Readers may be familiar with the long running saga in Bruton Holdings v. Commissioner of Taxation.

Concern was felt in insolvency circles when the Full Court of the Federal Court upheld the Commissioner’s argument that the Commissioner was entitled to serve a Section 260-5 Notice (commonly referred to as a Garnishee Notice) after the appointment of a liquidator. This decision had the potential to dramatically affect the rights of liquidators and other creditors but fortunately was reversed in the High Court – and the insolvency profession breathed a sigh of relief in the knowledge that the world of insolvency was not about to change dramatically.

Unfortunately the ghost of Bruton has arisen from its grave and returned to haunt the profession.

It is of course the case that liquidators are often called upon to act as liquidators of companies that, prior to their appointment, acted as a trustee of a trust. Trading trusts are becoming more regular features of commercial life and if anything it is likely that use of trading trusts will grow.

It is often the case that the appointment of the liquidator is, under the deed creating the trust, an event which automatically operates to cause the trustee to be removed as trustee of the trust. Even if the trust deed does not contain such a provision, if a liquidator is appointed, the persons controlling the appointment of a trustee will often remove the company in liquidation as trustee and appoint a new trustee in its place.

Steps taken to remove the trustee have, at least until now, not had any significant impact on creditors’ recoveries. The law has recognised for a long time that if a trustee incurs liabilities in the course of acting as trustee of a trust it has a right to recover, out of the assets of the trust, sufficient monies to meet those liabilities. This right is commonly referred to as “the right of indemnification” or “exoneration”.

It has long been considered that fees and expenses incurred by a liquidator in preserving or recovering assets out of which the right of exoneration can be enjoyed also enjoy a right of indemnity or exoneration. Put simply, as the liquidator incurs fees and expenses in recovering assets for the benefit of creditors, he or she has been entitled to payment of those fees and expenses. The position is not dissimilar to payment of a liquidator’s remuneration and expenses incurred in preserving and realising an asset for the benefit of secured creditors.

Having been unsuccessful in the High Court in the Bruton matter, the Commissioner  of Taxation was not prepared to accept the consequences of the judgment and made an application to the Federal Court for an order that Mr. Elliott, as liquidator of Bruton was not entitled to payment of expenses incurred by him in recovering the fund for the benefit of creditors. In order to recover the fund the liquidator was required to run the High Court proceedings. Had he not, then the Commissioner would have been entitled to retain the money pursuant to the Garnishee Notice.

Having been unsuccessful in the High Court, the Commissioner was required to repay the money to the trustee which then held it for the benefit of all creditors of the company. It seemed commonplace that, having taken action for the benefit of all creditors, the liquidator would be entitled to payment of his expenses (and incidentally his remuneration) of the proceedings.

The Commissioner however seemed to think not and unfortunately in a decision handed down in the Federal Court of Australia on 3 September 2010 his Honour Justice Graham agreed with the Commissioner.

Essentially his Honour decided that as Bruton, the company, had been removed as trustee prior to commencement of the proceedings in the Federal Court (which lead to the proceedings in the High Court), it was not part of the former trustee’s functions or responsibilities to institute the Federal Court proceedings.

Accordingly, the costs incurred in those proceedings were not “properly incurred” in the administration of the trust fund.

Even though the liquidator was successful in the proceedings and recovered money for the benefit of all creditors, the Court has held that it was not proper for the proceedings to be run, and accordingly the trustee should not be entitled to a right of exoneration out of the fund it created.

Conclusion

This decision is not in any way limited to the specific circumstances in which Mr. Elliott found himself as Bruton’s liquidator. The decision has universal application and should give all in the insolvency profession pause for thought.

Creditors should be concerned that, as a consequence of the decision, liquidators will no longer be interested in recovering assets for the benefit of those creditors. If liquidators incur expenses in recovering those assets, liquidators will not be entitled to be paid those expenses.

Mr. Elliott is considering his position and it is likely that an appeal from this decision will be filed. It is to be hoped this decision suffers the same fate as did the earlier Bruton decision and that eventually liquidators will be able to get on with the business of recovering money in the interests of creditors without the ghost of Bruton Holdings shadowing their every move and placing them at risk of losing money personally.