60 The University ofQueensland Law Journal Vol. 15, No.1

Trust Asset Wars - The Liquidator StrikesBack

Bryan Horrigan*

In pursuance of which purposes, and to what extent, may aliquidator of a trustee company in liquidation have recourse to thetrust assets held by the company in its capacity as trustee?l TheSupreme Courts in New South Wales, Victoria, and SouthAustralia have entertained this question (with varying results) onlyrecently, and it can be but a matter of time before the issue arisesagain. The issue itself requires the resolution of two major issues:(1) Must the liquidator apply trust assets to meet the claims solely

of trust creditors?; and(2) What status does the liquidator occupy in this scheme when he

seeks to recover his costs and expenses of the winding up andremuneration?2

The Problem:

When a trustee properly incurs a liability on behalf of a trust, hebecomes personally liable for that debt. Since he is personally liableto the trust creditor, the law allows the trustee to claim an indem­nity out of the trust assets to the extent of the liability, re-enforcedby a right of lien over the trust assets under his control.3 What hap­pens when the trustee goes bankrupt (if a person) or into liquida­tion (if a company)? Does that right of indemnity held by thebankrupt trustee become available through the process of subroga­tion for distribution to creditors of the trustee generally or only totrust creditors? Some commentaries4 suggest that if, contrary to theHigh Court decision in Octavo Investments Pty. Ltd. v. Knight5 ,

the right of indemnity is not aproprietary right arising at the pointwhere the liability is incurred (as opposed to discharged), but is aright or power in the trustee to apply trust assets only to discharge

*B.A., LL.B.(Queensland), D.Phil. student, University College, Oxford.(1) This article substantially expands upon, explores issues in greater deal than,

and raises possible arguments not considered in, a previous article by thisauthor which appeared in Obiter, No.3 of 1984, pp. 15-19.

(2) Unless a distinction is otherwise made, "costs" in this article means the costsand expenses of the winding up, including the remuneration of the liquidator.

(3) See Octavo Investments Pty. Ltd. v. Knight (1979) 144 C.L.R. 360 at 367,citing Vacuum Oil v. Wiltshire (1945) 72 C.L.R. 319. A recent restatement ofthis principle and a discussion of the extent to which beneficiaries may berequired to indemnify the trustee can be found in the decision of McGarvie J.in J. W. Broomhead (Vic.) Pty. Ltd. (In liquidation) v. J. W. Broomhead Pty.Ltd. and Others [1985] V.R. 891, at 936-940.

(4) See e.g. "Insolvent Trading Trusts", 1983 Companies and Securities LawJournal 170.

(5) (1979) 144C.L.R. 360; (1979) 54A.L.J.R. 87

Trust Asset Wars - The Liquidator Strikes Back 61

liabilities incurred as trustee, then certain problems arising fromthe decisions subsequent to Octavo (supra) could be avoided. Ascan be seen·from the discussion which follows, such a course mayresolve those problems in a way adverse to the interests of theliquidator. Must the liquidator rely on agreements between himselfand the creditors of the company, or future remedial legislation, toprovide for the expenses he incurs or are there existing authoritiesand statutory frameworks which provide adequately for hisposition? Resolution of that question requires an analysis both ofthe processes of reasoning used in the decided cases and of the rele­vant· statutory provisions, and is the focus of this article. The alter­natives available are:(1) to treat the liquidator as a trust creditor and to view the

trustee's right of indemnity as giving trust creditors, throughthe process of subrogation, priority over unsecured creditors ofthe trustee company;

(2) to treat the liquidator as not being a trust creditor and therebylimit his rights of recovery to non-trust assets;

(3) to treat the trustee's right of indemnity as a right personal tothe trustee and available through subrogation to generalcreditors of the trustee6 ; and

(4) to treat the liquidator as being in a class, separate from bothtrust and non-trust creditors, whose status and priority inclaiming for "debts" falls to be determined either under therelevant sections·of the Companies Code· ("the Code") 7 or onsome other basis.

The Possible Approaches:

Whilst Re Enhill Pty. Ltd.8 and In Re SucoGold Pty. Ltd. (InLiquidation)9 have swung the balance in favour of recovery by theliquidator, the Re Byrne cases10 still contain the strongestarguments for denying recovery and, in the absence of any HighCourt authority directly on the point, these four cases are the maincases constituting what can be .termed the "orthodox" approach.This is the first of three possible approaches upon which, it is sub-

(6) For a discussion of (1) to (3), see A. Moshinsky, "Trust Creditors and theByrne Australia Case", (1982) 56 L.I.J. 301.

(7) (4) is an addition derived from the approach of King C.J. and Jacobs J. in InRe Sueo Gold Pty. Ltd. (in liquidation) (1982-83) 7 A.C.L.R. 873; (1984) 33S.A.S.R. 99; 1 A.C.L.C. 895. According to King C.J., the costs etc. of theliquidator are incurred in discharging duties under the trust (thereby, in effect,making the liquidator a trust creditor), with the question of prioritydetermined by what is now s. 441 of the Companies Code. According toJacobs J., one of the bases upon which the question of access and priority canbe resolved is the statutory framework, (4) also requires consideration becauseNeedham J. held in Re Byrne Australia Limited (No.2) [1981] 2 N.S.W.L.R.364 that the liquidator is not a trust creditor.

