Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia & Ors [2019] HCATrans 6 (5 February 2019)

Last Updated: 18 July 2019

[2019] HCATrans 006

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M137 of 2018

B e t w e e n -

CARTER HOLT HARVEY WOODPRODUCTS AUSTRALIA PTY LTD

Appellant

and

THE COMMONWEALTH OF AUSTRALIA

First Respondent

MATTHEW JAMES BYRNES IN THEIR CAPACITY AS JOINT AND SEVERAL RECEIVERS AND MANAGERS OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) AND ANDREW STEWART REED HEWITT IN THEIR CAPACITY AS JOINT AND SEVERAL RECEIVERS AND MANAGERS OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

Second Respondent

BRENT MORGAN IN HIS CAPACITY AS LIQUIDATOR OF AMERIND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

Third Respondent

KIEFEL CJ
BELL J
GAGELER J
KEANE J
NETTLE J
GORDON J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 5 FEBRUARY 2019, AT 10.00 AM

Copyright in the High Court of Australia

____________________

MR D.J. WILLIAMS, QC: May it please the Court, I appear for the appellant. (instructed by Polczynski Robinson)

MR J.P. MOORE, QC: If the Court pleases, I appear with my learned friend, MR J.A.G. McCOMISH, for the first respondent. (instructed by King & Wood Mallesons)

KIEFEL CJ: Yes, Mr Williams.

MR WILLIAMS: The parties are agreed that the appeal raises two essential issues and both parties have addressed those issues as if there were, in effect, two grounds of appeal lumping together those grounds which address the first issue, being effectively the nature of the right of indemnity of a trustee and the second issue being the application of the Personal Property Securities Act regime and how it plays out in the context of the trustee’s right of indemnity in insolvency and I propose to address orally in the same way, unless the Court has a different view.

Accordingly, I move to the first of those grounds which is the nature of the right of indemnity and the impact that that has when a trustee enters the insolvency regime under the Corporations Act. I will do so by reference to the propositions stated in the document which I handed up a short time ago in accordance with the Court’s Rules, the outline of oral submissions.

Several of those propositions I think are uncontroversial on the appeal, but it is a useful discipline if I might respectfully say so, that that rule provides to set out a proposition sequentially nonetheless. So it may be of course that more time is spent on some than on others.

The first proposition is I think an uncontroversial one on this appeal, which is to say that the assets of the trust themselves are not the property of the trustee. In some senses this is to state the obvious but it is important for what follows. What is important is that notwithstanding what was said by this Court in cases like Bruton and Buckle where in the case of an insolvent trust and where in particular the liabilities of the trust exceed perhaps all of the assets of the trustee, whether they be trust assets or not but focusing on the trust assets, it is fair to say that the interest of the trustee that it has pursuant to the right of indemnity, to use the language of the cases, overwhelms the interest of the beneficiaries.

So that in a practical and certainly in an economic sense in those circumstances the beneficiaries cease to have any valuable right in the assets and that is why in Buckle the result was that the value of the trust was nil or negligible for stamp duty purposes. But that does not make the assets themselves wholly the property of the trustee, so that it can then deal with them as it chooses. It remains a trustee.

True it is that what you might call a residuary interest of the beneficiaries is now worthless, and the economic benefit of the assets will now be applied solely for the benefit of the trustee in meeting trust liabilities. That does not excuse or enable a trustee to deal with those assets on a nontrustee basis. It remains bound by its duties as trustee. That is why, notwithstanding what is said in those cases, and I will develop this further at a later proposition, but to introduce it, notwithstanding what is said in those cases, it is not right to say that the assets of the trust have become in some way the assets of the trustee simply because of the insolvency. They never were, and they never will be.

The second proposition is the true answer, which is that the property of the trustee is its right of indemnity. It is the benefit of that right, or I should say of those rights - to move to the third proposition and perhaps speak to them together, the right of indemnity is really a bundle of rights. It is more than simply a single right to be indemnified out of trust assets in the sense that we normally speak of indemnities in most other areas of discourse where indemnity is available only once a certain obligation has been met, typically by way of then enforcing. There are exceptions, but the typical way that we think of an indemnity is that we meet an obligation and then the party to be indemnified is entitled to be reimbursed, in effect, for meeting that obligation.

In relation to the trustee’s rights of indemnity, that is one of two limbs of the principal rights which constitute the trustee’s right of indemnity. The other is the right of exoneration. So we call that the right of recoupment or the cases and the judicial and extrajudicial writings of people like Justice McPherson and the late Professor Ford and Justice Meagher

KIEFEL CJ: In the case of recoupment, is the right that is relevant, the right that the trustee has, does that convert to a personal right, do you say?

MR WILLIAMS: No question that it is, your Honour. In the case of recoupment, the trustee, having already met the relevant obligation from its own funds, the right of recoupment on exercise results in the trustee having replaced its own funds, in effect, from the trust assets. So the appellant would say that it is not a controversial proposition that the trustee exercising a right of recoupment will be obtaining an asset of its own not held on trust, not required to be exercised for any trust purposes, because it has already met the relevant trust obligation.

KIEFEL CJ: Would it not then be otherwise with respect to the right of exoneration?

MR WILLIAMS: That is what we say. So in relation to exoneration the right is to have the trust assets applied so as to meet the liability that was incurred in the trustee capacity. Our learned friends make a point, which I acknowledge and, indeed, embrace, that the right also extends, in many circumstances, to former trustees. So not only the current trustee but a former trustee is entitled to have the assets of the trust applied so as to meet liabilities which that trustee has incurred in its trustee capacity.

Now, that is a right which Professor Ford described as a power rather than a right and, therefore, he did not regard as proprietary. Perhaps that ship has sailed. It does not matter for the purpose of the argument that I advance on behalf of the appellant in this case.

KIEFEL CJ: Where you really depart is in relation to creditors, is it not – where creditors fit in?

MR WILLIAMS: I am sorry; I did not hear the start of that question, your Honour.

KIEFEL CJ: Where you really depart is in relation to the position of creditors qua the trustee’s rights of indemnity?

MR WILLIAMS: Yes, in part. That is one element of the two elements that we advance. We say that it cannot be forgotten that creditors have, in some circumstances, a right of subrogation through the trustee into the trust assets. But we also look at the position of the trustee itself – qua trustee – and the obligation which it owes as trustee to the beneficiary, notwithstanding that they may in an insolvency situation no longer have an equitable – sorry, a valuable interest.

But it might be wrong to speak of beneficiaries in some cases because, of course, the same principles apply to discretionary trusts where it is not so simple to talk about the interest of beneficiaries. What you have is a trustee which has obligations arising from the existence of the trust and so long as the existence – the trust continues in existence – the trustee has obligations in relation to how it uses trust assets.

Now, insofar as it has a right of exoneration so that we are only speaking of circumstances where there is – can I use the shorthand “trust liability” to describe a liability incurred in a trustee capacity or for which the trustee is entitled to the right of indemnity out of trust assets. So it only arises where there is a trust liability which it has not met. That is the right of exoneration.

Now, its right in relation to that is to ensure that the assets of the trust are applied. Why? Well, because if the assets of the trust could not be so applied then the trustee would remain liable for that debt and that would be unjust in relation to the operation of a trustee unless for some reason it did not have the right of indemnity, either because it took on the trusteeship in terms where the right was negatived by a trust deed or because it had misconducted itself in such a way as to lose the right of indemnity.

But short of either of those two things the purpose of the right of exoneration as the second limb, if you like, of the right of indemnity is to avoid the injustice that would otherwise flow to a trustee for becoming liable for a debt in the proper performance of its duties as a trustee.

KIEFEL CJ: Well, that is to say that the right of exoneration is explained by trustor itself and the nature of the trust and the powers of the trustee and purposes of the trust. But when a trustee becomes insolvent do you accept that the right passes to the receiver or, in other cases, liquidator?

MR WILLIAMS: It may.

KIEFEL CJ: It must, must it not? That is the question, particularly when one has regard to the language of section 433(3) – that is the question.

MR WILLIAMS: Your Honour asked me about liquidators and we would say that the right does not, strictly speaking, pass to a liquidator. The liquidator takes control

KIEFEL CJ: We are concerned with the receiver here, anyway.

MR WILLIAMS: Yes, we are dealing with receiver here and in that circumstance, yes, the right falls under the control of the receiver to be exercised. But the receiver does not become the trustee and the right does not expand.

GORDON J: It does not restrict, either, though, does it?

MR WILLIAMS: No. We agree with that, your Honour. But the right never – putting aside insolvency, it has never been suggested in any of the cases or in any of the academic writings that the right of a trustee to be indemnified includes a right to take out of the trust assets for itself an amount equal to the amount of the liability, but then not apply that amount taken to the trust debt in respect of which it seeks the indemnity.

NETTLE J: Well, did not Sir George Lush say exactly that in Re Enhill?

MR WILLIAMS: I did not read it as so, your Honour.

NETTLE J: It was assets divisible amongst the creditors generally, in his Honour’s interpretation.

MR WILLIAMS: I thought his Honour was there speaking of the right itself as being such an asset. In terms of what his Honour said about “divisible amongst the creditors generally” where, if I might respectfully say, so not all the present issues arose because that case was about liquidators’ priority and his Honour

NETTLE J: So it is this, is it not, ultimately?

MR WILLIAMS: Yes, in part, yes. But his Honour, like the Chief Justice in that case, also observed that there are other paths to achieve in that outcome, including the Re Universal principle.

EDELMAN J: Basically you accept that the right of exoneration is property of the company.

MR WILLIAMS: Yes.

EDELMAN J: The point you are making then is what really is meant within 433(3) of “out of the property”?

MR WILLIAMS: Yes, and to the extent that Sir George Lush said that, if you like, the proceeds of the right – to leap ahead a little – might be divisible amongst all of the creditors, then at that point we respectfully depart from his Honour and invite this Court to not uphold that reasoning.

EDELMAN J: Why would not one read “out of the property” more broadly, even accepting what you say, to mean through the use of the right of exoneration rather than through some distribution of the right of exoneration itself but through the use of the right of exoneration to distribute trust property to the trust creditors?

MR WILLIAMS: If I might respectfully put it this way, it is a matter of identifying and applying the precise limits and contents of the right. To speak of proceeds, in my respectful submission, is to conflate proceeds of exercise of a sale power with proceeds of exercise of the right of indemnity.

EDELMAN J: That may be right but 433(3) does not speak of proceeds. It speaks of “out of the property”. Why could not one read “out of the property” to mean through the use of the indemnity?

MR WILLIAMS: Yes. Because the property – what is got out of the property does not in any sense come into the hands of the trustee free of trust obligations.

KIEFEL CJ: Is that the crux of your argument?

MR WILLIAMS: Yes, it is.

KIEFEL CJ: The words “property coming into” his, her or its hands.

MR WILLIAMS: Yes.

KIEFEL CJ: And you deny that the right of exoneration – do you deny that it comes into the hands of the receiver within that

MR WILLIAMS: No.

KIEFEL CJ: Or do you say that it comes into the receiver’s hands but it is not of its nature divisible in the way section 433(3) contemplates?

MR WILLIAMS: It is the latter, if I might say so, your Honour. If I could just explain that a little why I answered that question in that way? If the right is understood – this gets back to what I was answering Justice Edelman about a moment ago – if the right is understood to be a right no more and no less to have trust property applied to meeting trust obligations then the fact that it comes into the hands of a receiver does not mean that the realisation or exercise of that right generates something which is divisible amongst creditors generally. There is nothing left to divide.

EDELMAN J: That then is a construction of the words “pay out of”. So that whole argument comes down then to the meaning of the words “pay out of”.

MR WILLIAMS: It is “pay out of” the property.

EDELMAN J: Yes. The property coming into his or her or its hands is the power of exoneration.

MR WILLIAMS: Yes.

EDELMAN J: So, the question is what does it mean to “pay out of” that power of exoneration?

MR WILLIAMS: Yes. The power of exoneration is a right of application, not a right of receipt. So what comes into the hands of the receiver in that situation is a right, a power, an entitlement. It does not really matter, for the argument I advance, as to which language is employed. But let us call it a right; let us call it a proprietary right.

GORDON J: But it is a right which has been changed, though, in some senses and that is the way in which Vacuum Oil, Buckle, CPT, Chief Justice Allsop in Jones v Matrix said, yes, you have this proprietary right or proprietary interest which is the right of exoneration but once exercised, that is, gone and got court orders for the sale of trust property to meet that right of exoneration, one ends up with a fund, a fund which has particular characteristics attached to it, and which attaches to it obligations which the trustee must use that fund in the exercise of paying out the trust creditors, the very trust creditors it sought to use the right to exercise.

MR WILLIAMS: Yes.

GORDON J: You cannot suddenly separate the two out, can you, in the way you are?

MR WILLIAMS: I would say that you can, and that you should.

GORDON J: Why and how? So you seek to overrule Vacuum Oil, Buckle, and CPT?

MR WILLIAMS: No, because those cases - certainly Buckle and CPT did not get to the point of saying, “And then, once you have exercised the right, and then you can apply the benefit or the proceeds or what comes into your hands as a result of exercising that right, more widely than exercising the power of exoneration itself, the application power”. So it is one thing to say that the right continues to exist, that it comes into the hands of the receiver and that it overwhelms the rights of the beneficiaries. But what does that actually mean on analysis? It means that the trustee has an entitlement to hold the trust property as against the beneficiaries. It means the trustee has a right to apply for judicial sale, as your Honour points out. But all that those things do is preserve in the first case, and convert in the second case, the trust property from one form to another.

KIEFEL CJ: But where the trustee is insolvent and can no longer exercise the right of exoneration itself, do the creditors not become subrogated to the rights of the trustee, which are now in the hands of the receiver?

MR WILLIAMS: In some circumstances the trust creditors do.

KIEFEL CJ: Well, I meant the trust creditors, no one else.

MR WILLIAMS: Yes.

KIEFEL CJ: At this point. Well, why would it not always be the case with respect to trust creditors, to whom the trustee would have paid the funds itself, if it had not been for insolvency?

