National insolvency inquiry: Corporate trustees
6 mins reading time
On 28 September 2022, the Parliamentary Joint Committee on Corporate and Financial Services (“Committee”) began an inquiry into corporate insolvency in Australia, the first of its kind in over 30 years. The Committee invited submissions from interested persons and stakeholders to provide recommendations on how best to improve Australia’s corporate insolvency framework. Submissions have now closed, with contributions from over 50 industry bodies, government bodies and various representative bodies and groups.
Macpherson Kelley’s National Insolvency team will be doing a periodic deep dive into each aspect of the national inquiry and the arguments behind the submissions from interested parties. While merely at the submission stage, the inquiry provides a window into the potential insolvency reform that may shake up Australia’s business sector. This month, we’re discussing corporate trustees.
One aspect of the inquiry and an emerging theme across the various submissions includes potential areas for reform in relation to the treatment of corporate trustees in the insolvency context. The treatment of corporate trustees has been plagued by significant debate and uncertainty despite being subject of a 2021 Australian Treasury consultation paper “Clarifying the treatment of trusts under insolvency law” and having received increased judicial attention in recent years. Key recommendations and reform proposals in this space are discussed below.
Eliminating the effect of ‘auto ejection clauses’
The impact of auto ejection clauses, commonly contained in trust deeds, presents a myriad of challenges for external administrators of insolvent corporate trustees. It is widely accepted that change is necessary to eliminate the current practice of an appointed insolvency practitioner having to apply to Court to be appointed receiver over trust assets. This is often coupled with further applications seeking orders to distribute those assets, where the trust deed provides for the corporate trustee to be terminated as trustee upon formal insolvency.
Various submissions to the Committee advocated for reform to render auto ejection clauses unenforceable in this context, so that the corporate trustee maintains its right to act as the trustee of the trust. Alternatively, it is proposed that external administrators be given the necessary powers to deal with trust assets so that they can proceed without the need for Court guidance and intervention.
The current appointment process creates an additional step in the external administration process and incurs additional costs, at the expense of the company and its creditors. The recommendation to allow external administrators of insolvent corporate trustees to manage the affairs of the trust and its trust property without Court intervention is expected to lead to a more efficient insolvency process, including the quicker realisation of trust assets for the benefit of creditors.
Asset distribution in the winding up of a trust
At present, corporate trustees in the insolvency context are highly regulated by common law. It is clear from the submissions that there is public debate as to whether the existing common law is satisfactory, or whether legislative regulations are necessary. The High Court decision of Carter Holt Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20 (“Re Amerind”) was instrumental when determining the statutory priority regime under the Corporations Act. More specifically, the case clarified how the Corporations Act applies to the distribution of assets among trust creditors. Re Amerind confirmed the statutory order for the priority distribution of assets applies in the winding up of a trustee company, where all assets are trust assets. It also established that the ‘property’ of the company includes the whole of the trust property.
While the case of Re Amerind was illustrative, debate arises as to whether there is still need at a regulatory framework level to clarify issues relating to the priority regime in an insolvency event. Guidance and clarification on who should retain control over trust assets in the event of insolvency is crucial. While common law can be followed, the corporate framework should assist in eliminating grey areas surrounding corporate trustees.
The submissions propose that further clarity could be provided by amending section 556 of the Corporations Act to fully reflect the views of the Court when winding up a trust. Clear legislative provisions addressing asset distribution in the winding up of a trust will be beneficial in removing any ambiguity regarding this issue.
Defining insolvent trusts
Clarity and specificity regarding a statutory definition of an insolvent trust was also referred to in the submissions. It was suggested that the definition of an insolvent trust should be based on the same formulation that is used to define an insolvent company. That is, a trust is solvent if it has the ability to pay all debts incurred by it, or by its corporate trustee on its behalf, as and when they become due and payable. In its submission, the Australian Credit Forum suggested an alternative definition, namely that, in the event a trustee has no funds to facilitate the management of the trust, and the liabilities cannot be met, a trust may be deemed insolvent.
