Insolvent Corporate Trustee: Who Gets the Trust Assets?
A large share of Australian businesses trade through a trust, with a shell company as trustee. An insolvent corporate trustee is therefore a common scenario, and a deceptively tricky one. When that trustee company fails, an awkward question arises immediately: the assets used in the business are held on trust, not owned by the company outright, so what can the liquidator actually get at, and who has first claim? The answer is not intuitive, and getting it wrong costs creditors real money.
The short position is this. The trust assets are not beneficially the company’s, but the company’s right to be indemnified out of those assets for liabilities it incurred as trustee is company property, and that right, secured by an equitable lien, is the gateway to recovery. Since the High Court’s decision in the Amerind case in 2019, we also know how the proceeds are distributed. This guide explains the right of indemnity, the equitable lien, the priority position, and the practical traps in winding up a corporate trustee.
When a company acts as trustee of a trading trust, it enters contracts, employs staff and incurs debts in its own name, but the business assets are held on trust for the beneficiaries. In a liquidation, a liquidator’s power is over the property of the company. Trust assets, held beneficially for others, are not property of the company in the ordinary sense, so on its face the liquidator cannot simply sell them and pay creditors.
If that were the whole story, trust creditors would be badly exposed. It is not, because of a longstanding equitable principle: the trustee’s right of indemnity.
For anyone dealing with a trust that has failed, the first conceptual step is to stop thinking of the trust assets as belonging to the company and start thinking about the company’s rights against the trust.
A trustee who properly incurs a liability in administering the trust is entitled to be indemnified out of the trust assets. This right of indemnity is not a mere personal claim: it is proprietary, secured by an equitable lien (a form of charge) over the trust assets. It is that lien, and the right it secures, that constitutes property of the company available in the winding up.
The right has two branches: exoneration (using trust assets to discharge liabilities directly) and recoupment (reimbursing the trustee for liabilities it has paid from its own funds). In most trading trust insolvencies, the exoneration branch does the heavy lifting, because the company has few or no assets of its own.
Two features matter commercially. First, the right of indemnity survives the company’s removal as trustee and its insolvency: a former trustee retains its lien until it is paid. Second, the right can be reduced or lost where the trustee has committed unremedied breaches of trust or acted outside its powers, because indemnity only extends to liabilities properly incurred. A liquidator’s recovery is therefore only as good as the trustee’s conduct was clean.
For years it was contested whether, once the right of indemnity was realised, the proceeds should be distributed according to the Corporations Act 2001 (Cth) (“Act”) priority regime, which gives employees priority for wages and entitlements, or paid rateably to all creditors without those priorities.
The High Court settled it in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (“Amerind case”). The court held that the statutory priority regime in sections 556, 560 and 561 of the Act applies to the distribution of assets realised through the trustee’s right of indemnity. In other words, the proceeds of the right of indemnity are distributed as if they were ordinary company assets, and employee entitlements retain their priority ahead of ordinary unsecured creditors. This aligned the position with the Full Federal Court’s earlier reasoning in Jones (liquidator) v Matrix Partners Pty Ltd [2018] FCAFC 40.
A further point of importance: the property available through the right of indemnity is applied to satisfy trust creditors: those whose debts were incurred in the conduct of the trust. It is not a general pool for the trustee’s personal, non-trust creditors.
For employees of a business run through a trust, this means their statutory priority is protected. For ordinary trade creditors, it means they rank behind employees in the trust fund just as they would in a conventional company liquidation.
The law is now reasonably settled at the level of principle, but the execution is where trustee insolvencies become difficult and expensive.
The single most important document is the trust deed. Many deeds contain a clause that automatically removes the company as trustee on the appointment of a liquidator or on insolvency, converting it into a “bare trustee”. A bare trustee may lack the power to sell the trust assets, which can force the liquidator to apply to the court for directions or to have a receiver appointed to realise the assets, adding cost and delay. The deed also governs whether the right of indemnity has been cut down and who the successor trustee is.
Other recurring issues include distinguishing trust assets from any personal assets of the company where the two have been commingled; dealing with a successor trustee appointed to hold the assets; and the treatment of mixed-capacity claims. Each of these can convert an apparently simple liquidation into contested court work.
The commercial takeaway is to obtain the trust deed and the trust’s records at the outset, before assuming any asset can be sold or any creditor paid. In a trustee insolvency, the deed is as important as the balance sheet.
Does a corporate trustee own the trust assets in a liquidation?
No. The trust assets are held on trust for the beneficiaries and are not beneficially owned by the company. What the company owns is its right of indemnity, the right to be reimbursed out of the trust assets for liabilities properly incurred as trustee, secured by an equitable lien. That right is the company property available in the liquidation.
What is a trustee’s right of indemnity?
A trustee is entitled to be indemnified out of the trust assets for liabilities it properly incurs in administering the trust. The right is secured by an equitable lien over the trust assets and survives the trustee’s removal or insolvency, making it the key to recoveries in a corporate trustee liquidation.
Do employees keep their priority when a trading trust is wound up?
Yes. In the Amerind case, the High Court held that the statutory priority regime applies to the distribution of trust assets realised through the right of indemnity, so employee entitlements retain their priority.
Can a liquidator sell trust assets?
Often, but not always without court involvement. Many trust deeds strip the trustee of its powers on insolvency, leaving it a bare trustee. Liquidators frequently seek court directions or the appointment of a receiver to realise the trust assets safely.
What is the first thing to check in a corporate trustee insolvency?
The trust deed. It determines whether the company remains trustee, whether the right of indemnity has been reduced, and what powers survive insolvency, all of which drive the recovery strategy.
If you are a director, liquidator or creditor dealing with a business run through a trust, Chamberlains’ Insolvency & Restructuring team can advise on the right of indemnity, realising trust assets, and creditor priorities. Contact our Insolvency & Restructuring Managing Director Stipe Vuleta on 1300 676 823 to discuss your options.