MR WILLIAMS: If they were exercising that right of subrogation through the trustee and if there was a deficiency, trust law would have them share equally so that they would each receive the same number of cents in the dollar. Trust law would not have any element of preference or priority for one trust creditor over another. So that if that is the analysis as to what would otherwise happen then

KIEFEL CJ: Then section 433(3) alters the priorities as it alters that aspect of trust law, you would say?

MR WILLIAMS: Well, if it is read in a way that our learned friends would say that it should be read, that is what it would do, but our submission is that it is not doing that. It is simply speaking of the property that comes into the hands of the receiver and that property is the right relevantly

GORDON J: A right which gets changed into a fund subject to certain obligations and characteristics.

MR WILLIAMS: But if I might say this, your Honour, that is not the end of the right.

GORDON J: It is not the end, but it identifies what is the property that sits in the hands of the person who is the subject of the operation of 433. It is like a freehold estate subject to a lease. You do not ignore the lease.

MR WILLIAMS: No, quite, and that is an apt analogy, if I might say so, for the situation of a trustee. Just as the freehold owner cannot ignore the lease, nor can the trustee, having come into possession of the proceeds of sale of the trust asset, ignore the trust obligations that remain.

GORDON J: So when one gets to 433 and one talks about as you have analysed what is the property that has come into the hands of the receiver, in this instance it is a fund subject to certain characteristics and obligations, is it not?

MR WILLIAMS: Yes, and those characteristics and obligations include the obligation to apply that fund in the satisfaction of the trust obligations in respect of which it arose and that gave right to the exoneration right – sorry, that gave rise to the exoneration right which is being exercised and which at the point of sale and conversion into cash has not yet run its course.

GAGELER J: Mr Williams, there is an extremely thorough analysis of the right of exoneration in the judgment of Chief Justice Allsop in Jones v Matrix.

MR WILLIAMS: Yes.

GAGELER J: I would be assisted in knowing whether if at all you depart from his Honour’s analysis of the nature of the right of exoneration.

MR WILLIAMS: Not in relation to the nature, I think.

GAGELER J: So your argument is entirely then pitched at the effect of the statute on the right as identified by his Honour. Is that correct?

MR WILLIAMS: Yes, it is then what happens next which is the question that I pose. It has certainly not presented itself in this Court and in Jones v Matrix where of course there was a difference of opinion and in the other cases that we have referred to where there are differences of opinion between judges, between Justice Brereton in New South Wales and what the Victorian Full Court held in this case, what the courts are grappling with, if I might put it that way, is what flows from what seems to be developing as an accepted nature of the right and, to the extent that we differ from what Chief Justice Allsop said, it is because we differ with what is said to be the consequence of identifying the right of indemnity in the way that his Honour identifies and others have identified it.

GORDON J: Just so I am clear, you accept the way in which his Honour sets it out. I think the most critical paragraphs seem to be [51] and [76]. There are others, but they seem to be the critical ones. Is it your proposition then that, when you look at 433 and one seeks to identify the property that has come into the hands of the relevant receiver you strip away – is that your argument – the additional characteristics and conditions that attach to the fund?

MR WILLIAMS: No, my argument is that you do not strip away the additional characteristics that attach to the fund because those additional characteristics are those which require that the right of exoneration be exercised only for the purpose of in fact exonerating against the relevant trust creditors, that is to say

EDELMAN J: In other words, your argument effectively is that a right of exoneration can be or is property coming into the receiver’s hands but it makes no sense to talk about paying out of that right of exoneration because the right of exoneration is controlled by its content.

MR WILLIAMS: Yes.

EDELMAN J: So the burden of your whole argument really is what is meant by the words “pay out of” on this limb of your submissions.

MR WILLIAMS: Yes.

GORDON J: I am being slow but it seems to me difficult to identify how this - if you accept this is property of the company in the way you have because it could not be anyone else’s property

MR WILLIAMS: Yes.

GORDON J: You accept that property has come into the hands of the receiver, you have accepted that the receiver’s fund that he holds is subject to the characteristics and conditions that it must be used to pay trust creditors, one wonders why it then does not fall within section 433(3) in a way in which you have described.

MR WILLIAMS: Because it remains subject to that trust obligation and so the assets remain trust assets and ordinarily section 433 would not be regarded as applying to assets, even if they come into the hands of a receiver, which are trust assets. Take, for example

GORDON J: Where is the authority for that principle? You have accepted you can have a freehold estate subject to a lease.

MR WILLIAMS: Yes. You can also have a freehold estate that is subject to a trust. You might have a trustee that has a $100 million real estate portfolio and $10 in cash and it might give a

GORDON J: But that seeks to identify the wrong property. We are dealing with property that has come into the hands of – here you have this fund in the hands of the receiver which you have accepted is property of the company.

MR WILLIAMS: No, I have not accepted that the fund is the property of the company; I have accepted that the right which generated the fund and which was exercised in the course of generating the fund was the property of the company, but the fund is not the property of the company. The fund remains trust assets.

KIEFEL CJ: But the right of exoneration is to draw upon the fund. It is a right to draw upon the fund.

MR WILLIAMS: Not personally. It is a right to apply the

KIEFEL CJ: No, I did not say that.

MR WILLIAMS: I know your Honour did not and I was not meaning to put it that way, and I apologise for doing so. The point I am seeking to draw is a distinction between a right to draw in the sense that that right is a valuable right in the hands of a trustee capable of being exercised for its own benefit and a right in relation to property which must still

KIEFEL CJ: It is a right to draw upon the fund to discharge trust liabilities.

MR WILLIAMS: Yes.

KIEFEL CJ: But why cannot that work in the context of section 433(3)? If the property is, as you say, it is the right of indemnity of exoneration which has come into the hands of the trustee in insolvency – the receiver - why cannot the receiver do what the trustee could have done?

MR WILLIAMS: He can. The receiver can and should apply the proceeds of the right to paying trust liabilities. But he will be doing so because that is the trustee’s obligation because that is the contents and one of the limitations on the right.

GORDON J: But it is subject to the operation of the statute and one has to work out how it is that you can exclude the operation of 433. If one starts at 433, one realises that not only does it alter certain priorities but it alters priorities in the terms of secured lenders.

MR WILLIAMS: Yes.

GORDON J: So it is a fundamental change of its statute to the way in which the respective rights in relation to property are to be approached and dealt with.

MR WILLIAMS: Yes, but

GORDON J: One cannot ignore that it is at the statute.

MR WILLIAMS: No. But nor can one read the statute as enlarging that which comes into the hands of the receiver.

GORDON J: No, it is not enlarging it. It is just taking the property, subject to the way in which it is subject to the characteristics and conditions attached to it in its hands and it is dealing with it subject to those characteristics and adjusting the priorities in relation to it as it is with the other interests in the other assets.

MR WILLIAMS: A way of exemplifying my answer to your Honour’s question would be to posit a trustee which acted both in a trustee and in a private capacity and in a private capacity, let us say it had employees, but not in a trustee capacity. So it incurs trust liabilities. It has a right of indemnity out of trust assets in relation to those liabilities and it is entitled to exercise that right in order to meet those liabilities. So putting aside

GORDON J: The answer may very well be that you had a separate fund in the way Chief Justice Allsop identified in Matrix – and I think it is in paragraph [108] where he says you may very well have the fund, subject to the very thing that you are talking about, separately in relation to the trustee acting in its own capacity and one deals with them subject to 433 but recognising that the conditions that are attached to the trust arrangement. What is wrong with that?

MR WILLIAMS: That is not dissimilar, I should concede, to what Chief Justice King did in Re Suco Gold.

GORDON J: That is what Chief Justice Allsop refers to and adopts.

MR WILLIAMS: Yes. So what is wrong with that is that it overlooks the nature of section 433 which is not to create separate funds or have a separate arrangement with some creditors and not others, section 433 either operates for the benefit of all the creditors or not. Those determinations, convenient as they may be as a means of achieving what some might say was a desirable commercial or even moral outcome, nonetheless is not applying the language of section 433 which is not to treat there as being separate classes of creditors – some trust, some not trust; some trust A, some trust B – and then apply section 433 to each of those as if the company was three companies or more. But section 433 operates so as to deal with the creditors of the company as a whole by applying the assets of the company as a whole and when one does that – I am sorry, your Honour.

GAGELER J: No, I will allow you to finish now. I do want to ask you a question.

MR WILLIAMS: When one does that, my submission is that you end up with the proposition that, applying the asset which is the trustee’s right of indemnity, one can do no more than exercise that right. If that is the asset, one can do no more than exercise that right in accordance with its terms and that means, just as the leasehold example, subject to whatever limitations are imposed on it. The limitation imposed on the right of exoneration is that it can only be exercised by causing the assets of the trust to be applied to meet not even all liabilities, but the particular trust liabilities in respect of which exoneration is available. That is the limitation.

So, to read section 433 as requiring that the right be exercised so as to create a fund of money and then dividing up that fund of money pursuant to section 433, if one does not have regard to the limitations on the right of exoneration our submission is to expand the right and in fact to be dividing property which was not and was never the property of the company because the company – the trustee never had a right to do that with trust assets. It only ever had a right to apply trust assets to trust liabilities.

Whilst the present case might be a nice, convenient, clean example of a company which, so far as we know, has no nontrust obligations to creditors at least – liquidators may stand in a different position – but to creditors at least, whatever decision this Court makes I respectfully submit has to be capable of being applied in a principled way to all scenarios that might arise in relation to a trustee and that will occur if the Court is, as of course it will be, careful to identify and delineate the right which is being available and regarded as having fallen into the hands of the receivers and to require or come up with an interpretation of section 433 which acknowledges that the receiver is required to exercise that right only in accordance with its terms.

GAGELER J: Mr Williams, can I ask my question at this stage?

MR WILLIAMS: Yes, I am sorry, your Honour.

GAGELER J: Your submissions for the last few minutes have been focused on section 433 and you offer those submissions as a response to the analysis of Chief Justice Allsop in Jones v Matrix which, along with the analysis of Chief Justice King in Re Suco Gold were directed to sections 555 and 556.

MR WILLIAMS: Yes.

GAGELER J: So my question is, do your submissions draw any distinction between the operation of section 433 on the one hand and the operation of section 556 on the other?

MR WILLIAMS: No, they do not, your Honour. I make no such point.

GAGELER J: Thank you.

MR WILLIAMS: Which means

NETTLE J: Well, indeed, you have been keen to say that 433 has the same meaning as 556, have you not?

MR WILLIAMS: Yes.

NETTLE J: Because you pick up the benefit of re Richardson?

MR WILLIAMS: Precisely.

KEANE J: Your argument assumes that the trustee in exercising the right of exoneration as between the trustee and the beneficiaries may only exercise the right of application pari passu between creditors.

MR WILLIAMS: Yes.

KEANE J: Why, if one bears in mind that the trust obligation, the trust relationship, is an ongoing one, why would it not be appropriate for the trustee to say “I am bound by the statute in the events which have happened to pay debts in accordance with a statutory priority”? Why would not the situation be that as between the steward - the trustee - and the trustee’s beneficiaries, why would not in that relationship the trustee be entitled to say “I am entitled to exercise my right of application by way of exoneration in accordance with statutory priorities”?

MR WILLIAMS: If one is at that point I have already lost because that analysis presupposes that section 433 operates in that way before the trustee gets to exercise it.

KEANE J: But your analysis presupposes that obligations on the trustee as a debtor – that the nature of the obligations on the trustee as a debtor cannot affect the relationship between trustee and beneficiary in terms of the way the accounts between them are drawn up and settled. You proceed on the basis that pari passu is somehow or other written in stone.

MR WILLIAMS: Well, pari passu only arises in the insolvency situation in a trust.

KEANE J: Yes, but the trust is alive; we know that. The trust has not been wound up. There is a situation that has arisen and the law says that in that situation the trustee as a debtor has to pay in accordance with certain statutory characteristics of the various debts the trustee owes.

MR WILLIAMS: Might I respectfully suggest that that is an oversimplification of what section 433 does. The law does not require that the trustee make those payments but that the receivers make those payments out of property coming into their hands that falls within section 433 and that is to say out of property which comes into their hands by reason of the relevant security interest attaching to it and it being a circulating asset and so on.

So the question cannot be answered simply by identifying the statutory obligations and priorities that a debtor must meet. The question has to be answered by applying the terms of the statute, by examining what property it is that has fallen into the hands of the receivers and then determining what the receivers must do with that property.

KIEFEL CJ: Well, does that mean that your argument really is that the right of indemnity is not property to which section 433(3) refers? I thought you had accepted that it was.

MR WILLIAMS: It is property – the property is the right. The property is not the property to which the right attaches. The property is the right.

KIEFEL CJ: Yes, but if you say section 433(3) cannot apply to the right because of its nature and its limitations, are you not really saying that it is not property to which section 433(3) can operate upon?

MR WILLIAMS: In the way we have expressed the matter that way, yes, your Honour, I would agree because it cannot as a practical matter operate on it because of the absence of content of the right which is capable of division.

EDELMAN J: Unless one read the words “pay out of the” to mean “pay from the use of the”. If “out of” is read in that broad sense, meaning “from the use of” then it does not involve the contradiction that you are submitting which is really you are paying out of the trust assets and not paying out of the right of indemnity. But you are paying from the use of the right of indemnity.

MR WILLIAMS: If that was so and the right existed in relation to perhaps a discrete pure trust which was solvent and the only asset of which was a piece of real property it would follow that the moment that that right was exercised – and there might be a milliondollar property and a $1,000 debt in a trust capacity in relation to that property – the moment the right is exercised so as to realise the property, the danger in that analysis would be that one would say that the right was exercised to realise the milliondollar property. So once it is exercised, that property falling into the hands of the receivers, the fund not the right

GORDON J: But the fund is not just a fund sitting there absent; it has certain conditions attached to it

MR WILLIAMS: Yes.

GORDON J: $1,000 of which is subject to the characteristics and limitations you accept.

MR WILLIAMS: All of which are subject to the limitations. I would say that the limitations would be different in relation to the $1,000 in relation to the other $999. The limitations in relation to $1,000 can only be applied to meet the debt. The limitations in relation to $999 would be it has to be given to the beneficiaries.

GORDON J: It is not property of the company in that sense.

MR WILLIAMS: Yes, that is right.

GORDON J: I thought you had not agreed with the Chief Justice when her Honour put that question to you.

