On 23 February 2016, the Supreme Court of New South Wales delivered a decision of relevance to the practice of every liquidator in Australia.

Justice Brereton, whose recent decisions on insolvency practitioner remuneration have drawn a fair bit of attention, delivered a complex decision in which he reached conclusions of significance to any liquidator winding up a corporate trustee, considering a claim for superannuation, or seeking court approval of fees. In summary:

No section 556 priorities for trust creditors

• When winding up a company that carried on business as trustee of a trust, section 556 priorities do not apply to distribution of trust property. Rather, all of the trust’s unsecured creditors (including employees) are treated equally in a distribution of trust property.

Court approval required for remuneration and disbursements paid from trust property

• When winding up a company that carried on business as trustee of a trust, a liquidator cannot draw remuneration via the ordinary statutory methods (resolution of creditors or a committee – sections 473 and 499). These methods only apply to the distribution of company property, not trust property. A liquidator seeking remuneration from trust property must have it approved by the court, and the same applies to reimbursement of disbursements.

Calculation of “reasonable” remuneration

• It is preferable for courts to award insolvency practitioner remuneration by reference to a percentage of recoveries (rather than time-based charging). As a guideline, 15% of realisations would be “unusually high”, 2% would be more appropriate where limited work was done (or work was outsourced to a lawyer or debt collector), and an amount as high as 5% would require “special justification”.

Superannuation – “employees” for claim purposes may not be “employees” for priority purposes

• In matters where section 556 does apply (i.e. distribution of property not held on trust), superannuation claims by independent contractors are not to be given priority, even if they are valid claims under the superannuation legislation. Contractors who are deemed to be “employees” for the purposes of the superannuation legislation may not be “employees” within the narrower definition in the Corporations Act, in which case they should be treated for priority purposes as ordinary (non-priority) unsecured creditors.

I’m sorry, what?

*clears throat*

• Section 556 priorities do not apply in the winding up of a corporate trustee.
• Two percent of realisations.
• TWO PERCENT OF REALISATIONS.

Hit me

Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) was an application by a liquidator for directions as to how he should distribute funds recovered by him in the course of winding up a corporate trustee.

There was nothing special about the corporate trustee – it was not a regulated trust or part of a managed investment scheme or anything particularly fancy. It was a normal “pty ltd” company which carried on a labour hire business as trustee of a discretionary trust.

In the course of winding the company up, the liquidator realised funds. In circumstances where the company had only ever acted in its trustee capacity, the funds were clearly trust property – and the creditors of the company were all trust creditors.

The liquidator wished to have his remuneration approved and, in light of a previous court application he had made concerning the trust, he also required clarification as to how the balance of funds should be distributed. He was also mindful of the need to have his disbursements approved, in light of the decision in AAA Financial (No 2) (summarised here).

Accordingly, he approached the court for an order for his remuneration, approval of certain disbursements, and directions as to how he should distribute the remaining trust monies.

Decision

In a carefully reasoned decision, citing cases decided as far back as the 1800s, the court held:

• The Corporations Act process for approving remuneration (resolutions of creditors or a committee, as per sections 473 and 499) applies only where remuneration is to be paid from property owned outright by the company, not property held on trust for others.
• Similarly, the Corporations Act regime for distributing property (section 556, 560 etc.) only applies to the distribution of property that is not held on trust.
• When property is held on trust, an entirely different regime applies – one that was developed over the last two centuries by the courts of equity.
• In a nutshell, under the traditional regime for the fixing of remuneration and the distribution of trust property:
  • First, the person responsible for winding up the trust is paid his or her reasonable costs (and reimbursed his or her reasonably incurred disbursements), both of which must be scrutinised and approved by the court; and
  • Thereafter, all of the unsecured creditors of the trust share equally (pari passu) in whatever money is left over, without any special priority for superannuation or other priority claims.

As for superannuation claims more generally, his Honour noted that the superannuation claims in this case had been made by persons who had been engaged as subcontractors rather than employees, but who were caught by the deeming provisions in the superannuation legislation, and deemed to be employees.

He concluded that, if section 556 had applied, such claimants would not be entitled to priority, because the deeming provisions of the superannuation legislation only deem them to be employees for the purposes of the superannuation legislation, not for the purpose of receiving priority under the Corporations Act:

…for the purposes of the Corporations Act, s 556, “employee” is defined in s 556(2)(a) as a person “who has been or is an employee of the company, whether remunerated by salary, wages, commission or otherwise”.