(8) [1983] V.R. 561.(9) (1983) 33 S.A.S.R. 99.

(10) Re Byrne Australia Limited [1981] 1 N.S.W.L.R. 394; Re Byrne AustraliaLimited (No.2) (supra).

62 Bryan Horrigan

mitted, a liquidator may base his argument. The second approachrelies on statutory interpretation and focuses upon the statutoryframework of the Code. The third approach is the "incidental" viewcontained in the judgment of Dixon J. (as he then was) in In ReUniversal Distributing Co. Ltd. (In Liquidation). 11

The First Approach: The UOrthodox" View

In the Re Byrne cases (supra) a company being voluntarilywound up acted as trustee of a trust for the benefit of the childrenof certain named persons. The company only carried on thebusiness of the trust, the assets of the company were confinedsolely to trust assets, and the liabilities of the company comprisedsolely trust liabilities. The liquidator argued that the company'sright of indemnity as trustee constituted an asset distributable inaccordance with the priority deternlined by s. 292 of the CompaniesAct 1961 (New South Wales) (cf. s. 441 Companies Code).Counsel's reasoning was as follows:(1) s. 291(2) imports, subject to s. 292, the bankruptcy rules "with

regard to the respective rights of secured and unsecuredcreditors and debts provable ...";

(2) s. 291 (2) therefore imports into the winding up the provisionsof s. 116 of the Bankruptcy Act 1966 ("the Act"), whichdescribe what is the "property" of the bankrupt divisibleamongst his creditors; and

(3) the liquidator has recourse to the trust assets, by virtue of s.291(2), with s. 292(1) according top priority to the liquidator'sexpenses.

Needham J. 's rejection of this reasoning involved four steps inlogic:(i) s. 292 has no operation upon trust assets and therefore only

applies to non-trust assets;(ii) only trust creditors therefore have access to trust assets;(iii) the costs of the winding up can only be met out of trust assets

if the person incurring those costs is a trust creditor; and(iv) the liquidator is not a trust creditor.

The Nature of the Trustee's Right of Indemnity

The first of Needham J.'s propositions turns on the nature of theright of indemnity and his Honour's interpretation of s. 116(2) ofthe Act. The rationale for the exclusion in s. 116(2) is that propertyheld by a bankrupt on trust for another person is not property inwhich the bankrupt has a beneficial interest, although (as othercommentators have indicated) if the bankrupt· holds property ontrust both for himself and others then his share of the beneficial

(11) (1933)48C.L.R.171.

Trust Asset Wars - The Liquidator Strikes Back 63

interest is divisible amongst his creditors. By analogy, on one view,the beneficial interest of the trustee here ought to be distributablebecause the nature of the "trust" property has changed:

"The trustee's interest in the trust property amounts to a proprietaryinterest, and is sufficient to render the bald description of the propertyas 'trust property' inadequate. It is no longer property held solely in theinterests of the beneficiaries ..."12

In short, according to this view, the trust assets are no longer purely"trust" assets, but are assets impressed with a liability called "thetrustee's right of indemnity".

The issue of. the nature of the trustee's right of indemnity wasalso considered in Re Enhill (supra), where the Full Court of theVictorian Supreme Court held that the trustee's right of indemnitywas:(i)(ii)(iii)

an asset separate from the trust fund,property under the control of the liquidator, andproperty divisible among the general creditors, with theliquidator gaining priority over any other claim for paymentof his expenses. 13

As in theRe Byrne cases all of the assets were trust assets and theonly business carried on was done so on behalf of the trust.

One possible criticism14 is that by allowing the trustee's right ofindemnity to be considered an asset separate from the trust fund,thereby allowing trust assets to be used to pay both trust andgeneral creditors, the decision misunderstands the nature of theright of indemnity and ignores the distinction between a right ofrecoupment (Le. a reimbursement out of trust assets to repay atrustee who has paid a trust debt from his own monies) and a rightof exoneration (i.e. utilisation of the trust find directly to meet thepayment of trust· debts)15, with the latter right being limited to aright to extinguish only the trust debt.

Criticisms of this ilk must be weighed together with the followingthree points emerging from Octavo:(i) the right of indemnity arises at the point where the liability is

incurred rather than discharged (see pp. 369 and 370 of thejoint majority judgment);

(ii) the right is aproprietary right (see p. 370); and(iii) the right is of a quality sufficient to render the bald descrip­

tion "trust property" inadequate (see p. 370 and see also thediscussion of this point above).

The problems faced by the court in Re Sueo Gold (dealt with infra)in distinguishing between a right of recoupment and a right ofexoneration stem from the first of the two points outlined and these

(12) Joint judgment of the majority in Octavo (supra), cited in Re Sueo Gold(supra) at p. 102.

(13) Note that on this view it is irrelevant whether or not a liquidator is held to be atrust creditor.