MR WILLIAMS: No, the right is the property of the company; the fund is not. The company can exercise the right to seek indemnity out of that other trust.

GORDON J: Maybe the answer to one question is when you talk about the fund not being property of the company. If one looks at the definition of “property” in section 9 it is in the most broad terms.

MR WILLIAMS: Yes.

GORDON J: Explain to me how it does not fall within the definition of section 9.

MR WILLIAMS: Because if one read section 9 as extending the property held on trust, which it is capable of doing on its terms

GORDON J: That is was why I am asking. It says:

any legal or equitable estate or interest . . . present . . . or contingent –

et cetera.

MR WILLIAMS: Certainly Justice McPherson in his writings says that it is not and that

GORDON J: I understand Justice McPherson says it is not. I am trying to work out how it is it falls outside the definition of section 9 to test this proposition that the right is the property of the company but the fund, the proceeds of the exercise of it, which has these conditions and limitations attached, is not.

MR WILLIAMS: Because the proceeds remain held by the trustee on trust. The right is not held on trust. The right is a personal right of the trustee and that is not held on trust. So it is proper to describe the right as property of the company, but the fund remains held on and subject to the terms of the trust. So it is not appropriate to speak in the same way of the fund as being a property of the company.

EDELMAN J: Even if one accepts all of that, assume for the moment that all of that is correct, once the property is realised into a particular fund which is still held on trust, why is it not the case that payment out of the property can be read to mean payment from the use of the power of exoneration – in other words, by taking the fund and discharging the liabilities?

MR WILLIAMS: Because, first, it is very unlikely that that is what was intended. It would have the effect of expanding the property of the company simply on the exercise of a right and making that property, otherwise held on trust for others, available to people who it would not otherwise have been available to and that is a large thing to read into words of the kind that we are discussing.

EDELMAN J: It would not necessarily be available to persons to whom it would otherwise be unavailable to because it may still be constrained by the terms of the indemnity subject to the additional imposition of the statutory priorities.

MR WILLIAMS: Yes. But I think once one makes that qualification or accepts that limitation one is back to where I am.

EDELMAN J: If it is then a question of intention, basically the whole question then becomes does one construe the intention behind section 433(3) and its cognates to have the result which you contend or the result for which the respondent contends and the respondent says that the history behind the provision is one where it would have been very unlikely to create a situation where a trading trust has such fundamentally different consequences from the operation of an ordinary company.

MR WILLIAMS: I do not seek to discern the intention of Parliament down to the particular example of the trading trust and it is a slippery slope, I suspect, if I was to try and embark on that proposition. But what I speak of is the words “out of” that your Honour focuses on in your earlier questions - that when one speaks of “out of the property” that might be read in such a way that it results in what is, in practical terms, an expansion of the property of the company for the purposes of section 433 by using those words because, in the example I posit, you have property of the company which is limited to that which it does not hold on trust

NETTLE J: You contend.

MR WILLIAMS: I contend - and I think for the purposes of this element of the argument his Honour Justice Edelman may be accepting that proposition – I may be wrong but I think his Honour was positing to me that there is a next stage which is that when one then exercises the right and one creates a fund, that fund can be said to have been created out of the right and that that might be sufficient for the purposes of section 433 to regard the fund itself

EDELMAN J: I think my question was even simpler than that. It was why the exercise of the right in simply in making a payment from a fund in discharging a liability cannot be seen to be a payment “out of the property”, in other words, a payment through the use of the right of exoneration.

MR WILLIAMS: It comes down to what one reads of “out of”. I mean, in the ordinary sense what these words are intended to do is to speak of a company has assets, those assets are realised and then out of that which is realised certain payments are made. Our difficulty of course is trying to apply those words, which were no doubt enacted with that general concept in mind to the particular which has arisen because of the way in which the trustee’s right of indemnity has come to be used as a mechanism to achieve that which would hitherto be thought to have been unachievable, which is a right for trust assets to be applied other than in accordance with the terms of the trust.

NETTLE J: You would be on pretty safe ground in bankruptcy because of 116 but you do not have the benefit of that in a windingup under Chapter 6, have you?

MR WILLIAMS: Not in express terms, but as his Honour Justice McPherson says in the article to which we have identified and referred to, he reads it as being there but not stated because to say otherwise leads to absurdity. So he reads the expression “the property of the company” as achieving the same outcome.

NETTLE J: Well, as Justice Gordon said to you, in the Corporations Act it is extraordinarily widely defined and there is no express exclusion of trust property as there is in bankruptcy.

MR WILLIAMS: No, I accept that, your Honour. The word “property” is widely defined in section 9. But the expression “property of the company” is not defined at all. So of course a wide definition of “property” would include an interest as bare trustee only.

NETTLE J: In bankruptcy the expression is “property of the bankrupt”. It was thought necessary to have an express exclusion. Here it is “property of the company” and there is no express exclusion. What is the difference?

MR WILLIAMS: The expressed exclusion is belts and braces. It is a different statute with a different antecedence and history.

NETTLE J: Except the Corporations Act surely you would say picked up all that had been done under bankruptcy.

MR WILLIAMS: Well, not quite to the same extent that it used to in explicit terms, but it still does to some extent rely on the same concept, certainly. But the alternative is highly unattractive, if I might respectfully say so, which is to regard, for example, all property held by the trustee - the trustee in its trustee capacity, even on a separate solvent trust, as being available for division because

KIEFEL CJ: Trust property is not under section 116, is it?

MR WILLIAMS: No, not on 116 in bankruptcy. But if one was to say, well, that is a relevant distinction between bankruptcy and corporate insolvency so that one applies section 9 of the Corporations Act and says, well, “property” is extraordinarily widely defined and “property of the company” therefore includes any property in the hands of the company, even as bare trustee, which I concede section 9 is perfectly capable of doing, then you would get a scenario where the company, which is trustee of a perfectly solvent trust, would have that trust’s assets potentially available to be applied to its other creditors.

GORDON J: Well, that is not right, is it? You have accepted I thought that the right was subject to an obligation to use the right of exoneration to pay trust creditors.

MR WILLIAMS: That is my proposition.

GORDON J: But that is not inconsistent with the definition of “property of the company” in section 9 being broad and picking up the fund subject to those same limitations, is it? That is in a sense where you – that is the point at which you are either right or wrong and where your argument either rises or falls. I think it is the last line in proposition number 9. The fund itself is either property of the company subject to the limitations caught by 433 and therefore subject to 433, or it is not. Is that – in reality that

MR WILLIAMS: It is going to come down to that, your Honour, and that is why there is a limit to probably how much I can seek to persuade the Court one way or the other, because it is going to come down to how you approach that question.

NETTLE J: Do you get anything out of section 553?

MR WILLIAMS: I have done in the past but I have decided it is not fresh in my mind, your Honour. I am happy

NETTLE J: Well, subject to the division the debt is payable - governed by the rules that apply in bankruptcy.

MR WILLIAMS: Yes. Yes, we do get something out of that, your Honour.

NETTLE J: Justice Needham in Byrne mused about it but did not give an answer. Does it mean that you bring across the same rule, that property of the company does not include property held on trust?

MR WILLIAMS: One might do it by bringing across the same rule as his Honour did, although his Honour of course was not followed in Suco Gold and so on and certainly not in Enhill. But we would say that his Honour’s analysis is appropriate. There are a number of ways you can achieve the same outcome. That which I advance is by regarding the words “property of the company” as meaning less than simply property which is in the hands of the company.

NETTLE J: Well, it could mean either, but if property of the company excludes property held on trust, you are much more likely to be right.

MR WILLIAMS: Yes, I accept that, your Honour.

KIEFEL CJ: Mr Williams, could I take you back to the nature and limitations on the right of exoneration which I understood to be at the heart of your submissions with respect to the operation of section 433(3).

MR WILLIAMS: Yes.

KIEFEL CJ: The right of exoneration has to be distinguished from rights that trust creditors might have to payment from the trustee.

MR WILLIAMS: Yes.

KIEFEL CJ: The right of exoneration is simply to distribute to discharge the liability to ensure that the trustee has no further personal liability to the trust creditors.

MR WILLIAMS: That is right.

KIEFEL CJ: It actually does not say anything, does it, about ranking or which creditor receives, about pari passu. That is another rule of trust law, which we might put over there.

MR WILLIAMS: Yes.

KIEFEL CJ: So if one regards the right of exoneration as limited in the way in which I have described and does not take account of creditors’ rights which trust law might impose, when it comes into the hands of the receiver, is it not simply the creditors’ rights which might follow from the right of exoneration which arise by subrogation are simply altered by section 433(3)? Trust law in relation to creditors does not operate at all. They are subrogated simply to whatever section 433(3) operates upon the right of exoneration.

MR WILLIAMS: I understand what your Honour is saying.

KIEFEL CJ: Why does it not operate like that? Why can it not? Would that not give a harmonious result and it would not then serve to distinguish trust estate - payments of liabilities to creditors under trust estates from the operation of section 433 from any other creditors?

MR WILLIAMS: Can I deal with the harmonious element of your Honour’s question first and observe that harmony in one area may create disharmony in another. It may create an apparent harmony between the windingup of a trustee and the windingup of a nontrustee corporate entity.

KIEFEL CJ: That is perhaps a more abstract question but if one focuses upon what you say is the nature and limits of the right of exoneration qua trustee and if that is what the receiver - what comes into the hands of the receiver, why does not section 433 simply operate upon that to require that the payments then made in exercise of that right are altered, that is to say, the right of exoneration does not contemplate any other rule. It is limited to what saves the trustee from personal liability. It is not interested in what the trust law might otherwise apply. That simply applies when there is nothing else to guide the trustee as to what to pay, but now there is. Section 433(3) says this is what you do when you are exercising your right of exoneration.

MR WILLIAMS: One element that needs to be borne into this analysis is that the right exists not just for the current trustee, but for a former trustee. So that you might have a former trustee which incurred a debt or debts, and that the assets might now be in the hands of a current trustee; and the former trustee has a right of exoneration as well, and it has an entitlement to have trust assets applied. Its rights would, in those circumstances, not necessarily be caught by section 433 at all. It might never have given a charge to anybody. It might not be insolvent.

NETTLE J: But it would be caught by 556 in insolvency, so we are in the same position.

MR WILLIAMS: If it is insolvent.

GAGELER J: That is not really an answer to the Chief Justice’s question

MR WILLIAMS: It is not a full answer.

GAGELER J: which is focusing on, really, where is the conflict between compliance with the statute and exercise of the right?

MR WILLIAMS: Yes.

GAGELER J: Where does it lie?

MR WILLIAMS: The conflict arises, to deal with that question more directly, in regarding the receivers as free to exercise the right as if it was not constrained by the law applying to trustees. Now, her Honour’s question is, well, section 433

KIEFEL CJ: It says the law - the effect of 433(3) is that the law of trusts does not apply in that respect. But that is not to alter the nature of the right of exoneration; that is the point. The very point you were trying to make before was, your argument seems to hinge on the fact that section 433(3) somehow alters the nature of the right of exoneration. Well, it might not.

MR WILLIAMS: Not that it alters it, but that it can only act on the right as it exists.

KIEFEL CJ: Well, in the way in which Justice Edelman has put to you earlier, that it acts upon it by saying it may be utilised to draw upon trust assets to pay out in accordance with the statute.

MR WILLIAMS: But paying out in accordance with the statute may, in some circumstances, involve paying people who are not creditors to the relevant trust.

KIEFEL CJ: We are only concerned at this point, I think, in the argument, with trust creditors. That is for later I think. And that means whether or not we get into – whether the Victorian Court of Appeal was right to go down one path and not the other, in relation to general creditors.

MR WILLIAMS: Yes. So, in one sense I have the same answer to everything and I apologise for that but it is the fact of the nature of the case.

KIEFEL CJ: It might be less adaptable.

MR WILLIAMS: It depends on whether you think it is any good or not, I suppose. The answer that I offer

KIEFEL CJ: It answers all questions. Is that what you are saying, Mr Williams?

MR WILLIAMS: It is what I am saying. You may think otherwise, but hopefully you will agree with me. The answer I offer is that the contents of the right are application to that in respect of which the right has arisen.

NETTLE J: The answer is that the right of exoneration can never result in a fund. It must result in payment to the trust creditor or nothing else.

MR WILLIAMS: Yes.

NETTLE J: That is why you join them.

MR WILLIAMS: It might not be all trust creditors. It might be particular trust creditors in respect of which the right exists.

NETTLE J: So you do not finish up with a fund, is the answer.

MR WILLIAMS: Yes, that is exactly it.

NETTLE J: You just finish up with a right which can only be exploited for the benefit of its creditor to which it exists to answer.

MR WILLIAMS: That is right and if that is right then holding the right does not give rise to anything that is divisible.

GAGELER J: What if the trust itself was insolvent? How does the right work in those circumstances?

MR WILLIAMS: It works in exactly the same way because the trust

GAGELER J: But not all creditors can be paid.

MR WILLIAMS: No.

GAGELER J: Severally as put to you by Justice Nettle.

MR WILLIAMS: No, that is right. Ordinarily, the answer would be, apply to the Court for some form of direction as to how to deal with the insolvent trust estate and the answer will almost always be distribute it pari passu amongst the creditors.

NETTLE J: Why not in accordance with 556 in the way the Chief Justice suggested to you – as between the trust creditors?

MR WILLIAMS: Because that asks 556 or 433 to do more than they do.

NETTLE J: What it says is it applies to the order on which you pay creditors. Everyone is a trust creditor. Why would it not be taken as altering, to some degree, the order of priority as between trust creditors?

MR WILLIAMS: Because it applies to the priority out of property of the company and again we come back to what is that property of the company. It is no more than a right of application – a right of application of trust assets in a particular way and if that is borne steadily in mind

EDELMAN J: Come back to “pay out of” does not mean “pay by the use of”.

MR WILLIAMS: Yes.

BELL J: The Commonwealth contends that your argument in this respect involves what it describes as category error and in paragraph 19 in its submissions it suggests that the error is treating the right of indemnity as a proprietary right that is separate in some way from the assets to which it relates and the argument there depends on paragraph 48 in Buckle and what is your response to that?

