Liquidators of insolvent corporate trustees, the law on distribution of assets has now been settled

Following a landmark decision in the Full Federal Court, employees will retain their priority to payment of their entitlements in a company liquidation, even where the company is a corporate trustee of a trust.

Any liquidator of an insolvent corporate trustee will therefore need to follow the Corporations Act 2001 statutory priorities in the distribution of assets now as a result of the decision in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 (Clayton Utz acted for Westpac (which had paid employee entitlements) which, together with the Commonwealth of Australia, successfully advanced the position in favour of the employees).

Why is the Killarnee decision significant for corporate insolvencies?

The law had been unsettled in recent times, as a result of a number of decisions around Australia (such as Re Independent [2016] NSWSC 106) which favoured the general law position that all creditors of a corporate trustee should share equally (and without priority) from the company's assets in a liquidation scenario, which conflicts with the position under section 556 of the Corporations Act where certain creditors, particularly employees, are to be paid in priority to general unsecured creditors.

Given the prevalence of corporate trust structures in Australia, the uncertainty in the law posed significant risk to employees employed in a corporate trust structure that they would lose priority to be paid in their employer's liquidation, and instead have to share with general creditors such as trade creditors. Further, banks commonly pay employee entitlements during a restructuring, and then seek to stand in the shoes of the paid employees for reimbursement if the restructure fails and the company goes into liquidation (as was the case here); similar to the Commonwealth Government under its Fair Entitlements Guarantee Scheme.

The outcome in this decision is also consistent with the recent Victorian Court of Appeal decision in Commonwealth v Byrnes and Hewitt [2018] VSCA 41 (Re Amerind), which together serve to settle the legal position in Australia. It recognises the high public policy importance of ensuring that employees are protected in an insolvency scenario and given the best possible chance of receiving payment of their entitlements.

Alistair Fleming (Partner), Rebecca Hanrahan (Senior Associate) and Justin Naidu (solicitor) led the matter.