(14) See J.W. De Wijn, "Re Enhill Pty. Ltd.: Trust and Non-Trust Creditors", 12Aust. Tax Rev. (March, 1983) 24, at 25-27.

(15) See H.J .A. Ford in "Creditors' Rights in Relation to Liabilities of Trustees"(1981) 13 M. V.L.R. ,at 16-17.

64 Bryan Horrigan

problems, amongst others, have led some comnlentatorsl6 tosuggest that Re Suco Gold exhibits certain difficulties in reasoning.Further, if the right arises at the point when the liability is incurred,then why should the nature of the right depend upon whether thetrustee has already discharged the debt from his own money?Despite such queries, it is submitted that the distinction can bejustified (at least in part) by indirect reference to the third pointoutlined. l ? Although the description "trust property" is inadequate,the property is not merely property charged with the trustee's rightof indemnity but {rus/property charged with the trustee's right ofindemnity. To the extent therefore. that trust property is involved,some mechanism is required to ensure that trust property does notenure for the benefit of non-trust creditors. The distinction bet­ween rights of recoupment and rights of exoneration is such amechanism.

The comments of Professor Ford on this pointl8 have been citedin a number ofthe cases and the crux of his argument is as follows:

"If the trustee is also under a liability to other creditors but the liabilityis unrelated to the trust those other creditors cannot claim against thetrust property on the basis of the trustee's right to exoneration. If thetrustee had discharged the trust liability out of his own funds he wouldhave a claim for recoupment out of the trust property ... (and) ...his general creditors could get satisfaction out of the trustee's claim onthe trust property if he were to be made bankrupt. ... The reason whyit is only the trust creditor, in respect of whose debt the trustee has aright to exoneration (as distinct from a right to recoupment), who canuse that right to indemnity lies in the limitations on the trustee's powerto apply the trust property. The trustee's power is to apply the trustproperty only in respect of each particular debt properly incurred in theadministration of the trust".19

Trust property per se can only be properly dealt with in the way thelearned author suggests. To attempt to use these commentshowever as a justification for restricting access to the trustee's rightof indemnity solely to trust creditors in the circumstances of ReSuco Gold would be a misguided exercise in view of the HighCourt's comments in Octavo to the effect that the description "trustproperty" is inadequate in some circumstances. On the authority ofOctavo the right is more than a "power" over the trust property(contra Ford) and more than a "chose in action, and ... propertyof the trustee" (contra Lush J. in Re Enhil/); thus, on one view, thetrustee has a proprietary right and one which is more than a merechose in action, irrespective of whether it is a right of recoupmentor a right of exoneration.20 What remains in doubt is whether the

(16) See e.g. J. O'Donovan, "The Cracking Facade of Limited Liability", (1984) 14Q.L.S.J. 115.

(17) Although support for the distinction can be found in this argument, thequestion of whether the distinction is one that ought validly to be made isanother issue.

(18) Ford,op.cit.(19) ibid., pp. 16-17.(20) See generally the discussion in D. Williams, "Winding Up Trading Trusts:

Rights of Greditors and Beneficiaries", (1983) 57 A.L.J. 273

Trust Asset Wars - The Liquidator Strikes Back 65

distinction (as justified by the comments and quotes above)displaces the consequences which this view says flow from a findingthat the trustee has a proprietary right. In other·words, does the ex­tent to which the right is a proprietary right override the considera­tion that the property impressed with that proprietary right is stilltrust property?

Quite apart from the nature of the trustee's right of indemnity,what is the class of creditors which can claim the benefit of the rightthrough subrogation? On one reading of Octavo, only trustcreditors have access to the right, because " ... the trustee'sinterest in that property will pass to the trustee in bankruptcy forthe benefit of the creditors of the trust trading operation ... ''21(emphasis added). The phrase "for the benefit of the creditors ofthe trust trading operation" is but one of a variety of differentphrases used by the court, however, and at times the judgment isunclear as to whether trust creditors only or trust and non-trustcreditors are accorded access:

"(I)n the event of the trustee's bankruptcy, the creditors will besubrogated to the beneficial interest enjoyed by the trustee ... Theseprinciples lead naturally to the conclusion that the beneficial interestswhich, by subrogation, the creditors whose claims arise from the carry­ing on of the business have in the assets held by a bankrupt trustee formpart of the property of the bankrupt divisible amongst hiscreditors . .. The fact that the trust property itself cannot be taken inexecution by the creditors of the trustee is not to the point." (emphasisadded).22

Are the words "whose claims arise from the carrying on of thebusiness" restrictive generally in that they confine the class ofcreditors to a particular group (i.e. trust creditors) or do they mere­ly indicate that in this particular case the creditors in question aretrust creditors? Similarly, is there a difference between "creditorsof the trustee" and "creditors of the trust" or "creditors of the trusttrading operation"? Admittedly, such statements need to be read incontext and the context of the principles cited in the majority judg­ment does suggest that subrogation to the right of indemnity islimited to trust creditors. Even if this view is correct, first, "[t]hatpoint did not directly arise in the Octavo case, there being nocreditors other than trust creditors and no questions of liquidator'scosts and expenses''23 , and second, the point is moot if, contrary toRe Byrne (No.2) the liquidator is a trust creditor.