MR WILLIAMS: We do treat it as separate and that is right. What is said in paragraph 48 of Buckle does not change that. To go back and take that in stages – I am sorry, I am jumping too quickly. The categorisation error is not an error. I think everyone seems to accept, certainly the Commonwealth accepts, we accept, and all of the judges along the way accepted that the right of indemnity is the asset – the relevant asset of the company that we are looking at that has fallen into the hands of the receivers. So it is not a category error to seek to distinguish that from the assets to which it applies. It is actually a proper characterisation or categorisation to separate the one from the other.

If one then says, well, do you use Buckle to say that the one finishes up merging with the other, one should not read too much into the last sentence of Buckle and paragraph 48 without reading the whole of the sentence. The sentence that was from the plurality judgment in that case that is being referred to is that starting immediately after footnote (63) where it is said:

To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not “trust assets” or “trust property” -

Our learned friend, I think, would like us to stop there. The Court did not:

in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries –

and the footnote is to Octavo.

GORDON J: Yes, but 49 goes on citing Lord Justice Lindley to explain that the trustee has:

an “interest in the trust property [which] amounts to a proprietary interest” –

and that is the proprietary interest which is being treated as property of the company which is then converted here as we have done on the exercise into a fund.

MR WILLIAMS: Yes, but to call it a proprietary interest is to run the risk of using labels to obscure the full force and effect of that which exists. Not every proprietary

GORDON J: So that is meant to mean that one has to take it subject to the way in which Chief Justice Allsop identified, that is, it is, in effect, subject to the limitations and conditions that the Chief Justice put to you then that is to be accepted but that does not change the underlying nature and character of the interest, does it?

MR WILLIAMS: No, it does not. Those underlying characteristics and the nature include a limitation and the limitation is it is a right which is purely able to be exercised so as to achieve a particular outcome, namely, the application of the trust assets to meet the relevant trust liability. It is not a right that enables anything else.

KIEFEL J: With respect, you do not seem to be dealing with the separation of these concepts - what is the right of exoneration and what trusts law requires when that is put into effect and applied. The two are distinct, are they not?

MR WILLIAMS: Yes, they are.

KIEFEL CJ: When you are talking about the rights of creditors of subrogation to the rights of the trustee to exoneration you are talking about whatever it is that operates upon the right of exoneration when it is applied.

MR WILLIAMS: Yes.

KIEFEL CJ: So that could be trust law or it could, where statute puts trust law aside because of its requirements, be section 433.

MR WILLIAMS: If it does, although there is certainly nothing in the language of 433 expressly which says it puts trust law aside.

KIEFEL CJ: What is wrong with that analysis, Mr Williams?

MR WILLIAMS: It does have the effect of putting trust law aside in a way that

KIEFEL CJ: Statutes often do that.

MR WILLIAMS: But they do it expressly.

KIEFEL CJ: It has said what the order of priorities shall be.

MR WILLIAMS: But what it does not say is that that overrides any trust obligation or any trust principle.

KIEFEL CJ: Implicitly it must, must it not, because on your scenario you have the right of exoneration as a proprietary interest coming to the hands of the receiver?

MR WILLIAMS: Yes.

KIEFEL CJ: You have section 433, which says any property right, even if it is one which is a pure right of exercise of drawing on trust funds, must be exercised this way. On your argument, the right of exoneration is stymied; it cannot operate. Trust law could not operate in the face of section 433. So the right of exoneration is now property in the hands of the receiver which cannot be utilised.

MR WILLIAMS: I would respectfully say that trust law can operate perfectly well alongside section 433 as long as 433 is not read in the way that

KIEFEL CJ: Only if it is an exception and that is not exactly a harmonious operation, is it?

MR WILLIAMS: Harmony also extends to harmony in the operation of trusts. To approach the matter in that way would lead to a most unharmonious situation where the circumstances of a trust will be different in its insolvency depending on whether the trustee was personal or corporate which is also more than disharmonious. It is going to create all sorts of unseen questions.

GORDON J: There are two ways of looking at that and I think Justice Edelman raised this with you and that is it is unfortunate if you have a corporate entity conducting a business and employees do not know whether they are corporate entities acting as trustee or not and if it is not it gets a different result. So it cuts both ways.

MR WILLIAMS: There are lots of unfortunate possibilities whichever way we go.

GORDON J: Correct.

MR WILLIAMS: It is an area which certainly calls, we would say, for specific legislation if the legislature wanted to impact the law of trusts in the way that we would say is being sought to be done by reading section 433 so as to do more than it really does. Of course, our characterisation is you might say, “I would say that, wouldn’t I” and yes, I would. But that is the choice which is being made here.

GORDON J: It may very well explain the choice made by Chief Justice Allsop in Jones v Matrix.

MR WILLIAMS: It may.

GORDON J: In a sense especially where there are multiple trusts in the way he identifies at paragraph 108, in the sense that there may be separate funds for each of the relevant trusts, allocation in accordance with section 433 for each of them and then general directions for allocation of what I will call common costs or other costs across the funds in the way you would in the liquidation.

MR WILLIAMS: One can certainly see a more than respectable argument for why what his Honour did in that respect and proposed in that respect was a just outcome.

GORDON J: Well, it is just in a sense that it recognises, as you would have us, the importance of allocation of the fund or the application of the right to the trust creditors, at the same time recognising the proper operation of section 433 and the payment of the employees first.

MR WILLIAMS: In my respectful submission though, what his Honour did does not derive from section 433 at all, which is not expressed in a way that it could possibly operate that way. So, while one can see why his Honour

GORDON J: I think you and I have discussed you are driven back to what is “property of the company”.

MR WILLIAMS: Yes, we are. It is my “one size fits all” answer, I think, for the purposes of this morning.

GAGELER J: Perhaps this is just going over a question that you have already answered, but is it essential to your argument that the right of exoneration has as an instant that trust creditors rank pari passu in the event of the insolvency of the trust?

MR WILLIAMS: No, it is not essential because for the reasons I perhaps have not focused on sufficiently there is also the question of the right of exoneration insofar as it applies to particular trust debts so that one could, for example, have a trustee which incurred some trust debts in circumstances which would not entitle it to exoneration, but they might still be debts incurred in its trustee capacity. That could arise in lots of different ways. It could arise in relation to its having not conducted itself adequately in the incurring of the debt. It might arise by agreement with a beneficiary.

GORDON J: But is that not answered by the fact that when the trustee applies - and here it would be the insolvent entity applying, the liquidator or the receiver – for sale of trust assets one ordinarily applies in respect of the sale for the payment of particular debts, so there is an allocation at that point, a specificity. You are entitled to sell and have access to these trust assets for the sale to meet these trust debts. It is at that point the assessment is made as to whether or not the trust deed is one that is going to be met by reference to the right of exoneration.

MR WILLIAMS: But it cannot be met by reference to section 433, is my point.

GORDON J: No, we are dealing with – I am trying to address this idea that there is some difficulty where there are trust creditors that are not to be met out of a right of exoneration. That is addressed at the time the application is made for the sale of the asset, is it not?

MR WILLIAMS: Yes, and that is all the more reason, in my respectful submission, why one would not regard the sale of all of the assets as being susceptible to the section 433 priorities. There are trust questions which need to be determined.

GORDON J: But they are determined before the application of 433 in its terms, are they not?

MR WILLIAMS: Yes, but if one approaches it by applying the relevant trust principles before section 433 is applied, the answer is that by the time you apply section 433 there is actually nothing left.

NETTLE J: Can I just come back to Justice Gageler’s question because it is relevant to the point. If it were simply a case of a trust of which the only creditors were trust creditors and of which the trustee was corporate and was insolvent and being would up, would the order of priority of payment be governed by 556 or would it necessarily be pari passu?

MR WILLIAMS: It would necessarily be pari passu.

NETTLE J: And why is that so?

MR WILLIAMS: It is so because the right of indemnity has to be applied so as to cause – because that is the only thing that it is, it has to be applied so as to cause the assets to be applied to the liabilities. That is the step which is the exercise of the right. You cannot stop exercising the right halfway through at the point of realisation. To exercise the right of indemnity is to exercise all of it.

NETTLE J: Unless the statute says so, and you contend it does not, or unless equity follows the statute by analogy, as I think was considered in Matrix.

MR WILLIAMS: Yes, but which is not presently advanced, as I read it.

NETTLE J: It does not matter whether it is advanced or not. Why could equity not follow it by analogy in the way that was suggested in that case?

MR WILLIAMS: Well, it could do and in an appropriate case it might do but that would not be the present question. That would be the question of what would a judge faced with a trustee summons do in giving directions to the trustee, and it might be a rather factintensive inquiry.

NETTLE J: Well, then you would inquire under 433 as to the obligation of the receiver to pay out employee entitlements which would have ranked in priority in windingup - surely it is directly relevant?

MR WILLIAMS: Yes. But there may be a factintensive inquiry in a particular case as to what directions should be given.

NETTLE J: If the 556 order of priority would apply in the windingup situation I put to you, then presumably it would also apply under 443 to the obligation of the receiver to pay out to the employee entitlements.

MR WILLIAMS: I accept that it would be the same.

NETTLE J: That therefore you insist that it must always be pari passu?

MR WILLIAMS: Yes.

NETTLE J: It cannot be taken as having been altered by the statute?

MR WILLIAMS: That is right. But for me it is a timing matter. That is the way that I put it to the Court - is that when you look at the exercise of the right to give rise to that which is to be distributed, the exercise of the right has a number of stages. The realisation stage is not actually the exercise of the right, it is ancillary. The exercise of the right is the application. Once you have exercised the right there is nothing left; and that is true under 556 as it is under 433, and however you approach it.

NETTLE J: So it must always be pari passu unless equity, by analogy, follows the statute?

MR WILLIAMS: Yes.

NETTLE J: Is there any reason why equity should not, by analogy, follow the statute in the way suggested?

MR WILLIAMS: I think I too quickly agreed with the last few words of your Honour’s question, “unless equity follows the statute”. Equity need not follow the statute and should not follow the statute if that involves altering the trust obligation of the trustee.

NETTLE J: Well, not really. I mean, ordinarily when there is a shortfall in trust assets equity divides them up pari passu on the basis that it is thought to be the most equitable.

MR WILLIAMS: Yes.

NETTLE J: But why should equity not, in a case like this, by analogy, follow the statute as it sometimes does in other areas?

KIEFEL CJ: Perhaps you can think about that while we have our

MR WILLIAMS: I am sorry, yes, of course.

KIEFEL CJ: The Court will adjourn for 15 minutes.

AT 11.19 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.35 AM:

KIEFEL CJ: Subject to completing any answer, are we up to the second aspect of your submissions, the circulating asset question?

MR WILLIAMS: Yes, your Honour. But I feel I owe Justice Nettle an answer to his question about equity following the law.

KIEFEL CJ: Yes, of course.

MR WILLIAMS: The difficulty in having equity follow the statutory priority in section 433 in that respect is that to do so would create disharmony within equity between how the assets of an insolvent trustee of which the trustee was corporate would be dealt with, as opposed to insolvent trust where the trustee was personal. If section 433 is the source of the obligation, then it would give rise to potentially inequitable results and difficulties inasmuch as there may be an incentive to conduct changes of trustee, perhaps at the last minute, so as to achieve one or the other results.

One advantage of that which I contend for, which is that all of this is dealt with by the pari passu principle before there is anything on which section 433 can operate, is that the answer will therefore be the same no matter who the trustee is. Now, if that was not so and, for example, someone who wished to ensure that creditors were advantaged but the trustee was personal might be encouraged to conduct a lastminute change of trustee to the extent that it was within that person’s control – they may be the appointor under a classic discretionary trust scenario, might be encouraged to substitute a corporate trustee for the personal trustee.

On the other hand, somebody who wanted to ensure that employees did not obtain that priority but the trustee was corporate might be encouraged to do the reverse. So, ordinarily, one would expect the principles of equity to apply equally to trusts and to be blind to the identity of the trustee.

If equity is applied in such a way that the identity of the trustee and, in particular, the corporate or personal characteristic of the trustee becomes determinative, and in my respectful submission equity presents a problem and is presented with a problem which it would not resolve in the way that your Honour Justice Nettle suggests of simply following the law that applies to the windingup of a corporate nontrustee, but it would apply equitable principle harmoniously and universally as it applies to all trusts and would apply the longstanding pari passu principle rather than create a circumstance where trading in the identity of the trustee, if that is an expression, might become the norm. So that is what I would say about equity following the law in that respect.

EDELMAN J: Sorry, just before you move on

MR WILLIAMS: Yes, certainly.

EDELMAN J: why would not equity follow the law in relation to personal trustees as well?

MR WILLIAMS: The law is different in relation to personal trustees. That is the difficulty. Personal trustees do not have the priority provided by 433.

EDELMAN J: By why would not equity, by analogy, apply the priorities of 433 to personal trustees if it were doing so by analogy for corporate trustees?

MR WILLIAMS: You have an analogy on an analogy, in a sense. If, for example, a trustee was personal – it had always been personal – and so that there was never any suggestion that if that person became insolvent and was not a trustee there would be any priority in respect of their debts, then equity would not be following the law if it applied – not the Bankruptcy Act but the Corporations Act – to the windingup of that person insofar as they were trustee. The law that would apply to that person at bankruptcy does not include 433 or 556. In following the law, equity would follow, presumably, that law. So, that is the way I would approach that.

May I move then on to the second part and might I say that although the Court has allocated two days for this hearing and my learned friend and I have agreed on how we would allocate the two days if we felt that we need all of it – we do not.

KIEFEL CJ: The Court did not ever allocate the whole of two days anyway. The idea was that with the receivers also making submissions it might go into a second day.

MR WILLIAMS: Yes.

KIEFEL CJ: There is no way that this case is going two days.

MR WILLIAMS: No, and I was about to say that I do not intend to spend terribly long on the second point.

KIEFEL CJ: I would have thought we would finish today. Is there any disagreement with that?

MR MOORE: No, your Honour.

MR WILLIAMS: We will do our very best.

KIEFEL CJ: Thank you. So the second point I can deal with, I think, more briefly in any event. It does not present the same conceptual challenges as the first but it is nonetheless an important and complex one in its own way.

