Liquidator’s Beware – Selling Assets of an Insolvent Corporate Trustee

Where a corporate trustee is removed upon an insolvency event, the outgoing trustee retains a right of indemnity from the trust assets which is secured by an equitable charge.

Prior to the decision of Brereton J in Stansfield DIY Wealth Pty Ltd (in liquidation)^[1] ("Stansfield"), a liquidator of an insolvent corporate trustee (which was removed as trustee upon liquidation), which had a beneficial interest over trust assets by virtue of an equitable charge, could sell trust assets pursuant to section 477(2)(c) of the Corporations Act 2001 (Cth) ("the Act") without having to seek approval from the Court.^[2] However, Brereton J in Stansfield disagreed with this approach noting that the power of sale under section 477(2)(c) of the Act is limited to where the company has both legal and beneficial interest in the property (which interest is lost upon removal as trustee) as a liquidator cannot sell interests in property that the company does not have.  In this regard, Brereton J stated:

“The equitable interest of a trustee that has a charge to secure its right of indemnity extends to all the assets of the trust, but is not co-extensive with them: it is constrained to the limit of the liabilities that it secures. Moreover, it is in the nature of a hypothecation, and does not equate to beneficial ownership. The relevant "property of the company" is the charge, not the assets charged. Accordingly, the liquidator would be authorised by s 477 to sell the company's interest as equitable chargee, but not the underlying assets to which the charge attached”.

Accordingly, Brereton J found that:

"section 477(2)(c) does not empower a liquidator to sell the beneficial interest in property that the company holds on trust, even if the company has an equitable charge over it, because the property is not itself "property of the company”".

Whilst Brereton J accepted that an insolvent corporate trustee can sell its equitable interest in trust assets, it is only that interest and not the whole asset that a liquidator is entitled to sell. Brereton J gave the example that, if the insolvent corporate trustee holds land upon trust for itself and three others, the liquidator can sell the legal interest of the insolvent corporate trustee and its 25 per cent beneficial interest, but not the other 75 per cent.

Therefore:

1. an insolvent corporate trustee cannot sell trust assets to satisfy liabilities of the company where it holds only legal title to those assets;
2. where an insolvent corporate trustee has a beneficial interest in trust assets, it can sell only this beneficial interest; and
3. an insolvent corporate trustee is not empowered under section 477(2)(c) to sell trust assets where the insolvent corporate trustee has an equitable interest over those assets by virtue of an equitable charge.

However, as identified by Brereton J, this does not leave a liquidator of an insolvent corporate trustee without remedy. In circumstances where an insolvent corporate trustee has been removed from the position of trustee and has an equitable charge over the trust assets for liabilities incurred while acting as trustee, a liquidator can seek appointment as a receiver of the trust assets, by way of enforcement of the indemnity.

It appears that Stansfield has set a new precedent in this area of law. Accordingly, at least until this issue is decided by an appellate court, a liquidator of an outgoing corporate trustee looking to sell trust assets should apply to the Court to be appointed as receiver of the trust assets.

If you are a liquidator of an outgoing corporate trustee, contact our Dispute Resolution & Insolvency team for further information and advice.