It is within the context of the last point that the reasoningemployed in Re Suco Gold 24 falls to be considered. In attempting

(21) Octavo (supra) at 370. See also De Wijn op cit. at 26.(22) Octavo (supra) at 367.(23) Re Enhill (supra) at 18-19, per Lush J.(24) Re Suco Gold (supra) represents the high water mark of judicial analysis. Re

Enhi/l (supra) had been followed by McLelland J. of the New South WalesSupreme Court in Grime Carter and Co. Pty. Ltd. v. Whytes Furniture(Dubbo) Pty. Ltd. [1983] N.S.W.L.R. 158; (1982-83) 7 A.C.L.R. 540. Thelearned judge did not attempt an exhaustive analysis of this field of law in thatcase. What is more noteworthy about the decision is that the same judgequestioned the authority of Re Enhi/l (supra) in Re A .D.M. Franchise Pty.Ltd. (1982-83) 7 A.C.L.R. 987, subsequent to the decision in Re Suco Gold(supra).

66 Bryan Horrigan

to balance the commercial unsatisfactoriness of the result in the ReByrne cases with equity's refusal to "entertain recovery by non-trustcreditors from trust assets''25, it is submitted, with respect, that thecourt solved practical problems at the expense of some conceptualones. The liquidator in Re Suco Gold sought directions as to howtrust assets ought to be applied. The only assets of the trustee com­pany were rights under the trust deeds to be indemnified againstliabilities incurred in carrying out duties under the trust. The onlydebts were trust debts incurred as trustee of two unit trusts. Sincethe liabilities exceeded the assets and the creditors would notfinance the winding up, the liquidator could recover none of hiscosts unless resort was had to the trust assets.

In assuming a position in between the broad view in Re Enhilland the narrow view in the Re Byrne cases, the court based its deci­sion on the distinction between a right of recoupment and a right ofexoneration. As to the question of whether trust assets can be ap­plied only for the benefit of trust creditors, King C.l. summarisedthe problem and the court's solution in the following terms:

"The right of indemnity, it is true, exists for the trustee's own benefitand it passes to the trustee in bankruptcy or the liquidator. The proceedsof that right of indemnity are therefore part of the estate divisibleamong the creditors. It seems to me, however, that the right ofindemnity can only produce proceeds for division among the creditorsgenerally if the trustee has discharged the liabilities incurred in the per­formance of the trust and is therefore entitled to recoup himself out ofthe trust property. If he has not discharged the liabilities, the right ofindemnity entitles him to resort to the trust property only for the pur-pose of discharging those liabilities." 26 .

King C.l. then turned to consider the position of the liquidator inrelation to the above principles. His Honour's reasoning developedin the following way:(i) the trustee company's duty as trustee is to incur debts and to

pay them;(ii) upon winding up, those debts must b~ paid in accordance

with the relevant companies legislation;(iii) this action necessarily requires the existence of a liquidator

and that·he incur expenses; and(iv) the use of "other" in s. 292 of the Companies Act 1961

implies that the costs and expenses of the winding up plus theremuneration of the liquidator are debts of the company.

Upon this basis, King C.l. reached the crux of his decision:

"As the company's obligation as trustee to pay the debts incurred incarrying out the trust cannot be performed unless the liquidation pro­ceeds, it seems to me to be reasonable to regard the expenses mentionedabove as debts of the company incurred in discharging the duties impos­ed by the trust and as covered by the trustee's right of indemnity"27 (em­phasis added).

(25) De Wijn, Ope cit., at 27.(26) Re Suco Gold (supra) at 107.(27) ibid., at 110.

Trust Asset Wars - The Liquidator Strikes Back

Contrast this with the view of Needham J. in Re Byrne (no. 2):

67

"The liquidator is not, in my opinion, administering the trust; he is win­ding up the company which, as trustee, has a liability towards the per­sons with claims against the trust property,,28

The belief of King C.J. (and Jacobs J.) that the only way theliquidation can proceed is for the liquidator to be paid his costsreasonably incurred in the winding up proves a strong policyconsideration underlying their respective judgments. At least threecommentators29 have indicated the fallacy of the belief that the onlyway in which the trust debts can be paid is for the liquidation toproceed. The alternative (and, in the light of the conflicting caselaw,more practically desirable) solution may lie in having a trustee(who may in fact be the liquidator) appointed, since the liquidatoris appointed to wind up, not the trust, but an insolvent companywhich just happens to be a trustee company. Such a trustee wouldhave the power to realise the trust assets in the process of meetingclaims by creditors. This alternative solution undermines thestrength of the policy consideration discussed above and expresslymentioned by King C.J. and Jacobs J. and would be an extra factorto be assessed by courts in the future. 3o

The status of the liquidator has fallen to be determined morerecently in Re Thomas Dawn Nominees Pty. Ltd. 31 , with thecritical passages occurring at page 464 of the judgment of Beach J.:

"Can it be said, however, that the costs and expenses of the winding ,up,the petitioning creditors' costs and the liquidator's remuneration, all ofwhich are regarded by the statute as debts of the company, are debts ofthe company incurred in discharging the duties imposed by the trust,and as covered by the trustee's right of indemnity, as was held to be thesituation in Re Suco Gold Pty. Ltd.? In my opinion, they cannot. As Ihave previously stated, the facts inRe Suco Gold Pty. Ltd. and ReEnhill Pty. Ltd. are quite different from the facts in the presentcase . .. In those cases the companies were insolvent . .. Their obliga­tions to pay those debts could not be performed unless the liquidationsproceeded." (emphasis added)

Several comments can be made. First, the decision does notdecide, as a general proposition, that the liquidator cannot haverecourse to the trustee's right of indemnity. It is a decision based onthe facts distinguishing Re Thomas Dawn Nominees from the or­thodox line of cases. Second, the case regards the liquidator's costs

(28) Re Byrne (No.2) (supra), at 366.(29) See: De Wijn, op. cit., at 28; O'Donovan op. cit., at 124, footnote (43A);

Moshinsky op. cit., at 303.(30) The issue arises only briefly in Kerntron Industries Pty. Ltd. v. C.S.D. (Qld)

[1984] 1 Qd.R. 576. Although the court followed the decision in Octavo(supra), both D.M. Campbell J. (at 580) and McPherson J. (at 586) (withwhom Andrews S.P.J. agreed) expressly excluded from their considerationthe right of a liquidator to costs and expenses out of the assets of an insolventtrading trust. Recent Queensland decisions on the subrogation of a·· trustcreditor to the trustees' right of indemnity include: Corozo Pty. Ltd. v. TotalAustralia [1987] 2 Qd.R.l1, and Burns v. Leda Holdings Pty. Ltd. [1987]A.C.L.D. 569 (Judgment of Dowsett J. delivered 1 June 1987).

(31) (1984) 2 A.C.L.C. 459.

68 Bryan Horrigan

as debts of the company for the purposes of the statutoryframework32 , even though they are not, in the purest sense, "debts"of the company. Third, the distinguishing fact upon which thedecision is based is that the company was solvent at the time of win­cling up. This latter factor can itself be criticised on two counts.First, it is arguable whether the point of distinction upon whichrecovery by the liquidator for his costs depends should be thesolvency of the company33. Second, the justification for the distinc­tion upon which this decision is based (Le. that the obligation topay the debt could have been performed without the companybeing wound up) applies equally to the decision in Re Suco Gold in­ter alia34 .

The "Statutory Interpretation" Approach

The second ... possible ·approach focuses on the statutoryframework of the Companies Code and is derived from theapproach· of Jacobs J. in·Re Sueo Gold where, in considering theapplication of s. 292 (1) - the equivalent to s. 441 of the Code ­his Honour said:

"That section ordinarily operates upon the proceeds of the realisation ofthe assets of the insolvent company. But in this case, the only assets ofthe company are trust assets. Does that make any difference? If theanswer to this question were free from authority, I would have nodifficulty in saying that, at least in the circumstances of this case, itmakes no difference ... I prefer to rest my decision upon what appearsto me to be the manifest intention of the legislation, derived from thestructure and language ofthe Act. "35

The question is whether later courts would be willing to adopt aninterpretation of the relevant statutory provisions analogous to thatadopted by Jacobs J. According to Jacobs J., s. 292 operated uponthe trust assets to provide for the liquidator's remuneration inpriority to other claims, on the following grounds. First, theliquidator is required "to take into his custody or under hiscontrol ... all things in action to whicltthecompanyis or appearsto be entitled"36. Second, "the other"provisions of s. 292 wouldseem clearly to be available to regulate the rights of creditors interse"37. Third, "(t)o hold otherwise would defeat, or at least frustratethe legislation"38. Fourth, the "percentage" in s. 232(3) can onlyrefer "to a percentage of the realised value of the assets available

(32) See the later discussion in this al ticleof the approach of Jacobs J. in Re SueDGold (supra).

(33) See also "Costs of Winding Up a Trustee Company. Who Pays?", 54 Aust.Ace. 769 at 770, and A. Moshinsky, "Trust Creditors and the Byrne AustraliaCase- Revisited", 58 L.l.J. 1332 at 1333.

(34) See the discussion infra of the alternative solution of appointing a trustee topay the trust debts.

(35) at 112 and 115 (emphasis added).(36) Re Sueo Gold (supra) at 115.(37) ibid., at 113(38) ibid.