GORDON J: Does it arise?

MR WILLIAMS: Yes, we say that it does.

GORDON J: In the sense that if 433 applies, then here the receiver had a circulating security interest by reference to the debenture, did it not?

MR WILLIAMS: Yes, it does, in some property, but not, we would say, in the right of indemnity.

GORDON J: But it is that necessary element of the analysis?

MR WILLIAMS: Yes.

KIEFEL CJ: Section 433(2)(a) is not express to refer to particular property, is it? You are focused on subsection (3) but subsection (2)(a) simply requires that a receiver is appointed on behalf of the holders of debentures that are secured by a circulating security interest.

MR WILLIAMS: Yes.

KIEFEL CJ: Here the general security deed.

MR WILLIAMS: Yes, but it is subsection (3) which determines what the receiver is then to do.

KIEFEL CJ: Yes, but subsection (2) is determinative of when the section applies and it is satisfied, is it not?

MR WILLIAMS: It is satisfied in this case inasmuch as there was a receiver who was appointed and took possession of some property. What we say is that the property of which he took possession pursuant to a circulating security interest did not include the right of indemnity and this is of course in the alternative to all of the submissions that I made in respect of the first set of grounds.

GORDON J: I am sorry; I am a bit lost, Mr Williams. I had understood section 433(2) to have two pathways of operation. The first pathway is where a receiver is appointed on behalf of the holders of debenture secured by a circulating security interest.

MR WILLIAMS: Yes.

GORDON J: That is satisfied here?

MR WILLIAMS: Yes.

GORDON J: Is that not the end of it?

MR WILLIAMS: No, because we say that when you then read it in the context of what happens then with (3) that there is a limitation, perhaps an implied limitation in (3), that the property coming into his or her hands means property coming into his or her hands pursuant to the circulating security interest, not otherwise.

EDELMAN J: In other words, it has to be the circulating assets.

MR WILLIAMS: Yes.

EDELMAN J: Then you say that the right of exoneration is not a circulating asset.

MR WILLIAMS: We do.

EDELMAN J: Despite the breadth of the terms of the security deed.

MR WILLIAMS: Yes. Well, we accept the security deed is expressed in very wide terms and it includes the power to take control directly of trust assets. The receiver does not need the right of indemnity and did not need it and has not at least expressly, as far as we know, purported to exercise it. There is absolutely no reason to do so because the charge extends to all the property held on trust or otherwise, a point our friends make with which we agree, and the receivers took control of all of the property. But the question is what is subsection (3) directed to?

Subsection (3) is directed not to the whole of the property of the company taken control of by the receivers but to that part of it which is circulating. So the fact that a receiver, for example, takes possession of $1 in a cash bank account and otherwise a whole bunch of fixed assets does not give employee creditor priority in relation to all of the fixed assets. It has never been suggested that it does and it would be contrary to principle that it should do so. That is not what subsection (3) does.

Subsection (3) focuses on how that which is circulating and to which the relevant interest is attached is to be divided up. It is to prevent the priority creditors from missing out from assets which are literally circulating or revolving, or being used and changed and modified from day to day in the ordinary course of the company’s business. The purpose of section 433 and indeed its operation is not to give them priority in relation to other assets.

To read subsection (3) as if it meant all of the property of the company, notwithstanding its apparently broad expression in using those words, is to overlook the relationship between (3) and (2) and overlook the purpose of the provision, which is to provide for priority in relation to circulating assets only.

EDELMAN J: Why do you say that the power or the right of exoneration is not a circulating asset within the definitions of “collateral”, “security interest” and “personal property” on page 151 of the further materials?

MR WILLIAMS: Page 151 of the further materials, your Honour?

EDELMAN J: Yes. They are the definitions in contest, are they not?

MR WILLIAMS: The definitions in contest are really those that arise out of section 340 of the PPSA.

EDELMAN J: Yes. But your submission is that under the security deed, as I understand it, the security deed does not pick up the right of exoneration.

MR WILLIAMS: No, that is not my submission.

EDELMAN J: You accept that it does?

MR WILLIAMS: My submission is that it is perfectly capable of doing so.

EDELMAN J: I see.

MR WILLIAMS: But that it does so not by the – but that at the time that it does so and indeed at any time, the right of exoneration, or the right of indemnity more broadly, is not a circulating asset.

EDELMAN J: And why not?

MR WILLIAMS: It is not a circulating asset because it does not satisfy the test, and I need to spend a little bit of time doing that, if I might do so. I am dealing at the moment with the threshold question which has been posed by her Honour the Chief Justice and her Honour Justice Gordon in particular, as to whether we even get to that point, and I have tried to deal with that proposition as best I can by pointing to the relationship between subsections (2) and (3) and to the necessarily implied limitation on the operation of subsection (3) that it does not apply to what might under the old language have been called a fixed asset.

So, to deal with the question of the application of the definition, it is necessary to start I think with section 51 of the Corporations Act. In our bundle you will find that at page 79 of volume 1 of the authorities, or your Honours may have your own copies. The definition of “PPSA security interest” is necessary for an understanding of what then happens in section 51C:

PPSA security interest . . . means a security interest within the meaning of the Personal Property Securities Act 2009 and to which that Act applies -

with an irrelevant exception of transitional security interest, and no one is suggesting that exception applies here. But to be a PPSA security interest, it has to be a security interest within the meaning of the PPSA. Why does that matter? Because of section 51C which is on the next page of the extracts that we have in volume 1, because a circulating security interest, which gets us to the expression that we need for the purpose of section 433:

circulating security interest means a security interest that is –

and then there are two alternatives. Can I start by eliminating the second alternative because it is not said that there is a floating charge. Floating charges do not exist any more. That is to pick up historical possibilities and reliance is not placed on the floating charge element. So the question is, does (a) apply:

a PPSA security interest, if:

(i) the security interest has attached to a circulating asset within the meaning of the Personal Property Securities Act 2009; and

(ii) the grantor . . . has title –

No problem with the second; clearly there is title. The grantor here is Amerind. It had title to the right of indemnity so that is not a problem. The question is is the right of indemnity a circulating asset? If it is not a circulating asset then there will not be a circulating security interest in relation to it.

So, as I said, what is a circulating asset as (i) explains, you have to work out what that means for the purposes of the Personal Property Securities Act 2009. So that takes us to the PPSA and what that Act says about circulating assets. “Circulating assets” is defined in the dictionary to the Act as being - it means relevantly an asset – correction, attention is directed to the operation of section 340 so that arises from section 10 and on page 169 of our extract:

circulating asset has the meaning given by section 340.

Then when we go to section 340 we find a structure which commences with a general definition – and I am now on page 219 of volume 1 of the book of authorities. It says in subsection (1):

For the purposes of this Act, if a grantor grants a security interest in personal property to a secured party, the personal property is a circulating asset if –

and, again, there is an (a) and a (b). Can I start by eliminating (b), which I can do fairly briefly:

the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor’s business, free of the security interest.

Now, here the personal property we are talking about is the trustee’s right of indemnity. I think it would be very difficult to suggest that either expressly or by implication the secured creditor here, the bank, could be said to have given authority to the trustee to alienate from itself the right of indemnity. So (b) simply does not arise. We are confined to (a) and (a) says it is a circulating asset if:

the personal property is covered by subsection (5) (unless subsection (2) or (3) applies)

Now, subsections (2) and (3) I can say very briefly, I think, because I do not think this is in contest, do not apply because subsection (2) would require the secured party to have control of the relevant personal property, never any suggestion here that the bank had control of the right of indemnity and subsection (3) requires that the relevant personal property to have been goods. So neither subsection (2) nor subsection (3) is engaged so we are going back to (1)(a) we can ignore unless subsection (2) or (3) applies.

We are simply taken to what amounts therefore to a code of whether something is a circulating asset and that is, is it covered by subsection (5)? So we go to subsection (5) on the next page and it identifies six types of personal property, mainly conscious of the fact that it is a subsection that does work for the purposes of other sections which refer to it. It is simply introduced by the following words:

This subsection covers the following personal property –

and then it identifies them. So it really is a very simple matter for saying is this any of those six items. We say it is impossible to shoehorn the trustee’s right of indemnity into any of those items. We are aware that at an earlier stage of the proceedings, the Commonwealth contended that (a) was engaged by reason of it being said that the right gave rise to an account, but that argument is no longer pressed and we would say rightly so. Once one gets that, then one has no qualification as a circulating asset.

Although I have had to take the Court through a number of steps to get there the answer seems beyond any real argument that the trustee’s right of indemnity is not a circulating asset. If it is not a circulating asset, then working back through the same procedure we just followed, it follows that you cannot have a circulating security interest in relation to it and we would say that means that you cannot then apply a modern language of section 433 as it now exists post the enactment of the PPSA to the right of indemnity.

It is not an asset which is subject to the circulating security interest that would bring it within the operation of section 433(3) and for the reasons I enunciated earlier in response to questions from the Chief Justice and Justice Gordon, we say that is necessary. It is not just any asset that has to be dealt with pursuant to section 433, it is only assets which are subject to the circulating security interest. That is a necessary implied limitation on the words, the alternative to which would create absurdity.

GAGELER J: If we separate the right of exoneration from the fund to which it attaches, is the fund property coming into the hands of the receiver, within the meaning of section 433(3) in your submission?

MR WILLIAMS: No, because of the limitation that I just mentioned. Whilst if one just looked at those words absent their context, one might say yes; one might say every asset of the company comes into the hands of the receiver - the fund, a piece of real property, some other asset held on trust, everything. That is not the way 433(3) is intended to operate. Intended to operate (a) in respect of that property which comes into the hands of the receiver by reason of being subject to a circulating security interest which the receivers have then come into possession of and if that is right, and we say it is, then the result is that section 433(3) cannot be engaged in relation to the right of indemnity.

EDELMAN J: Why? Why does the right of indemnity not fall within 340(2)(b)? In other words, is that because you read 340(2)(b) as applying only to those circulating assets, or only that personal property that the secured party itself has exercised control over or only that personal property which a receiver has actually exercised control over, rather than is able to exercise control over?

MR WILLIAMS: That is a neat question, if I might say so, and can I just have a moment to contemplate it and make sure I answer it correctly? Just give me a second. The subsection is not engaged at the point of receiver appointment; it has to be engaged at an earlier point, because of the registration element. So that subsection (2) requires two things, a registration which includes disclosing in the registration:

that the secured party has control of the personal property; and

(b) the secured party has control of the personal property.

I admit, because I ran through it perhaps too quickly, I did not focus sufficiently on the first element, but it is there.

EDELMAN J: That is the first element, it is (a) that fails, not (b)?

MR WILLIAMS: Yes. Well, (a) certainly fails and (b) probably fails as well.

EDELMAN J: I see.

MR WILLIAMS: I accept your Honour’s proposition that if it was assessed at the time of the receiver having taken control it might not fail and so that would lead to an interesting question if (a) did not exist as to what time does (b) fall to be assessed but it does not matter because of (a).

EDELMAN J: Yes.

KIEFEL CJ: Speaking for myself, Mr Williams, I really do not understand why we are in the realms of section 433(3) and seem to be ignoring the express terms of subsection (2) which describe the nature of a security interest as enlivening the application of the section. Subsection (3) then operates in its terms in relation to property which comes into the hands – the reference there to the nature of the property is that which is subject to the requirement of priorities, but the section comes into operation under subsection (2), does it not, by reference to the nature of the security not the property over which or the interest that the grantor holds in the property, which I think is the argument put by the Commonwealth.

MR WILLIAMS: Yes. We say there are two stages to the inquiry. There is the subsection (2) stage which asks has there been an appointment or a taking of possession which means that 433 has operation in relation to the company? Then as a second stage which says if that is right, then some property of the company falls to be distributed pursuant to the priorities in section 433.

KIEFEL CJ: Subsection (2) says the section applies if there is a security interest of a particular nature and you accept that is satisfied here.

MR WILLIAMS: Yes.

KIEFEL CJ: Then it says if there is a taking of a possession or control, and you accept that that has occurred, it follows that the section applies, does it not? It is as simple as that.

MR WILLIAMS: Subsection (2), yes. We say subsection (2) is engaged.

KIEFEL CJ: Is satisfied. Well, according to it the section applies.

MR WILLIAMS: Yes, but then the question is what does it apply to? So that if there were other assets not including the right of indemnity, which were circulating assets which were taken control of the company in its own right had a bank account, for example, or traded its own private business and had stock, classic circulating assets – you would then go to those assets and you would sell them and apply their proceeds in accordance with the priorities in subsection (3). Subsection (3) does not speak of all of the assets of the company, even though it is expressed in wide language.

EDELMAN J: Why would it use the words “property of the company” instead of “circulating security interests” – sorry “circulating assets”?

MR WILLIAMS: The answer is probably to refer back to the original qualifications in subsection (2) that are focused on property of the company. But why things are drafted a particular way is often something that I am unable to assist on. One does one’s best to imagine that things were drafted with particular ideas in mind.

EDELMAN J: Yes, but if one wanted to refer back specifically to those qualifications in (2), then the words that would have been used would be “circulating assets”, would they not? But you say the “property of the company” has the same functional effect.

MR WILLIAMS: Yes. The property coming into his, her or its hands is also a nod back to language in (2)(a).

KIEFEL CJ: But 2(a) only requires that possession or control is assumed of any property comprised in or subject to the circulating security interest.

MR WILLIAMS: Yes.

KIEFEL CJ: That is the floating charge here.

MR WILLIAMS: Yes.

KIEFEL CJ: So, as soon as any property is taken in control – it does not have to be this property – any property – the section comes into effect. Then you look to how subsection (3) operates. But you do not use subsection (3) to add to or limit the application of the section under subsection (2) which seems to be what you are doing.

MR WILLIAMS: It does not limit the operation of subsection (2) in the sense of negativing its operation if it otherwise applies.

GORDON J: It says “any” in (2).

MR WILLIAMS: Yes.

GORDON J: Then (3) operates because (2) is the gateway because what it is saying is you may be the secured lender – you may be in a dollar – but you are not to do anything with that dollar at all until you have met the priority set out in subsection (3).

MR WILLIAMS: Yes. With that dollar, we agree. But it is with anything else that you might come into possession of is the issue.

