Section 433 of the Australian Corporations Act 2001 (Cth) (Corporations Act) provides that, in respect of property subject to a circulating security interest, payment of certain debts has a priority over others. One category of debts which has priority is debts owed to employees, in respect of unpaid wages, superannuation and the like.
The fundamental issue before the High Court in Carter Holt Harvey Woodproducts Australia Pty Ltd v Cth & Ors was whether employees of a company that is in receivership (or insolvency) have no statutory priority if that company happens to have been trading as the trustee of a trading trust and holding its assets on trust.
The earlier decision of the Court of Appeal in this case was the subject of an earlier LK Blog post which can be reviewed here for the relevant facts and procedural background. As foreshadowed in that earlier blog post, the case was eventually decided by the High Court.
In three separate judgments, the High Court unanimously held that the statutory priority scheme of s 433 applies to employees of a company trading as the trustee of a trading trust. The Court also made clear that the same reasoning applies to s 561, which is the equivalent provision to s 433 but which applies to liquidators rather than receivers.
The Court also unanimously held that the proceeds from an exercise of the corporate trustee’s right of exoneration in respect of trust liabilities may be applied only to satisfy trust debts, but, further, that this does not preclude the application of the relevant statutory priority rules. To the contrary, those rules still apply. The decision in Re Enhill (1983) 1 VR 561 was wrongly decided on this point and the decision of Re Suco Gold (1983) 33 SASR 99 represents the better approach.
In the joint judgment of Kiefel CJ, Keane and Edelman JJ, their Honours, having regard to the trustee’s power of exoneration, concluded that the right of indemnity of the trustee was property subject to a circulating security interest, within the meaning of s 433. When funds were obtained by the Receivers as a result of the Receivers’ sale of trust assets, those funds were property coming into the Receivers’ hands for purposes of s 433 and, as such, those funds were subject to the statutory priority scheme.
Bell, Gageler and Nettle JJ viewed the matter somewhat differently, and did not consider the right of indemnity, as such, to be property subject to a circulating security interest. However, the company assets that were realised by the Receivers were property of the company and the Receivers took possession of that property pursuant to the circulating security interest. The trustee would have been entitled to discharge that property for properly incurred trust liabilities, and in a winding up it would have been available for payment of creditors in accordance with s 556(1)(e) of the Act. Accordingly, s 433 applied.
Gordon J considered that to the extent that the receivership surplus represented the proceeds of the sale of circulating assets, s 433(2)(a) was satisfied, and therefore, s 433(3) required the application of the statutory priority rules in respect of that surplus.