson J) had come to his conclusion in part by following a previous decision of the judge in this case, Brereton J[3].

The issue facing the Court here

The difficulty for the Court in this case was that the Victorian Court of Appeal’s decision is currently the subject of an application for special leave to appeal to the High Court. The Court of Appeal’s decision might be overturned, affecting how trust assets should properly be distributed.

The question had real world significance in this case. The liquidator proposed a pari passu distribution between all trust creditors, contrary to the Victorian Court of Appeal’s decision. But the Deputy Commissioner of Taxation had lodged a proof of debt for over $100,000 in respect of a superannuation guarantee charge. Under s 556 of the Corporations Act 2001 (Cth), such a claim is one type of claim that must be paid in priority to the claims of other creditors. Therefore, according to the Victorian Court of Appeal in Commonwealth v Byrnes, the ATO’s claim needed to be paid before other trust creditors.

Justice delayed, but not justice denied

The Court recognised that the liquidator needed to progress with the liquidation with certainty, but that the High Court’s decision might change the landscape about distribution of the trust assets. Therefore, the Court held that:

• the liquidator would be justified in distributing assets of the trust in payment first of his remuneration; but
• the balance of the proceedings relating to the further distribution of other trust assets be adjourned until the outcome of the application for special leave in the Re Amerind litigation (and then any High Court appeal) were known.

The solution enabled the liquidator to get paid now and gain certainty about remuneration for the balance of the liquidation, but in a way that made sure the right decisions about distribution were made once the Re Amerind issues were resolved. As Brereton J stated in this case:

“Such a course would enable the Liquidator to progress the liquidation, without unduly delaying its completion – as the creditors have requested the Liquidator to consider action against the former directors.”

Significance for practitioners

A few weeks ago, TGIF considered other circumstances in which the Court can provide certainty for practitioners (Don’t Sweat the Small Stuff – Let the Courts Help). An entitlement to remuneration for liquidation work where the insolvent corporate trustee has no beneficial assets is another good example of the certainty that a Court decision can provide, even where other fundamental legal issues remain up in the air.

This decision also demonstrates how court processes can benefit creditors and practitioners alike. By locking in remuneration now, the liquidator was able to begin investigating recovery actions and keep the liquidation moving along – a better outcome for all concerned.