Trust Asset Wars - The Liquidator Strikes Back 69

for distribution to creditors" and it does not matter that "the onlyassets are trust assets and the only creditors are trust creditors''39.Fifth, by the time s. 232(3a) comes into operation, the liquidatorhas already incurred expense in admitting creditors' claims toproof. Thus,

"(w)hy should the legislation give a voice to the creditors whose debtshave thus been admitted to proof ... unless it contemplates that thefund to which they would have otherwise had recourse is answerable forthe remuneration that they so determine?" 40

Sixth, the rights of trust creditors under s. 291(2) to prove for andreceive dividends out of the trust assets (where their debts remainunpaid) is expressed to be "subject to s. 292" which provides for theliquidator's remuneration41 . Contrast the latter two points withNeedham J .'s observation in Re Byrne (No.2) that if creditorsdesire that distribution which ought to come to them be deferred tothe claim of the liquidator then "they can take the necessary steps toensure that result"42. Why should it be incumbent upon thecreditors, however, to decide whether the liquidator takes from aproportion of the amounts owing to them? The right of a liquidatorto compensation for expenses incurred ought not depend upon thepossibility of the creditors agreeing to supply the liquidator withsuch an indemnity. What liquidator would be prepared to acceptappointment on such a contingency - particularly where the assetsare insufficient to meet all claims?

If the approach of Jacobs J. is not applicable to the equivalentprovisions in the Code, what potential applicability do the relevantstatutory provisions possess? If, contrary to Octavo, the right of in­demnity is not a proprietary right, then it is arguable that the rightfalls within the description in s. 116(1)(b) of the Bankruptcy Act,which includes within the ambit of the phrase "property divisibleamong the creditors of the bankrupt":

"the capacity to exercise, and to take proceedings for exercising, all suchpowers in, over or in respect of property as might have been exercised bythe bankrupt for his own benefit at the commencement of the bank­ruptcy or at any time after the commencement of the bankruptcy andbefore his discharge".43

Now, s. 438(2) imports into the Code, subject to s. 441 inter alia,the provisions of the Act regulating "the respective rights of securedand unsecured creditors". Are the relevant provisions of s. 116 ofthe Act thereby imported into the Code? Such importation dependsupon whether a section (Le. s. 438(2) of the Code) which incor­porates provisions regulating rights between creditors therebyincorporates provisions identifying property available for dis­tribution to creditors. If they are so imported, it still must be notedthat property held in trust for another person is expressly excluded

(39) ibid., at 112.(40) ibid. This particular factor is closely linked with the reasoning underlying the

"incidental" approach of Dixon J., discussed infra.(41) ibid., at 113.(42) Re Byrne (No.2) (supra) at 367.(43) See O'Donovan Ope cit., at 117.

70 Bryan Horrigan

from the ambit of s. 116(1) by s. 116(s). Does that make any dif­ference? In the circumstances of Octavo (supra) it did not.44 Thecontrary view is that the arguments dealt with earlier concerningthe changed nature of the trust property when a right of indemnityattaches to it are of no use here because the property is still trustproperty. In other words, the extent to which the trust property canno longer be considered purely "trust" property in view of theoperation of s. 116(1)(b) is expressly excluded by the operation of s.116(2)(a). If these provisions of the Act are not so imported, thenthe liquidator faces problems in locating assets to which the priorityprovisions of s. 441 of the Code can apply, since assets held on trustby a company cannot be deployed in the payment of non-trustliabilities on winding Up.45 In other words, if the trust assets are notwithin the "property" to which the priority provisions of s. 441apply, the priority given to the liquidator's costs by s. 441 is of littleuse.

The liquidator therefore faces the problem that the Code provi­sions must be capable of attaching to the "assets" and the li­quidator's costs must be liabilities to which the priority provisionsin s. 441 apply.

Section 374(1) of the Code allows the liquidator to take into hiscontrol "all the property to which the company is or appears to beentitled" (emphasis added). The liquidator may "sell or otherwisedispose of, in any manner, all or any part of the property of thecompany" and "do all such other things as are necessary for wind­ing up the affairs of the company and distributing its propertyunder s. 377(2) (emphasis added). Under s. 441, the costs andexpenses of the winding up, including the remuneration of theliquidator are (subject to certain exceptions) "paid in priority to allother unsecured debts". On the basis of the decisions discussedearlier in relation to the first approach, it could be argued that theright of indemnity falls within the description "property" in s.377(2)(c) and s. 377(2)(1) of the Code. The fallacy in this argumentis that the right could not fall within the description "property towhich the company is or appears to be entitled" because the rele­vant property remains trust property and the company is not "en­titled" to that property. Further, although the description, "prop­erty" is arguably wider than the description "property to which thecompany is or appears to be entitled" in s. 374(1) of the Code, it isthe latter section which authorises the liquidator to take propertyunder his control and the other references to property per se maywell be read down. The liquidator may be reduced to raising the asyet untested (and probably untenable) argument that s. 441operates upon the realised assets on the ground that the exceptionto s. 438(2) (which imports the relevant provisions of the Act intothe Code) contained in s. 441 relates not only to the rights betweencreditors inter se but also to the property capable of being realisedby the liquidator in paying his costs.

(44) See Octavo (supra) at 369-370.(45) See The Hon. Mr. Justice McPherson, "The Insolvent Trading Trust" in P .D.

Finn (ed.), Essays in Equity, Sydney, Law Book Company Ltd., 1985, at 152.