Either way, a clear definition of an insolvent trust should be adopted in the Corporations Act to avoid confusion when determining insolvency. We would, however, endorse the idea of extending the same formulation of ‘solvency and insolvency’, as currently defined in section 95A of the Corporations Act, to corporate trusts to achieve greater consistency. Acknowledging the various capacities in which a corporate trustee may act, it would also be prudent for the definition of an insolvent trust to refer to the ability of the trustee to pay all trust debts as they become due and payable. As it currently stands, the legislation should be amended to provide clear guidelines in determining the solvency of a trust.
Register of trusts
A common interest among submissions advocated the establishment of a national register of trusts. Currently as the insolvency framework stands, there is no way for a liquidator to easily confirm and identify whether they are potentially dealing with trust assets. Consequently, it is not uncommon for a liquidator to find out at a later date that they have been dealing with assets subject to a trust. To resolve this issue, a suggested reform sees the creation of a publicly searchable register of trusts existent in Australia. Mandatory registration of trusts would be necessary to provide the intended benefit to liquidators, ensuring all trusts were captured on the register.
The Australian Restructuring Insolvency & Turnaround Association (“ARITA”) noted that in the absence of a register, the Australian Taxation Office and other government agencies holding information that identify the relationship between trusts and their trustees, should be authorised to disclose that information to an external administrator who has been appointed to a corporate trustee. This proposal aims to address the current difficulty of identifying trusts in the absence of an established register.
The way forward
It is clear that stakeholders are unanimously in favour of reform in this area. Despite 2018 amendments to the legislation and the 2021 Government consultation, the treatment of corporate trusts and trustees in the event of insolvency remains unclear. A thorough investigation into the effectiveness of Australia’s corporate insolvency regime is crucial to achieve greater clarity and certainty, with the aim of reducing unnecessary costs in the winding up process.
Now that public submissions have closed, the Committee aims to table a report in both Houses of Parliament by 30 May 2023.
Macpherson Kelley’s team of Restructuring and Insolvency lawyers will continue to monitor the Inquiry and provide further updates on future developments in the insolvency area.
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National insolvency inquiry: Corporate trustees
On 28 September 2022, the Parliamentary Joint Committee on Corporate and Financial Services (“Committee”) began an inquiry into corporate insolvency in Australia, the first of its kind in over 30 years. The Committee invited submissions from interested persons and stakeholders to provide recommendations on how best to improve Australia’s corporate insolvency framework. Submissions have now closed, with contributions from over 50 industry bodies, government bodies and various representative bodies and groups.
Macpherson Kelley’s National Insolvency team will be doing a periodic deep dive into each aspect of the national inquiry and the arguments behind the submissions from interested parties. While merely at the submission stage, the inquiry provides a window into the potential insolvency reform that may shake up Australia’s business sector. This month, we’re discussing corporate trustees.
One aspect of the inquiry and an emerging theme across the various submissions includes potential areas for reform in relation to the treatment of corporate trustees in the insolvency context. The treatment of corporate trustees has been plagued by significant debate and uncertainty despite being subject of a 2021 Australian Treasury consultation paper “Clarifying the treatment of trusts under insolvency law” and having received increased judicial attention in recent years. Key recommendations and reform proposals in this space are discussed below.
Eliminating the effect of ‘auto ejection clauses’
The impact of auto ejection clauses, commonly contained in trust deeds, presents a myriad of challenges for external administrators of insolvent corporate trustees. It is widely accepted that change is necessary to eliminate the current practice of an appointed insolvency practitioner having to apply to Court to be appointed receiver over trust assets. This is often coupled with further applications seeking orders to distribute those assets, where the trust deed provides for the corporate trustee to be terminated as trustee upon formal insolvency.
Various submissions to the Committee advocated for reform to render auto ejection clauses unenforceable in this context, so that the corporate trustee maintains its right to act as the trustee of the trust. Alternatively, it is proposed that external administrators be given the necessary powers to deal with trust assets so that they can proceed without the need for Court guidance and intervention.