GORDON J: The point is, though, it demonstrates what the purpose of (2) and (3) is in the structure.

MR WILLIAMS: Yes, and, with respect, I agree with that and adopt it in this way. What it is intended to do is say to the secured lender you cannot deal with the assets that you get hold of pursuant to your circulating security interests, the floating element of the former fixed and floating charge, until you have met the obligations to priority creditors.

GORDON J: Did that happen here, by the way – just at a factual level?

MR WILLIAMS: To some extent, yes, it has. There is now a fund – although it has been eaten up by me speaking.

GORDON J: No, no – were the secured creditors paid out first or was the fund kept back?

MR WILLIAMS: Yes, the secured creditors have been paid out.

GORDON J: That is contrary to 433 and 561.

MR WILLIAMS: There were fixed assets sufficient to pay out the secured creditor.

GORDON J: Does that answer my question? So, on the assumption

MR WILLIAMS: It answers the question

GORDON J: Sorry, on the assumption that 433 operates contrary to the argument you have put, the paying out of the secured lender was contrary to 433 and 561.

MR WILLIAMS: On the argument I put, it was not.

GORDON J: No, I said if you are wrong about your argument.

MR WILLIAMS: If I am wrong about it, then it would have been.

NETTLE J: This section only applies to floating charges and always did, did it not?

MR WILLIAMS: Yes, and the floating element – the fixed and floating charges, your Honour.

NETTLE J: Yes. It has changed the language because of the PPSA introduction

MR WILLIAMS: They have and they have not done a fabulous job of it, if one might respectfully say so.

NETTLE J: What it used to say is that if you took assets – the subject of a floating charge – before you did anything else with them you had to make the priority payments.

MR WILLIAMS: Yes.

NETTLE J: And it is pretty much the same now except for the language that has been layered on top of it.

MR WILLIAMS: That is exactly what I propose. The point that I make is that it therefore, change in language notwithstanding

NETTLE J: So you are entitled to take the fixed assets and give them to the bank and the stuff that is the subject of the floater is in the bank waiting to be disposed of in accordance with the ruling. Is that it?

MR WILLIAMS: That is right, and if the bank does not take the fixed assets, then they just fall to be dealt with as ordinary assets of the company, not subject to the priority regime.

NETTLE J: Yes.

MR WILLIAMS: If it was otherwise, then by infelicitous language a massive and extraordinary change was worked to everyone’s understanding, including evidently these liquidators, of the application of the section to that element of the property taken possession of which was not floating or subject to a floating charge.

NETTLE J: Yes. There is enough there to answer the call if you lose the principal argument on the meaning of 433 and the right of indemnity and the nature of it, is there not?

GORDON J: To pay the employee.

MR WILLIAMS: I do not know.

NETTLE J: There is some in the fund to pay the employees.

MR WILLIAMS: Or in this case to repay the Commonwealth for having paid the employees but I accept that the proposition is the same.

NETTLE J: I understand.

GORDON J: If you have finished your arguments, I want to ask one other factual question. Here under the trust deed it contained a provision that said if the trustee went into liquidation it would retire. Did that happen here?

MR WILLIAMS: I do not know. As your Honour would know, that is a very common provision of trust deeds but it probably does not change anything because of the proposition I advanced earlier about former trustees also having a right of indemnity including a right of exoneration. What it might mean is that at present you have a trust of which the company is no longer the trustee and in respect of which the receivers are in practical control of its operation, but the right of exoneration that we are talking about is actually the right of exoneration of a former trustee.

Perhaps your Honour might have identified something I could have advanced earlier in support of Part 1 of my submissions. Perhaps that is an additional reason why it is risky and problematic to seek to take the right of indemnity out of its trust context and try to deal with it as if it was a corporate asset in the insolvent company. It does have a right of indemnity but it has a right of indemnity out of assets which it no longer holds.

EDELMAN J: Logically, this second proposition really comes first, does it not?

MR WILLIAMS: I accept that. The first one is more interesting, and that is why we put it first.

BELL J: Mr Williams, has the second proposition undergone some change since the notice of appeal was drafted? As I understood in answer to the question that the Chief Justice put to you a few minutes ago you do not cavil with the fact that 433(2) was answered according to its terms.

MR WILLIAMS: Yes.

BELL J: But when I look at your notice of appeal the complaint at appeal book 300, in subparagraph c, is the asserted error in the Court of Appeal’s holding within the meaning of 433(2)(a). Now, that is not a point – in the way the argument has developed, that is not in fact your contention, is it?

MR WILLIAMS: No, it is probably not, your Honour. I accept that.

BELL J: Similarly, when you drop down to d.iv, that is not your contention. The argument is, while the terms of 433(2)(a) were met

MR WILLIAMS: Sorry, I have just misplaced my notice of appeal, your Honour. It would help me a great deal in answering your Honour’s questions if I had it handy. I am sorry, your Honour.

BELL J: No, it is just that it seems that the argument that is presented on the hearing is an argument respecting an implication when 433(2) is read with 433. Is that right?

MR WILLIAMS: It is really that, yes.

BELL J: That seems to be a rather different complaint to the complaint in your notice of appeal. That is the matter I am raising with you.

MR WILLIAMS: Yes.

BELL J: It is the argument in the notice of appeal which, as I understand it, the Commonwealth has responded to, and you accept the force of the Commonwealth’s submission in that regard. Is that fair?

MR WILLIAMS: I do not think I would quite put it that way, your Honour, perhaps understandably. The reference in the notice of appeal in ground c, for example, to:

property comprised in or subject to a circulating security interest, within the meaning of s. 33(2)(a) –

is a reference to the language which only appears in that section. The court below held that the right of indemnity was such property. In advancing the argument what I submit is that it was not such property. There was other such property.

BELL J: But you do not dispute, for the purposes of the argument you now make, that the terms of 433(2)(a) are satisfied here?

MR WILLIAMS: I do not dispute that they are satisfied. But I do dispute that they are satisfied in relation to the right of indemnity. What I do not dispute is that there were other assets in respect of which section 433(2)(a) was engaged, but not the right of indemnity itself. The other assets included the cash. There may have been additional assets. But the right of indemnity was not engaged – sorry, was not subject to a circulating security interest.

GAGELER J: If the receiver were to pay your client in the way that you say the receiver should pay your client, would the receiver not be utilising the right of indemnity?

MR WILLIAMS: Yes, he would.

GAGELER J: In some sense then, perhaps not the statutory sense, but one would think more likely the statutory sense the right of indemnity on your very argument has come into the receiver’s hands.

MR WILLIAMS: I do not dispute that, your Honour. I do not say it has not come into the receiver’s hands. What I do say, it has not come into his hands as property comprised in or subject to a circulating security interest.

EDELMAN J: In other words, it is not a circulating asset.

MR WILLIAMS: Yes. It has certainly come into his hands. I accepted that from the outset and still do for the purposes of both first and second portion of the argument. But what we say is it is not property which is subject to a circulating security interest because it is not a circulating asset and because it is not such an asset then (3) does not apply to it because (3) is not intended to apply to those assets which are not circulating assets which also come into the hands of a receiver.

The receiver has had some circulating assets come into his hands. He has also had the right of indemnity come into his hands. In relation to the circulating assets, such as they are, he has to apply subsection (3). In relation to the noncirculating assets, the old fixed assets, he does not apply subsection (3). So it is important to ascertain whether or not the right of indemnity is subject to a circulating security interest within the meaning of subsection (2)(a).

GORDON J: Can I just ask one thing? I know Justice Edelman may have asked you this question, but I just wanted to make sure I understood the answer to it. Here in these facts when one looks at the definition of the creation of the security interest under the deed and one recognises that any collateral interests are picked up as part of the security interest and one looks to the definition of what constitutes collateral for the purposes of this deed, tell me again why that is not caught, even on your

MR WILLIAMS: It is caught.

GORDON J: So you accept that it is a circulating interest?

MR WILLIAMS: No. It is caught but it is not circulating. None of that makes it circulating.

GORDON J: Well, it is both, is it not, fixed and floating?

MR WILLIAMS: No. It is fixed. It does not float in any real sense; in fact, in any sense. It may change in its value from time to time as the value of the trust assets change from time to time and as the amount of the obligations to which it attaches or give rise to it fluctuate from time to time. But that does not mean that it floats. It attaches to all of the assets of the trust all of the time.

KIEFEL J: Mr Williams, your argument in relation to subsection (2)(a) focuses upon the words “of any property comprised in or subject to a circulating security interest”?

MR WILLIAMS: Yes.

KIEFEL J: All of those words in relation to possession being taken of that property are preceded by the word “or” – is it not sufficient under 433(2)(a) that a receiver is appointed on behalf of the holders of any debenture that are secured of a company that are secured by a circulating security interest?

MR WILLIAMS: Yes.

KIEFEL J: That is the case here?

MR WILLIAMS: Yes.

KIEFEL J: You do not need to get to the alternative possession that was taken of property?

MR WILLIAMS: No you do not but

KIEFEL J: How can you qualify what is clearly simply the description of an instrument – the existence of an instrument?

MR WILLIAMS: Because to do otherwise is to read the word “property” in subsection (3) as extending to every item of property of the company regardless of whether it is circulating or not and that would wreak such a massive change to the law that it is inconceivable.

KIEFEL J: Do you have anything further?

MR WILLIAMS: There is perhaps one final point to be made and I think it is probably pretty close to my last proposition – perhaps it is a gloss on my last proposition so if I could be permitted a subproposition it is advanced in the written submissions and I am sure the Court would be alert to it anyway. It is the Court of Appeal’s proposition that a right of indemnity takes its character from that to which it attaches. I simply alert the Court to the fact that we make that submission. It is not clear to me what the principled answer to it is.

The court effectively simply stated it as something which was a necessary incident of the nature of the right of indemnity but we say that it is not. The right of indemnity is the right of indemnity. It is a right. If it attaches to cash it does not make the right cash. If it attaches to a piece of real estate it does not make the right real estate. It does not change in character between, you know, an old floating asset or fixed asset depending on that to which it attaches.

So that alternative language which the Court adopted to justify the outcome we say does not commend itself by any principle and is in fact contrary to principle. When the question is what is the asset, the answer is the right, not the property which the right might attach to. So you cannot
answer the question is the right of indemnity a circulating asset by saying does it attach to a circulating asset. That is the wrong question. Unless there are further questions, that is our submissions.

KIEFEL CJ: Thank you, Mr Williams Yes Mr Moore.

MR MOORE: If the Court pleases. The discussion this morning has focused on three aspects of section 433 - the words “property of the company”, the words “pay out of” and the last aspect that was just dealt with, the words “property comprised in or subject to a circulating security interest”. I propose to deal with that aspect that last aspect in the second part of my submissions, but just while it is fresh in my mind, can I just outline what we say about that.

We say that the submissions now seem to be abandoned that 433(2) was not satisfied because those words “property comprised in or subject to a circulating security interest’ were not satisfied in 433(2). It is now accepted that it is the first part, the first limb of 433(2), the receiver appointed pursuant to a debenture secured by a circulating security, were satisfied.

The argument now is that 433(3) must be read as applying only to property comprised in or subject to a circulating security interest, and that means that the right of indemnity itself must be a circulating asset. We say that is not a proper construction of the legislation. The Court of Appeal correctly held that that question, “Was the right of indemnity a circulating asset?” simply does not arise. Once the gateway is opened by 433(2) being satisfied, as it is, then the same situation in 433(3) applies as in 556.

EDELMAN J: So that would mean that 433(3) assets that would have been described previously as fixed assets or might be described as noncirculating assets, they are all part of both the property of the company and property coming into the hands of the receivers.

MR MOORE: No. We do not – we accept the proposition this was not intended to alter the law in relation to the old 433 when it referred only to floating charges. We do not assert, the Court of Appeal did not find and its reasons do not have a consequence that fixed assets are subject to 433.

GORDON J: Is that right in relation to the last line and a bit of the chapeau to 433(3), when it says:

the following debts or amounts in priority to any claim for principal or interest in respect of the debentures

MR MOORE: Your Honour, we accept that the intention of those words is to pick up by use of the word “debentures” the concept of a floating charge. What are the debentures 433(3) is referring to? Answer, in our respectful submission, the debentures that are secured by circulating security interest. That is how we contend the section is to be read because we accept the proposition that our learned friend puts, because it was never intended to give employees a super priority over fixed charged assets like land.

So it is only debentures that are secured by circulating security interests. When you read the definition of “circulating security interests” you come to the proposition that it is the old floating charge, the charge that has, in modern language, attached to a circulating asset. That is how the limitation arises, not because you need to characterise the right of indemnity as itself a circulating asset, it is because of the word “debentures” that one has inherent and, we say, almost express in 433 that it does not change the old law. The old law always was and the law is now that this is restricted to circulating securities, à la floating charges in the old language.

NETTLE J: It is plain as a matter of fact, is it, that all the moneys in the fund are the product of assets which were the subject of a floating security interest?

MR MOORE: Yes. There was some debate about that in the Court of Appeal, which assets should be circulating - was it the debtors or was it some of the cash, was there - I think there was a refund.

NETTLE J: But that is all resolved.

MR MOORE: That is all resolved.

NETTLE J: It is all the subject of a floater.

MR MOORE: Yes, and it is not contested now that that fund is the product of the old floating charged assets. But is what we say about that. The final thing I will say about this question is it assumes, this 433 question about property comprised in or subject to a circulating security interest only arises if my learned friend loses his first ground of appeal which is that property of the company includes the interests that a trustee has through the right of indemnity. If he loses that argument the Court will find that 556, for example, is engaged in this case. Employees get priority over other unsecured creditors, at least other unsecured trust creditors.

That is the starting proposition before turning to his second argument. His second argument is that because of this language, subject to a circulating security interest, it does not apply in this case, so employees in a trust context like this get priority rights over other unsecured creditors, but they do not have priority rights over a secured creditor with a floating charge or what is called now a circulating security.

That means Parliament in the trust context, on his second argument, has only afforded employees one form of priority, not the two that they have had for many years over a century. They have had two forms of priority: over other unsecured creditors and over a floating charge holder. He wants to say even if they have priority over the other unsecured creditors, no priority at all over the floating charge holder, who therefore, with a debt that exceeds the value of all the assets in question, comes in and scoops the pool, leaving nothing for employees, that is the result that he contends 433(3) has now on the facts of this case.