Trust Asset Wars - The Liquidator Strikes Back 71

This matter can be approached from another perspective. InR. W.G. Management Ltd. v. Commissioner for Corporate Affairsand Anor.46 [1985] V.R. 385, Brooking J. said:

"A trustee's right to be indemnified out of the trust property is limited toliabilities or expenses that have been properly incurred in the executionof the trust ... In respect of these liabilities, it will not be entitled to beindemnified out of the trust property; yet the liabilities incurred may bevery substantial, and according to the law as laid down in this state byRe Enhill Pty. Ltd. [1983] 1 V.R. 561 the creditors concerned will, onthe winding up of the trustee, be entitled to share with trust creditors inthe proceeds of the trustee's lien." 47

Note the distinction between the two concepts and that one cannotbe used to counteract the other. While it is true that only trustliabilities can be discharged out of trust assets, the proceeds of thetrustee's lien produce assets, once converted to the trustee's ownestate, out of which both trust and general creditors can besatisfied. The question of which exactly are "trust assets" is,however, a different one. On first impressions, it may seem strangethat, while a trustee could not use trust assets to payoff a non-trustdebt to a creditor, that creditor could be satisfied, on the windingup of the trustee, out of the proceeds of the trustee's lien. Whatresolves that apparent conflict is that while one aspect of the rightof indemnity relates to the treatment of trust assets, its secondaspect deals with the trustee reimbursing himself:

"In the exercise of his right of indemnity the trustee may resort to thetrust assets for the purpose of discharging liabilities incurred but notpaid, and also for the purpose of reimbursing himself in respect ofliabilities paid by him out of his own funds ..." 48

On the view in Re Enhill, timing is not crucial. On the view in ReSuco Gold, it is - the scope of the right of indemnity dependsupon whether the liabilities have been discharged.49

The key point is that once the trustee has himself discharged trustliabilities properly incurred and is reimbursed, the assets the subjectof the right of indemnity are taken out of the realm of the descrip­tion "trust property". Kemtron Industries Pty. Ltd. v. .C.S.D.(Qld) 50 provides the reasoning for this, as "trust property ... isconfined to so much of those assets as is available after theliabilities have been discharged or at least provided for." By ex­trapolation, when the trustee exercises rights over the trust assets"for the protection of his "personal property" ",51, the exercising ofthose rights produces property which, it is submitted, is caught bythe provisions of SSe 374(1) and 377(2) of the Code. If the liquidatoris to be regar.ded as a trust creditor, however, (as was the case in Re

(46) [1985] V.R. 385.(47) ibid at 396, 400.(48) per McPherson J. in Kemtron (supra) at 585.(49) See King C.J. in Re Sueo Gold (supra) in the passage quoted above and

indicated at note 26 (supra).(50) [1984] 1 Q.L.R. 576 per McPherson J. at 587 .. See similar comments by D.M.

Campbell J. at 580.(51) See D.M. Campbell J. in Kemtron (supra) at 580.

72 Bryan Horrigan

Suco Gold), but the only assets available are trust assets, to whichthe provisions of the Code do not apply, then the order ofpayments ought not necessarily be that depicted in s. 441.52 In otherwords, if the priority provisions of the Code do not apply, becausethe assets used to discharge the debts are not caught by the provi­sions of the Code, then some other basis for establishing prioritymust be ascertained.53

The "Incidental" approach

Express support (by King C.J. in Re Suco Gold and Lush J. in ReEnhill) and implied support (by Jacobs J. and Matheson J., whoagree with the reasons of King C.J. in Re Sueo Gold) exists for theapproach of Dixon J. (as he then was) in In Re UniversalDistributing Co. Ltd. (supra). There, the assets of a company incompulsory liquidation were insufficient to meet the liability of adebenture which secured a charge over the assets. The debenture­holder argued that the liquidator's remuneration ought not beallowed out of the assets in priority to his security. Dixon J. held:

"The security is paramount to the general costs and expenses of theliquidation, but the expenses attendant upon the realisation of the fundaffected by the security must be borne by it. "54

His Honour's reasoning was that while debenture-holders arecreditors who have a specific right to property, if that property isrealised in the winding up - a proceeding to which they are parties- then the proceeds must bear the cost of the reaslisation55 •

Arguably, the words used by Dixon J. could be construed to sug­gest a narrower ground for relief than that sought by the liquidatorin Re Sueo Gold. On this reasoning, the judgment only goes so faras to allow the eosts of the realisation of the assets to be met andnot the wages, etc. of the liquidator. On their face, the words mightsuggest this. King C.J., however, accepted Dixon J.'s judgment asan alternative ground - in totality - in Re Sueo Gold andtherefore must be taken to accept that all expenses sought to berecovered by the liquidator in that case (including, but not only, thecosts of realisation) fell within the scope of expenses covered by thereasoning employed by Dixon J. It can also be argued in reply thatthe costs and expenses (including remuneration) of a liquidator arewithin the phrase "expenses attendant upon the realisation of thefund" in the holding above because:(i) expenses of a liquidator are merely one of the types of costs

necessarily incurred in the process of realising the assets,(ii) creditors gain a benefit from the realisation, and(iii) therefore, as between the liquidator and the creditors, the

proceeds of realisation ought to bear the costs of realisation.56

(52) See the Hon. Mr. Justice McPherson in Fin Ope cit., at 154-156.(53) ibid.(54) In Re Universal Distributing Co. Limited (1983) 48 C.L.R. at 174.(55) ibid.(56) Indeed, support for this argument in reply can itself be found in the reasons

for judgment advanced by Dixon J.

