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Statutory Gap for Unsecured Trust Creditors?

It is clear that the priority of unsecured creditors in relation to an insolvent individual are to be dealt with in accordance with the statutory regimes set out in the Bankruptcy Act 1966. Similarly, the Corporations Act 2001 provides for a statutory regime in relation to the priority of unsecured creditors of an insolvent company. However, it is not entirely clear if the statutory regimes apply to unsecured trust creditors.

There is currently judicial uncertainty in relation to this issue with the recent cases of RE Amerind [2017] VSC127 and Independent Contractor Services (Aust) Pty Limited (in liquidation) (No 2) [2016] NSW SC106 finding that property held by a company as trustee is not property of the company for the purposes of s556 of the Corporations Act dealing with priority of unsecured creditors. In these cases, the Courts found that the property should be distributed in accordance with normal trust principles, on a proportional basis between unsecured trust creditors, as opposed to pursuant to the provisions under the Corporations Act.

However, in Commonwealth v Byrnes and Hewitt [2018] VSCA 41, the Victorian Supreme Court found that where a company that is a trustee goes into liquidation, the trust assets available to the trustee to pay unsecured trust creditors are to be applied in the statutory order of priority consistent with the provisions of the Corporations Act. For example, certain employee entitlements will rank ahead of other secured creditors.

Whilst in the writer’s humble opinion, the Victorian Supreme Court’s approach appears to be the most logical approach in relation to the issue, the issue essentially remains unsettled and awaits High Court determination before any real certainly can be provided as to whether or not the statutory regimes apply to trust creditors, or whether a separate statutory regime is required to deal with this issue.

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