The current appointment process creates an additional step in the external administration process and incurs additional costs, at the expense of the company and its creditors. The recommendation to allow external administrators of insolvent corporate trustees to manage the affairs of the trust and its trust property without Court intervention is expected to lead to a more efficient insolvency process, including the quicker realisation of trust assets for the benefit of creditors.
Asset distribution in the winding up of a trust
At present, corporate trustees in the insolvency context are highly regulated by common law. It is clear from the submissions that there is public debate as to whether the existing common law is satisfactory, or whether legislative regulations are necessary. The High Court decision of Carter Holt Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20 (“Re Amerind”) was instrumental when determining the statutory priority regime under the Corporations Act. More specifically, the case clarified how the Corporations Act applies to the distribution of assets among trust creditors. Re Amerind confirmed the statutory order for the priority distribution of assets applies in the winding up of a trustee company, where all assets are trust assets. It also established that the ‘property’ of the company includes the whole of the trust property.
While the case of Re Amerind was illustrative, debate arises as to whether there is still need at a regulatory framework level to clarify issues relating to the priority regime in an insolvency event. Guidance and clarification on who should retain control over trust assets in the event of insolvency is crucial. While common law can be followed, the corporate framework should assist in eliminating grey areas surrounding corporate trustees.
The submissions propose that further clarity could be provided by amending section 556 of the Corporations Act to fully reflect the views of the Court when winding up a trust. Clear legislative provisions addressing asset distribution in the winding up of a trust will be beneficial in removing any ambiguity regarding this issue.
Defining insolvent trusts
Clarity and specificity regarding a statutory definition of an insolvent trust was also referred to in the submissions. It was suggested that the definition of an insolvent trust should be based on the same formulation that is used to define an insolvent company. That is, a trust is solvent if it has the ability to pay all debts incurred by it, or by its corporate trustee on its behalf, as and when they become due and payable. In its submission, the Australian Credit Forum suggested an alternative definition, namely that, in the event a trustee has no funds to facilitate the management of the trust, and the liabilities cannot be met, a trust may be deemed insolvent.
Either way, a clear definition of an insolvent trust should be adopted in the Corporations Act to avoid confusion when determining insolvency. We would, however, endorse the idea of extending the same formulation of ‘solvency and insolvency’, as currently defined in section 95A of the Corporations Act, to corporate trusts to achieve greater consistency. Acknowledging the various capacities in which a corporate trustee may act, it would also be prudent for the definition of an insolvent trust to refer to the ability of the trustee to pay all trust debts as they become due and payable. As it currently stands, the legislation should be amended to provide clear guidelines in determining the solvency of a trust.
Register of trusts
A common interest among submissions advocated the establishment of a national register of trusts. Currently as the insolvency framework stands, there is no way for a liquidator to easily confirm and identify whether they are potentially dealing with trust assets. Consequently, it is not uncommon for a liquidator to find out at a later date that they have been dealing with assets subject to a trust. To resolve this issue, a suggested reform sees the creation of a publicly searchable register of trusts existent in Australia. Mandatory registration of trusts would be necessary to provide the intended benefit to liquidators, ensuring all trusts were captured on the register.
The Australian Restructuring Insolvency & Turnaround Association (“ARITA”) noted that in the absence of a register, the Australian Taxation Office and other government agencies holding information that identify the relationship between trusts and their trustees, should be authorised to disclose that information to an external administrator who has been appointed to a corporate trustee. This proposal aims to address the current difficulty of identifying trusts in the absence of an established register.
The way forward
It is clear that stakeholders are unanimously in favour of reform in this area. Despite 2018 amendments to the legislation and the 2021 Government consultation, the treatment of corporate trusts and trustees in the event of insolvency remains unclear. A thorough investigation into the effectiveness of Australia’s corporate insolvency regime is crucial to achieve greater clarity and certainty, with the aim of reducing unnecessary costs in the winding up process.
Now that public submissions have closed, the Committee aims to table a report in both Houses of Parliament by 30 May 2023.
Macpherson Kelley’s team of Restructuring and Insolvency lawyers will continue to monitor the Inquiry and provide further updates on future developments in the insolvency area.