Trust Asset Wars - The Liquidator Strikes Back

Conclusion I: The Bases of Recovery

73

The identification of three approaches is not merely an exercise inacademic abstraction. In Re Suco Gold and in R. W.G. Manage­ment, there appear warnings for liquidators that the first approachdiscussed herein may not afford a basis for recovery where the rightof indemnity is lost through breaches of trust. Likewise, if the firstand second approaches are inapplicable, the third approach mayfind judicial favour. The latter becomes particularly relevant if theCode provisions do not attach to the assets the subject of the rightof indemnity or the priority provisions in s. 441 are otherwise inap­propriate. Indeed, there are differences between liabilities incurredby the trustee and liabilities incurred in the winding up, with thelatter ranking as "salvage" costs, for as Cohen J. indicated in In reS. Davis and Co. Ltd. 57

"All debts and liabilities incurred in the course of carrying on thebusiness by the liquidator, being in the nature ofsalvage, rank for pay­ment in priority to the general debts and liabilities of the first company."(emphasis added).

The three approaches outlined in this article produce five basesupon which a liquidator may seek recourse to trust assets todischarge his costs and expenses of the winding up plus remunera­tion:(1) the right of indemnity possessed by the company as trustee is

an asset to which general creditors may have recourse bysubrogation, with the liquidator being a creditor of thecompany and taking priority under s. 441 of the Code;

(2) alternatively, if trust assets are available to meet the claims oftrust creditors only then, providing the liquidator can be heldto be a trust creditor, he gains priority under s. 441;

(3) alternatively to the preceding two options, irrespective ofwhether the trust assets are available to meet the claims ofgeneral or trust creditors, priority is determined other than byreference to s. 441 58 ;

(4) alternatively, the language of s. 441 inter alia and the structureof the Code combine to give the liquidator access to trust assetsin priority to the trust creditors; and

(5) alternatively, the liquidator gains priority not by the right ofexoneration but by virtue of his position as liquidator and isentitled to "the costs of identifying and realising the trustassets. "59

The second and, to a lesser extent, fifth bases are given the mostsupport in the cases. Re Enhill supports the first basis, while thefourth basis exists by analogy with the judgment of Jacobs J. in ReSuco Gold. The third basis is, as yet, untested in the cases.

(57) [1945] 1Ch. 402 at 407.(58) See The Hon. Mr. Justice B.H. McPherson in Finn, Ope cit., at 154.(59) The first two bases are alternatives within the first approach. The fourth basis

is derived from the "Statutory Interpretation" approach, while the fifth basisis derived by analogy with the decision of Dixon J. as portrayed in the thirdapproach.

74

Conclusion II: A Practical Guide

Bryan Horrigan

Until either the issue is resolved by the courts or remedial legisla­tion is passed providing adequate compensation for the liquidator,certain practical steps can be taken. Liquidators may be accustomedto winding up insolvent companies and discovering that no assetsare available to meet the payment of their costs60 , and a liquidatorought to be on guard if it is apparent on the books of the companythat the assets are held in the capacity of trustee. Liquidatorsshould be wary of accepting appointment unless the creditors areprepared to indemnify them for their costs. Even if the liquidator isappointed as trustee, such an indemnity ought to be sought, sincethe priority afforded by s. 441 of the Code would provide noprotection61 •

The liquidator may still face other problems. If a trust creditor,in reliance upon the right of subrogation in the winding up, provesas a secured creditor, he may gain priority over reimbursement ofthe liquidator's costs, which has important consequences for a li­quidator relying upon s. 441 of the Code because although ReEnhill gave priority to the liquidator in accordance with thestatutory provisions, the creditors there all claimed as unsecuredcreditors62 • Finally, what of the situation where the trustee com­pany acts as trustee of a number of trusts and liabilities are notevenly apportionable between the trusts (cf. Re Sueo Gold)? Whatis the basis of apportionment in this case? These and the other pro­blems discussed above highlight the unsatisfactoriness of the resultif the liquidator is not allowed to deduct his costs out of the trustassets. In thatevent,one can echo the sentiment expressed byNeedham J. in Re Byrne (No. 2'3:

"If this conclusion is correct, as I think it is, it points up a veryundesirable situation".

(60) See Re Byrne (No.2) (supra) at 367.(61) See Moshinsky, "Trust Creditors and the Byrne Australia Case - Revisited"

op. cit., at 1333.(62) See Williams, op. cit. 273 at 276-277.(63) [1981] 2 N.S.W.L.R. 364 at 367.