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Estate Group update: High Court rules that insolvent trading trusts must first pay employees

Jun 25, 2019

Last week, the High Court of Australia handed down a ruling that means payment of employee entitlements will now take priority over both secured and unsecured creditors of insolvent trading trusts.

Prior to the High Court’s decision, uncertainties in law meant that unpaid employees of trading trusts may have been forced to share in any recoverable assets proportionately with other unsecured creditors, and only after secured creditors had been paid. Practically speaking, this would result in employees receiving less than what they were entitled to, or nothing at all.

The case

Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20, involved a dispute regarding how the receivership surplus of insolvent company Amerind Pty Ltd (Amerind) was to be divided amongst creditors.

Amerind existed solely as trustee of a trading trust and employed staff. The trading trust became insolvent in 2014.

Carter Holt Harvey Woodproducts Australia Pty Ltd (Carter Holt) — one of the creditors — objected to the Commonwealth of Australia’s claim that the receivership surplus of $1.6 million should be used to pay Amerind’s unpaid employee wages and other entitlements.

The law

The Corporations Act 2001 (Cth) directs that employee claims have priority over those of secured creditors in relation to certain assets when a company is in liquidation and a receiver has been appointed.

In the case, Carter Holt argued the provisions of the Corporations Act did not apply as Amerind employed its employees strictly in its capacity as trustee of a trust.

The decision

The High Court disagreed and held that, “it would be perverse if the Corporations Act operated to deny employee creditors a particular priority … solely for the reason that the company which employed them was, perhaps even unknown to the employees, trading as a trustee”.

The decision clears up longstanding uncertainty regarding the order of priority in which an insolvent trading trust (having a corporate trustee) must repay its creditors under the Corporations Act.

Companies considering how to structure their business should keep this decision in mind and seek legal advice.

More information

If you would like to discuss the structure of your trading entities, or if you have queries regarding trading trusts generally, please contact our Estate Group on (03) 8600 8885.

Note: This update is a guide only and is not intended to constitute legal advice.