When your client is owed money by a trustee company, you may wonder whether there is anything to gain from winding up the trustee company. The company is probably a $2 company. The beneficiaries or the appointor will probably replace the trustee with a new one. What assets will the liquidator of the former trustee have access to?
The recent decision of Justice Kenny in Neeeat Holdings (in liq) [2013] FCA 61 provides a useful summary of the relevant principles and provisions. In short, if assets remain in the trust, winding up the trustee company may produce valuable returns.
In Neeeat Holdings the subject company was the trustee of three trusts: two discretionary trusts and a superannuation trust. Under the trust deed, the trustee would automatically be removed as trustee if wound up.
Through the discretionary trusts it conducted two businesses. The company was also the registered proprietor of a property, which the mortgagee had sold up and retained the surplus proceeds. The appointor of the discretionary trusts had the power to appoint a new trustee and had done so after the company was wound up.
The liquidator of Neat Holdings sought the Court’s approval to sell the assets of the trusts and deal with the surplus proceeds from the sale of the real property to distribute them to creditors (naturally, after the liquidator’s own costs had been paid).
Kenny J held that the liquidator was entitled to do so. The following principles emerge from the decision:
1. A trustee incurring a liability has a right of indemnity out of the assets of the trust, secured by an equitable lien over trust assets.
2. If liquidation causes a trustee to be removed, it remains entitled to hold the assets as against the beneficiaries and as against the new trustee in order to exercise its right of indemnity out of the trust assets.
3. A liquidator may exercise a statutory power of sale over trust assets without seeking the Court’s leave to do so, as long as the liquidator has legal title to dispose of the asset.
4. The liquidator is entitled to be indemnified out of trust assets for his costs and expenses in identifying, recovering, realising, protecting or distributing trust assets. Where a company acts only as trustee, most of the liquidator’s costs will be recoverable from trust assets. But when a company carries on non-trust activities, a liquidator’s costs in examining those activities are unlikely to be recoverable from trust assets.
