A mix of trust law, PPS and insolvency – what are the lessons from the Re Amerind appeal?
Commonwealth v Byrnes and Hewitt is the appeal from the much reported 2017 decision, Re Amerind. It looks at how the Personal Property Securities (PPS) Act and trust law interact in the context of insolvency.
Amerind traded solely as the trustee of a trading trust. It owned no assets and was entitled to be indemnified from the trust asset for liabilities it incurred on behalf of the trust.
When Amerind's finance facilities held with its bank faced termination, the bank appointed receivers and subsequently, the amounts owing to the bank were fully discharged. Later, Amerind was wounded up following a creditors' resolution.
Under the Fair Entitlements Guarantee Scheme, the Commonwealth paid $3.8 million to Amerind's former employees in accrued wages and entitlements. After the bank was paid, there was a surplus of around $1.6 million. The Commonwealth sought to be repaid as a priority creditor out of the “circulating assets” according to the statutory insolvency distribution regime in section 433 the Corporations Act.
The trial judge found that Amerind's right of indemnity was not the property of the company, so the priority regime did not apply to the surplus. The Commonwealth appealed this decision.
The Court of Appeal found that the right of indemnity was the property of the company. The Commonwealth was entitled to be repaid ahead of other creditors as the priority regime applied.
What does “circulating asset” mean? The Australian Financial Security Authority explains this PPS Act concept well. A circulating asset will typically be either an account or inventory, among other particular types of property, over which the grantor of the security interest retains control of the property. In other cases, collateral would be a circulating asset where the secured party had given the grantor authority for the transfer of the collateral in the ordinary course of the business free of the security interest. In this case, the trade account held by the company was a circulating asset as it has authority to deal with the account in the ordinary course of its business.
So, what have we learnt? The Court of Appeal held that the relevant asset to be assessed for the purpose of applying section 433 to a corporate trustee is not the right of indemnity, but it is the assets making up the trust and subject to the right of indemnity. This, is lesson #1. Further, the time for determining whether an asset is a circulating asset is not at the time the security interest was created, but it is at the time the receiver takes possession of the asset. And this, is lesson #2.
These are valuable lessons for lawyers and insolvency practitioners, especially those dealing with the insolvency of corporate trustees.
Finally, lesson #3 is don't forget to search the PPS Register to find out if an asset or a company that is relevant to your transaction is the subject of any security interests - this is an important due diligence step that should not be missed. SAI Global's Search Manager has an intuitive user interface and you can access a range of property and information search services from a single environment. You can even visualise commercial and property data via Encompass - there is no fee for accessing this visualisation platform, which gives you the full picture, fast.
 Commonwealth v Byrnes and Hewitt  VSCA 41
 Re Amerind Pty Ltd (receivers and managers appointed) (in liq)  VSC 127
 AFSA. 2018. Floating charges. [ONLINE] Available at: https://www.ppsr.gov.au/floating-charges [Accessed 19 April 2018]