It could arise on the facts of this case because although the bank has been paid out in full from other assets, his client has a marshalling claim to some of the bank’s securities. So his client wants to say, “We scoop the pool; we are marshal to the bank’s circulating security. In a trust context, 433 does not apply because the right of indemnity itself is not a circulating asset, therefore we scoop the pool”.

In short, his argument is 433 never works in a trading trust context and, in our respectful submission, that is a proposition that would be rejected by the Court. Once the gateway is opened, as it is, 433 applies according to its terms, with that one caveat about the word “debenture”, carrying with it priority of employees over a secured creditor with a circulating security only to that extent.

Your Honour, can I then turn back, please, to the first argument and discuss if I might the term “property of the company” in many sections of the Act. It appears, as I have said, not only in section 433 but it is, in our submission, the controlling words for the priority in section 556. Section 556 appears in volume 1 of the supplementary book at page 265 or 451 of the printout. That says:

Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims –

It goes on to list all the priority creditors but, in our respectful submission, what that is doing is following section 555 and explaining what is to happen to the property of the company. Section 555 is on the earlier page – 450 of the printout – 264 of the supplementary book:

Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.

So, that is explaining that it is the property of the company that is to be used as provided by the Act and, in particular, the next section, 556. The words also appear in other sections that are important to note, the first of which is 478 on page 196, slightly different language but exactly the same context:

the liquidator must:

(a) cause the company’s property to be collected and applied in discharging the company’s liabilities -

Then 500, the use of the words “property of the company” – that is on 226 of the supplementary book and 412 of the printout:

Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void.

Then 501, “Voluntary winding up generally”, and this is a voluntary winding up because it was converted from administration:

Subject to the provisions of this Act as to preferential payments –

and those words “preferential payments” do not mean voidable preferences, they mean priority claims in insolvency, subject to those provisions:

the property of a company must, on its winding up, be applied in satisfaction of its liabilities equally -

Then the 555 and 556 that I have taken your Honours to, and finally to two sections 559 – this is within each class of priority creditors, 559 says:

The debts of a class referred to in each of the paragraphs of subsection 556(1) rank equally between themselves and must be paid in full, unless the property of the company is insufficient to meet them –

Finally, 561, this is the liquidator’s equivalent to the old floating charge priority when no receiver is appointed and it says:

So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of –

and then it lists the priority creditors:

payment of that debt or amount must be made in priority –

Then of course we have the very wide definition of “property” in section 9. I will come back to the authorities in a moment and I will just say a few brief things then about what we say was decided in the High Court decisions. But can I just say what all of those authorities - Octavo, Buckle, Bruton, CPT – they all decide – all stand for the propositions that they stand for. What they stand for, in our respectful submission, is that by operation of law a trustee with a right of indemnity by way of exoneration has an interest in the trust property amounting to a proprietary interest.

That interest is a beneficial interest in the trust property itself. It applies to the whole range of assets. It is an interest that takes priority over the rights in the assets held by the beneficiaries. It is not a security interest. It applies equally with respect to indemnity by way of reimbursement or exoneration. In a case such as the present when the value of the debts owed by the trustee properly incurred exceed the value of the trust assets, the trustee’s proprietary interest exhausts the beneficiary’s interests which accordingly have no value.

Now, in our respectful submission, the Court of Appeal correctly held that the proprietary beneficial interest, having all of those characteristics, falls well within the definition of “property” in section 9 and, thus, “of property of the company” in all of those sections, particularly 433, 555 and 556 and that none of those sections provide a contrary intention to disapply the application of the section 9 definition in the circumstances in which they are engaged.

NETTLE J: It is different then to bankruptcy?

MR MOORE: No, your Honour. We think there would be no case decided any differently in a bankruptcy context. There are priority provisions in the Bankruptcy Act 109.

EDELMAN J: You accept then that assets that are held on trust do not become property of the company whether it be in bankruptcy or under the corporations regime?

MR MOORE: It depends, your Honour, with respect, on what ones means by, “assets held on trust”. This Court in Buckle said that when a trustee has a right of indemnity and has, through that right, conferred on it

EDELMAN J: Yes, putting aside the right of indemnity for the moment, though.

MR MOORE: Yes. So if your Honour has said there is a bare trust asset with no right of indemnity then the situation under the Bankruptcy Act would be the situation in the Corporations Act.

NETTLE J: What about the sort of trust in re Richardson where there is a trust, properly so called, and a right of indemnity? The right of indemnity vests in the trustee in bankruptcy, but the asset of the trust fund does not, it was said.

MR MOORE: Yes. In our respectful submission, the conclusion that the proprietary interest that is conferred on the trustee through its right of indemnity does not vest in a trustee in bankruptcy, or comes under the control of a liquidator in a windingup, cannot stand.

NETTLE J: But you say that order of priority payments provided for in the Bankruptcy Act would still apply in such a case?

MR MOORE: Yes. Yes, we do.

NETTLE J: Richardson did not deal with that.

MR MOORE: No. There was one creditor only in that case and it seems that therefore questions of priority were not argued or engaged.

EDELMAN J: Those questions are mediated through the right of indemnity, rather than directly through the trust assets themselves.

MR MOORE: They are mediated to the extent that the trustee itself has a beneficial interest in the trust assets through the right of indemnity.

GAGELER J: Does this analysis differ from Chief Justice Allsop’s analysis?

MR MOORE: No, it does not. A bit later in my submissions I will have some very brief remarks to say about the contest between Re Enhill and Suco Gold and Chief Justice Allsop. Everything that I will say until that point is consistent and accepts the correctness of what his Honour the Chief Justice said in Jones v Matrix. There might be an argument as to why Re Enhill should be preferred over Jones v Matrix, and that is our primary position, but our alternative position accepts as correct every word that fell, with respect, from Chief Justice Allsop.

GORDON J: Does that include paragraph 108, which is the multitrust question?

MR MOORE: Yes. The assets come in, on this analysis, with their inherent limitations. The Act does not change the character of the assets in that respect, but so far as it is consistent with that character the Act is nonetheless engaged. So within each trust

GORDON J: And it sets the priority between those?

MR MOORE: Exactly.

EDELMAN J: Is that your primary position or your alternative position?

MR MOORE: That is our alternative position but there is much force in that position. It removes all of the references that are in my learned friend’s written submissions about why this Court would recoil at any suggestion that in a statutory insolvency trust assets can be used to pay nontrust debts. The argument goes in short that is a breach of trust outside of the Act, at least. The Act could not have intended to condone a breach of trust and therefore the Act cannot have that operation.

Well, that just says Re Enhill is not right to that extent, but it does not say anything at all about Chief Justice Allsop’s position in Jones v Matrix, which answers that very complaint. There will never be, on his Honour’s analysis, the use of trust assets to pay nontrust debts but there will be a ranking of priority because the Act is engaged.

KIEFEL CJ: That might be a convenient time, Mr Moore. The Court will adjourn till 2.15.

AT 12.44 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.15 PM:

KIEFEL CJ: Yes, Mr Moore.

MR MOORE: Thank you, your Honour. Your Honour, just before the luncheon adjournment I was dealing with the aspects of the proprietary interest.

KIEFEL CJ: Could you speak up a little, Mr Moore?

MR MOORE: I am sorry, your Honours. Just before the luncheon adjournment I was dealing with the aspects of the proprietary interest that the trustee has through the right of indemnity and outlining what the characteristics of that proprietary interest was and that it fell well within the statutory term “property of the company” through the definition of “property” in section 9.

I just wanted to say one more thing about the text of the legislation and that is to adopt, with respect, the proposition that fell from Justice Edelman which was, even if you put to one side all of that authority that says the trustee has a proprietary interest in the trust assets to the extent of the right of indemnity, put that all to one side and just focus on the right of indemnity itself, can still read the Act as engaged by reading the words “out of the property of the company”, here the right to apply funds to pay trust debts, as meaning “make use of”. We say that construction is well open and one that would be adopted by the Court, even ignoring or putting to one side, the proposition established by authority in this Court that the trustee has its own beneficial proprietary interest in the trust assets.

GORDON J: By authority you mean Vacuum Oil, Buckle, CPT?

MR MOORE: Yes, exactly.

GORDON J: Et cetera.

MR MOORE: And, Octavo, yes.

GAGELER J: Would that last proposition produce a different result between looking at 433 and 556?

MR MOORE: No, no, it would not because we accept that 556 is a use of the property of the company to pay those debts in priority. If the company does not have property, in any form, then there is nothing on 556 to bite. So, the same result would follow

EDELMAN J: It is really the same proposition, is it not? When you talk about “only the right of indemnity” it is the right of indemnity with all of its characteristics.

MR MOORE: Exactly, yes. And, to speak of it as if it is just a power is, with respect, not consistent with authority in this Court. It is a right of indemnity with all the characteristics that Buckle and Octavo say it has – proprietary beneficial interest of the trustee not held on trust in priority to the beneficiaries.

EDELMAN J: It can be a power. It is just a proprietary power. It is a power to do something rather than a right that imposes a duty on somebody else.

MR MOORE: Yes, yes, although it is cast in terms of a proprietary interest in the assets.

KIEFEL CJ: That is to explain the lien and the particular position of the trustee though, is it not?

MR MOORE: Yes, but one could have a lien without having a proprietary beneficial interest of one’s own in the asset itself. To hold onto someone else’s property is a lien but, I think, some of the judges say it does not really make sense to speak of a trustee having a lien when the trustee holds the legal title to the property and has its own proprietary beneficial interest in the property. Although the cases do speak about lien, it is more accurate to describe it the way Octavo did which was proprietary beneficial interest in the assets – although attended by obligations outside of insolvency to use it in a particular way.

That is what I wanted to say, for the moment, about the text of the legislation. Can I just very briefly make the following remarks about the context and the purpose of the legislation? We have explained in paragraph 10 of our submissions the long history of the priorities given to employees over 200 years’ worth, going back to old English legislation.

The policies for strong, well established, enshrined in statute policy reasons has given employees two forms of priority over unsecured creditors and priority over a floating charge holder. We have added to the authorities some references to two other cases that discuss the history of employees’ priority in footnote 1 of our oral outline.

The first is the relevant passages from Jones v Matrix I will not refer to it as Killarnee; I will continue to refer to it as Jones v Matrix and the House of Lords decision in Re Spectrum Plus also speaks about the history of the statutory priority for employees.

The second thing about the context we wish to emphasise is that maintaining a statutory priority for employees regardless of whether the employer was a company acting in its own right or a company acting as trustee is consistent with Australia’s obligations under an international convention that Australia has ratified.

The Protection of Workers' Claims (Employer's Insolvency) Convention is now being provided to the Court in the supplementary book of authorities at tabs 5 and 6. The relevant article is Article 5 on page 796 which says:

In the event of an employer’s insolvency, workers’ claims arising out of their employment shall be protected by a privilege so that they are paid out of the assets of the insolvent employer before nonprivileged creditors can be paid their share.

KIEFEL CJ: Which article are you reading from?

MR MOORE: I am sorry, Article 5 on page 796.

KIEFEL CJ: I am sorry, article?

MR MOORE: Article 5 in Part II.

KIEFEL CJ: Article 5. Thank you.

MR MOORE: I should have said Part II.

GAGELER J: I think it is 11. Article 11, is it not?

MR MOORE: Your Honour, there are two parts. There are two

KIEFEL CJ: Which page are you on?

MR MOORE: I am sorry, 796 of the book, and page 10 of the printout. I am sorry, your Honour. Part II was the part of the convention that was ratified by Australia, and one sees that in the book under the next tab, page 799. Ratified by Australia on I think that is 6 August 1994, it might be 8 June 1994, to commence on 8 June 1995, except in Part II Articles 5 to 8, and that is the Article 5 that I have taken the Court to.

So, as far as our researchers can see, what obviously happened is that there already was compliance with the Convention by the various jurisdictions in Australia prior to the Corporations Act 2001 and when the Corporations Act 2001 was enacted it replicated those priorities in the context of Australia having undertaken an obligation to give workers priority over other unsecured creditors.

Of course, what the appellant wants is to say that employees do not get the priority in a trust case where the employer acted as trustee. That would mean, we say, if correct, that for a significant class of employers, namely, companies who acted as trustee, Australia would not have honoured its obligation under this Convention. That in turn would be contrary to the principle of statutory construction that statutes should be interpreted in a way, so far as their language can do so, consistently with obligations undertaken by Australia in conventions ratified by it.

EDELMAN J: Although you do have exactly the same question in Article 5, which is the meaning of “assets of the insolvent employer”.

MR MOORE: Yes, that is so, your Honour, but all of the employees, if my learned friend is correct, rank pari passu with the right of indemnity process. If I could just put that in neutral terms and not forget property for the moment. The right of indemnity, he accepts, is property and that that right will be used to get money from a trust fund and pay all of the creditors and the employees are such creditors and they will rank equally. So you have employees who do not get priority over that asset – in the use of that asset. And, in our respectful submission, that would be contrary to the obligation in Article 5.

Your Honours, we also adopt, with respect, the remarks that Chief Justice Allsop made in Killarnee as to the fact that the legislation should be construed against the background well known, certainly at the time of the Corporations Act, that sometimes companies act as trustee when they incur trading debts and when they employ employees. By the time of the Corporations Act, Re Suco Gold and I might add Re Enhill had said consistently between each other that at least where the company acts only as trustee in relation to one trust, the statutory priorities apply.

That is the background against which one ought read what Parliament has said in 433 and 556 when enacting the Corporations Act in 2001. And his Honour refers to that background, paragraphs 99, 101 and 106. We adopt, with respect, those remarks as our submissions in this case.

Your Honours, can I just return briefly to the authorities of this Court and just make the following brief remarks about them. Octavo we say establishes the following four propositions and I just wish to give your Honours pinpoint references for those propositions. Firstly, the trustee with a right of indemnity has a beneficial proprietary interest in the assets held on trust – 367, point 5 on the page.

