TGIF 2 August 2019: Putting to rest questions on the realisation of trust assets

This week’s TGIF considers the decision in Cremin, in the matter of Brimson Pty Ltd (In Liquidation) [2019] FCA 1023, which confirms that liquidators should approach the Court before taking steps to realise trust assets.

Background

Three ‘Snooze’ franchisees were placed into liquidation and a liquidator appointed in May 2019. The liquidator's investigations soon revealed that each of the three companies operated a franchise business exclusively in its capacity as trustee of a trading trust.

The companies did not undertake any activities or conduct any business in their own right and at all times held and continued to hold all property on trust. Therefore, the stock and plant and equipment assets were held by each of the companies as trustee of the relevant trading trust.  

The trust deeds for two of the trading trusts contained clauses that operated to remove the corporate trustee upon that company being placed into liquidation. The third trust deed did not contain an automatic removal clause, but did provide that on liquidation of the trustee the principal (also the sole director of each of the three companies) was permitted to remove or replace the trustee.  The liquidator was not aware of any of the three corporate trustees having been replaced.

Each of the trust deeds conferred a right on the trustee to be indemnified out of the assets of the trust for liabilities incurred by the company as trustee. While the trustee under each trust deed had certain powers, none permitted the trustee to sell trust property except for the benefit of the beneficiaries.

The application 

On the day following his appointment, the liquidator received an offer from the franchisor to purchase the three businesses. The sale to the franchisor would enhance the return to creditors.

To deal with the assets of the trading trusts, the liquidator made an application to the Federal Court pursuant to s 90-15 and 90-20 of the Insolvency Practice Schedule and the Trustee Act 1958 (Vic), amongst other provisions, for orders that he:

• have the power to wind up each trust (including carrying on the business of the trusts, selling the assets and paying trust creditors from the proceeds) and that he is justified under s 477 of the Corporations Act 2001 (Cth) in winding up the trusts and paying creditors from the trusts’ assets; and
• alternatively, be appointed receiver and manager to the assets and undertaking of the trusts (with a power of sale for realising those assets).

Critical considerations

There has been some uncertainty as to how practitioners are to deal with trust assets, specifically, whether the power to sell the property of a company extends to the sale of trust property. The Court has helpfully stepped through some of the critical considerations for practitioners appointed to corporate trustee entities.

First, a company that is a trustee of a trading trust has a right of indemnity to resort to the trust assets under its right of exoneration from a liability incurred in carrying on the business of the trust.  This right and the equitable lien that arises endures in a liquidation, even if the company is removed as here. The company will continue to hold the assets as bare trustee.

Secondly, a liquidator appointed to a former corporate trustee cannot sell the property of the trust without order of the Court, or by appointment of a receiver over the trust assets. This requires consideration as to whether the sale is in respect of the whole trust asset rather than merely that subject to the trustee’s lien or charge.

Thirdly, the courts are generally willing to make orders permitting the sale of trust assets by a liquidator by granting a power of sale. The more common course, however, is for the liquidator to apply to the court to be appointed as a receiver.

Fourthly, as was confirmed in the recent decision of Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20, the proceeds from the exercise of a corporate trustee’s right of exoneration may only be applied in satisfaction of the trust liabilities or trust creditors.

The Court’s preference here was to appoint the liquidator as receiver and manager to the assets of each of the trusts to enable the sale to the franchisor.

Comments

The realisation of trust assets and the purpose to which those proceeds can be put has been fraught with uncertainty for some time. As a result, practitioners have been turning to the courts for guidance, despite the costs associated with doing so and the inconsistent outcomes arrived at.  

This case confirms that practitioners must approach the court either for the grant of a power of sale or to be appointed as receiver and manager over the trust assets.