Key Takeaways

The FCA recently confirmed the required course for liquidators when dealing with trust assets.

In the decisions of Sprowles, in the matter of Triumph N Triumph Pty Ltd (in liq) (No 2) (FCA 2021) (Sprowles) and Phillips, in the matter of Scope Plastics Pty Ltd (in liq) (FCA 2021) (Scope Plastics), the Court has confirmed a liquidator appointed to a corporate trustee has no statutory power to sell trust assets without an order of the Court, that either:

1.   Extends their powers as a liquidator to allow for the sale of trust assets; or

2.   Appoints the liquidator as the receiver of the trust’s assets.

Approval may be sought retrospectively as seen in the VSC decision of Total Truss Systems Pty Ltd (In Liq) (VSC 2021) (Total Truss Systems) where the liquidator sought Court approval after disposing of trust property.

Brief Facts

Section 477(2)(c) of the Corporations Act 2001 (Cth) (Act) grants liquidators the power to ‘sell or otherwise dispose of, in any manner, all or any part of the property of the company’.

It is well established that a corporate trustee has a proprietary interest in the assets of a trust. This interest allows a trustee to exercise a right of exoneration so as to permit the trustee to utilise trust assets to discharge any liabilities incurred in the performance of their duties as a trustee, essentially releasing the trustee from personal liability they would otherwise have been liable to meet.  

The interest does not provide a right to the asset, which continues to belong to the trust. It follows that trust assets are not ‘property of the company’ and a liquidator is unable to rely on s477(2)(c) to sell those assets.

More often, the trust instrument itself will also contain an ‘ipso facto’ clause, terminating the trustee’s appointment upon appointment of the liquidator. The corporate trustee will then become a bare trustee of the trustee and any action by the liquidator in dealing with the trust assets will amount to unauthorised dealings (as was the case in Total Truss Systems).

Judgments  

​​​​In each of the Total Truss Systems, Sprowles and Scope Plastics decisions, the Court confirmed the requirement for the liquidator to obtain an express order extending their power, to allow them to sell trust assets, or otherwise seek to be appointed as receiver over the assets in order to sell and distribute the proceedings to creditors of the trust.

Yates J, in the Sprowles decision, and White J, in the Scope Plastics decision, both made orders appointing the liquidator of the respective corporate trustees as receivers over the trust assets, noting this approach to be the more common and preferred course to be taken.

In Total Truss Systems, Gardiner J made the orders as sought, but reminded practitioners of the need to carefully review the trust deed, and promptly seek Court orders to deal with trust assets. Such applications will require the liquidator to provide full disclosure and explanation to the court as to any delay.

Implications

The current approach requires a liquidator of a corporate trustee to apply to the court (assuming it is commercial to do so). The approach is cumbersome and is often an inefficient use of liquidator resources. The costly and timely nature of the application directly impacts the funds available for distribution of trust creditors by a liquidator.

This approach suggests a need for the legislation to be amended so a liquidator’s power to sell company assets set out within s477(2)(c) of the Act is extended to include trust assets while ensuring the right of exoneration is available to a corporate trustee.