…

SGAA admittedly contains, in s 12, an expanded definition of “employee” [which includes certain subcontractors] … However, the extended definition in the SGAA applies only “for the purposes of this Act”; it does not apply for the purposes of any other Act – including, relevantly, the Corporations Act, s 556.

His Honour summarised his conclusions in paragraph 52:

ICS as trustee of the trust had, and its liquidator now has, a right of indemnity from and lien over the trust assets, which has priority over the interest of the beneficiaries, for liabilities it incurred in acting as trustee. As all the company’s liabilities were incurred in its trustee capacity, all its creditors (including in particular the ATO in respect of superannuation guarantee charge and PAYGW penalty) are entitled to be subrogated to the Liquidator’s lien. The statutory priority referred to in the Corporations Act, s 556, does not apply in respect of trust assets, and the creditors share pari passu in the trust assets, after providing for the costs of administration, including the Liquidator’s remuneration and expenses. But even if the statutory order of priority did apply, the superannuation guarantee charge liability would not in the circumstances of this case be entitled to priority under s 556(1)(e)(i), because the contractors in respect of whom it is payable were not “employees” of ICS for the purposes of s 556.

Remuneration

As for remuneration, as on previous occasions, his Honour expressed his preference for remuneration calculated by reference to a percentage of realisations, rather than the amount of time devoted to the work involved:

Remuneration may be by way of commission on assets realised and/or assets distributed, or time-based. Liquidators will not necessarily be allowed remuneration at their firm’s standard hourly rates for time spent. Particularly in smaller liquidations, questions of proportionality, value and risk loom large. In smaller liquidations, liquidators cannot expect to be rewarded for their time at the same hourly rate as might be justifiable where more property is available.

…

…ad valorem remuneration, while not without shortcomings, is inherently proportionate, incentivises the creation of value rather than the disproportionate expenditure of time, was – until the relative recent proliferation of time-based costing – conventional, and is still contemplated by the relevant statutory provisions.

…

Indicatively, I would be inclined to allow 2% on realisations ($4,236), reflecting the very limited work done by the Liquidator in respect of realisations; but 15% on distributions ($16,647), an unusually high rate mainly to reflect the complicating feature of the two applications for directions, in which respect there are analogies with AAA Financial Intelligence and Gramarkerr. This approach would result in a total remuneration of $20,883. However, I am also conscious that the Court ought not to discourage liquidators from undertaking small but difficult liquidations. In my view, having regard to the size of the fund, the totality of work undertaken and time expended by the Liquidator and his staff (including that for which he has not specifically claimed, or has written off), the challenges presented, and the extent to which others (including lawyers and debt collectors) were engaged and remunerated for associated work, the Liquidator should be allowed remuneration of $30,000 (which equates to about 14% of gross realisations).

Where does this leave liquidators?

In light of Independent Contractor Services (No 2), liquidators should be mindful that, when winding up a company that carried on business as trustee of a trust:

• A court application will be required before any remuneration is able to be drawn from trust property.
• The court application will cost money, but before that cost is able to be reimbursed from trust property, the court must approve it – so the liquidator may have to pay up front first, from his or her own pocket.
• The court – particularly the NSW Supreme Court – may take a fairly savage approach to the quantification of “reasonable” remuneration.
• In all of the circumstances, a liquidator looking at taking appointment over a corporate trustee would generally be well advised to make sure, beforehand, that the company has some money “of its own” (i.e. not held on trust) to meet the costs of the winding up (subject to approval by creditors in the normal fashion) and, if necessary, the costs of approaching the court.

Liquidators should also approach with caution superannuation priority claims made by anyone other than traditional waged/salaried employees, and ensure that the claimant is an “employee” within the narrower definition in the Corporations Act.

As always, if in any doubt about your rights and obligations when winding up a trustee, adjudicating superannuation claims or attending to any other aspect of a complex insolvency administration, advice should be sought from lawyers who are familiar with the territory and understand the law.

ERA Legal will continue to monitor decisions in this area and if you have any queries about the decision summarised above and how it affects you, or any other aspect of insolvency law and practice, please do not hesitate to contact one of our specialist insolvency lawyers.