That proprietary interest fell within the term “property of the bankrupt” – 368, point 1 on the page. That proprietary interest passed as property of the bankrupt to the trustee in bankruptcy. These are the pages of the CLR – 370, point 1 on the page and 371, point 5 on the page. Finally, that proprietary interest of the trustee that passed to the trustee in bankruptcy was divisible among the creditors of the bankrupt – 367 CLR, point 10 on the page.

There was another argument raised in that case which concerned a preferential payment and the words that appeared in the relevant statutory provision at that time, “own money”. The argument was put by the appellant that the payment could not be a preference because it was not made using the trustee’s own money. The Court said it is not necessary for that to have occurred. Those words “own money” only define the fact that the trustee did not have enough of its own money to pay its debts, so it was insolvent. But importantly, the Court went on to say even if it was necessary to say that the trustee had made a preferential payment with its own money, those words were satisfied when the payment had been made by reason of the right of indemnity and the proprietary beneficial interest that that right gave the trustee. That is 369, point 1 on the page.

Your Honours, those propositions were in large respects confirmed in Buckle by this Court at paragraph 48, “The entitlement of the beneficiaries” to the trust property is confined to that which remains after the trustee’s preferential interest is satisfied through payment of trust debts and it is not trust property in the sense that it is solely held for the beneficiaries.

The trustee’s interest was confirmed in Buckle, at paragraph 49, to be a proprietary interest. At paragraph 50, the Court said the trustee’s interest “is not a security interest”. And, in 51, it was confirmed that the trustee’s proprietary interest was a beneficial interest.

Finally, just on Bruton, there is one aspect that is particularly relevant although dealt with only in dicta by the Court. That case concerned a notice issued by the Commissioner under the Taxation Administration Act to a third party. The third party owed money to the taxpayer and the Commissioner’s notice operated as a form of attachment. The taxpayer was a trustee who had incurred a debt in that capacity to the Commissioner. And, the question before the Court was whether that notice infringed section 501 of the Corporation’s Act. That is one of the sections I took the Court to earlier this morning which uses that phrase, “property of the company” – no sequestration, attachment, distress or execution can be put in force against property of the company.

And, one of the arguments raised by the Commissioner in that case was, when you are dealing with a trustee who holds the property on trust, it is not property of the company – property of the trust – not property of the company. And, the Commissioner said, therefore the section simply is not engaged, a similar sort of argument that we have here. It is not property of the company – trust property – therefore, the words “property of the company” are not engaged.

Now, although it was not necessary for this Court to rule on that submission, its reasoning in substance rejected it. The Court at paragraph 43 of the judgment – this is in the authorities, volume 1, tab 9 – said that the company had, in respect of the debt owed to it, the proprietary interest held by the trustee with a right of indemnity.

Then, a little earlier at 47, the Court said, halfway at page 359 of CLRs, 243 of the book of authorities, in the middle of that paragraph, last sentence:

This proprietary interest would appear to be “property” of the appellant protected by s 500(1) of the Corporations Act against any attachment put in force against it during the winding up. Both the primary judge –

which was Justice Allsop, as his Honour then was:

and the Full Court so held.

Both of the lower courts and in dicta the High Court say that the term “property of the company” in section 501 – 500, subparagraph (1) – was satisfied in the case of a trustee with a right of indemnity having the proprietary interests that Octavo and Buckle said the trustee had. That directly supports, in our respectful submission, the proposition for which we contend that “property of the company”, that term in 433, 555, et cetera, is satisfied in a case such as the present.

Could I then, just while we are on the end of the authorities of this Court, just say three things about the appellant’s written submissions? The appellant says in paragraph 1(a) on page 5 of its written submissions that the exoneration limb of the trustee’s right of indemnity out of trust assets:

confers upon the trustee no interest in the trust assets themselves -

In my respectful submission, that proposition cannot stand consistently with what this Court said in Octavo, Buckle and Bruton, which was to the exact opposite. A trustee with a right of indemnity does have a proprietary beneficial interest in the assets themselves. The second thing I wish to say about the appellant’s written submissions is the contention in paragraph 35 that the trustee’s right of indemnity is:

a right held on behalf of the creditors -

That seems to be a suggestion which adopts what the learned trial judge said in this case, which is the trustee’s rights, proprietary or otherwise, are held on trust for the trust creditors. That is what his Honour said at paragraph 96, core appeal book 35, and at 333, core appeal book 92.

In our respectful submission, that is not a correct proposition of law. No case and no text has ever said that the rights held by a trustee with a right of indemnity are held on trust for the trust creditors. Chief Justice Allsop in Jones v Matrix said that that proposition was not correct – [67] to [68] and [79].

Finally, there is an argument which seems to adopt a line that appears in Jacob’s Law of Trusts that Re Suko Gold is not correct because the priority provisions are directed towards property “beneficially owned by the company”. Trust property, the argument goes, it seems, is not beneficially owned by the company, therefore the priority provisions do not apply.

In our respectful submission, there is no warrant for reading down the words “property of the company” to mean something other than the plain meaning of those words using the section 9 definition of “property” and, in any event, one would have to ask what one means by using the term “property beneficially owned by the company”.

If it means property in which the beneficiaries have no independent proprietary rights, then that is satisfied here. No one says that the trustee with a right of indemnity, to the extent of that right, can in insolvency overreach existing extant independent rights of beneficiaries. So if there is a trust fund that is worth $1 million and the trust debts are worth $500,000, no one suggests that the independent rights of the beneficiaries to the remainder, after the trust debts are paid, are overreached. But the $500,000 that is owed by the trustee is not a right in relation to which the trustee has any obligation with respect to the beneficiaries, apart from the fiduciary duty, at least outside of insolvency, to use trust property for trust purposes.

If this phrase “beneficially owned by the company” means held beneficially and not on trust, then that is also satisfied here. Octavo says that a trustee with a right of indemnity, to the extent of the right, has a proprietary beneficial interest in the trust assets. Octavo says that beneficial interest is not held on trust, and that is the point I just sought to articulate before. No case has said the trustee’s rights, proprietary or otherwise, are held on trust for anyone else. Even if attended by fiduciary obligations, the trustee’s own rights in relation to the property are not held on trust, either for the beneficiaries or for the creditors.

There is a very similar argument to the one just mentioned that you need to read down the phrase “property of the company” to mean property beneficially owned by the company, advanced in one case which is presently under appeal, and that is Lane, an authority my learned friend relies upon, a decision of Justice Derrington, that focuses on the word “proceeds” in the Bankruptcy Act. That is section 109, which contains priority provisions similar to 556, got to pay employees first before other unsecured creditors. It says that the priorities are engaged when applying the proceeds of the property.

Justice Derrington fixes on that word “proceeds” and says, well, the right of indemnity can never generate proceeds, and so the Act does not apply at all, and in a bankruptcy of an individual trustee who has conducted a business and then owes employees, et cetera, takes place completely outside of the Bankruptcy Act, and all trust creditors including employees take pari passu.

The first thing we would say about that argument is the word does not appear in the Corporations Act. The second thing we would say about it is the word “proceeds” is undefined in the Bankruptcy Act. The third thing we would say is the proper meaning to the word “proceeds” in the Bankruptcy Act is simply to understand it as the fund that is remaining after any noncash assets are converted into cash. That is the proceeds that are to be used by the trustee in bankruptcy, to the extent that it can be said that that fund is property of the company or, to adopt the alternative argument, to the extent that use can be made of the property of the company to distribute that fund in the order of statutory priorities.

In any event, one thing the word “proceeds” does not do is to determine what order of priority there should be amongst trust creditors. In our respectful submission, the statute speaks in clear terms on that issue.

Can I just say something briefly about the trust creditor’s right of subrogation, which is sometimes a right that is referred to as giving justification to an argument that the statute cannot be engaged.

KIEFEL CJ: Is it a right or a remedy?

MR MOORE: We say that the proper characterisation is it is a remedy, to approach the court to stand in the shoes of the trustee to exercise the trustee’s right. And that is the reason why the trust creditor’s ability to approach the court for that remedy cannot stand in the face of the statute because if the trust creditors want to stand in the shoes of the trustee to exercise the trustee’s rights, proprietary we say, the Act has already spoken and said what must happen with the trustee’s property - proprietary beneficial interest or the proprietary power.

However it is phrased, the Act has said that property must be used in a particular way - pay trust creditors, if it is Re Suco Gold, in order of priority. There is no ability, in our respectful submission, for trust creditors to come along, to say, “We want to be subrogated to the trustee’s right but ignore the statutory priority”, even though in the face of the Act saying that is what must happen with the trustee’s property.

KIEFEL CJ: The appellant seeks to impose, as I understand it, upon the notion of the right of exoneration at an earlier point some obligation arising under trust law with respect to creditors.

MR MOORE: Yes.

KIEFEL CJ: So that when you have it so limited you then have the clash with the statute.

MR MOORE: Yes.

KIEFEL CJ: But in discussion with counsel for the applicant, the question really essentially on this argument must be whether that is so or whether or not creditors’ rights to an order of payment under trust law is subject to any number of things – court order, statutes, all of the above.

MR MOORE: Yes, in our respectful submission, the latter is correct. The creditor’s rights to come in to exercise – stand in the shoes of the trustee, must be effected by the statute because the statute has spoken, to say, “This is what must happen with a trustee’s rights”. But there is no preexisting principle of law that says prior to statutory insolvency, a trustee can only pay creditors pari passu. The trustee has got a right to reach into a trust fund and pay trust creditors. There is no law, certainly no statute and, in our respectful submission, no principle of general law, that says if there is some doubt about the trustee’s ability to pay all creditors, the trustee as a matter of general law must pay pari passu.

GORDON J: We would ordinarily apply for directions.

MR MOORE: Yes, and the result of the directions, in our respectful submission, if the trustee is insolvent, would be a statutory insolvency. Either the individual in bankruptcy, or the company in windingup, in liquidation.

GORDON J: I cannot quite hear you, Mr Moore.

MR MOORE: I am sorry, yes. The direction would be that if the trustee is insolvent, it would include the proposition, the individual must be bankrupt, or the company must be liquidated. And once that happens, the statutory regime applies. A Court of Equity, in my respectful submission, would not permit a trustee to ignore the statute by not becoming bankrupt when the individual is insolvent, or the company not being wound up if the company is insolvent.

KEANE J: So observing the statutory order of priority in that situation would not be so much a case of equity following the law, as just a Court of Equity saying, observe the requirements of the law as to the proper order of payment of debts.

MR MOORE: That is exactly right, with respect. The law would apply, and the court would say, you must follow the law. Not as in equity following the law, but you must apply the law

KEANE J: Apply the law. And the beneficiaries of the trust have got absolutely nothing to say against that.

MR MOORE: No. They are completely unaffected. Your Honour, the rationale for creditors having a right of subrogation has been put in various ways in the cases in three ways in particular. One is the notion that it is unconscionable for beneficiaries to walk off with the benefit of the estate enlarged with property bought, say on credit, without the trust estate being used to meet the debts. That does not imply an insolvency situation. The beneficiaries are not walking off with the benefit of the trustee’s dealings without exposing the trust estate to paying the trustee’s debts. That was the rationale said by the Court of Appeal in Re Johnson, or appeal book page 160.

Another rationale is that it is unconscionable for the trustee to retain for itself its interest in a trust estate without using it for the purpose for which the law gave the trustee the proprietary interest or the right of indemnity, and that is how Justice Barrett expressed it in Agusta, or appeal book 167. That does not apply in insolvency because the trustee is, like the beneficiaries, exposing the trust estate for the payment of all trust debts.

And, the third rationale is, it would be improper for the trustee to use the right of indemnity to pay private creditors and, therefore – that is, creditors in a personal capacity – and, therefore, make an unauthorised profit. That does not apply in insolvency in this case and it will not apply – even in the private business and trust business case, it is hard to see the trustee making a profit when it is being liquidated and, whatever property it has, being used in accordance with the statute even if Re Enhill is right. But, there is certainly no notion of improper use of the right of indemnity if Chief Justice Allsop is right because the trust assets are only used to pay trust creditors, albeit in the statutory order of priorities.

So, given those realities, there is no basis in the argument, in my respectful submission – relying on the trust creditors’ rights of subrogation – to say that there is a different insolvency regime other than the one that the Act provides for. The right of subrogation that the trust creditors had does not resolve the question, in what order of priority should trust creditors be paid. We say the answer is given by the statute.

We have said in our written submissions that Re Enhill is our primary position and Re Suco Gold and Chief Justice Allsop in Jones v Matrix is our alternative position and I just want to say the following about Re Enhill. If there is an advantage provided by Re Enhill, it is that it will closely apply the words of the statute.

Section 555 of the Corporations Act says that all debts rank equally:

Except as otherwise provided by this Act –

and 556 says that:

the following debts and claims must be paid in priority to all other unsecured debts and claims

If there is an advantage in Re Enhill, it is that those words are applied according to their plain meaning.

Priority creditors get priority over all other debts – unsecured debts – of the company. And, whether a debt is owed because of conduct by a trustee in that capacity or by the company acting in some other capacity, it is still a debt of the company. So, the advantage of Re Enhill, if it be one, is that it is faithful to that.

It is faithful to the other aspect of section 555, the reference to “the property of the company” being used to pay the debts in the specified order. The words “the property of the company” are divided literally into two forms of property: one, property that outside of the Act could only be used to pay trust creditors; and two, property that could be used to pay any creditors.

EDELMAN J: But if the property of the company is the right of exoneration, it can only be used to meet the claims of trust creditors. So, there is no inconsistency in the words because the words talk about meeting them or meeting the claims and it must refer only to the claims that it is capable of meeting.

MR MOORE: Yes.

GORDON J: Which is the alternative view adopted

MR MOORE: Yes, it is.

GORDON J: by Chief Justice Allsop and it drives us back to the discussion we were having this morning about what is the property of the company and whether this statutory regime alters the character of it once it has arrived in the hands of the relevant insolvency holder.

MR MOORE: Yes. The only thing that could be said against that is that that presupposes an answer to the question does the Act have the effect of changing the character of the property, and it either does or it does not.

NETTLE J: Or of ignoring it. Ignoring it is the way Justice Lush put it. Despite the obligations that de hors the statute, the statute prevailed.

MR MOORE: Yes. I think we prefer to put it in terms of the statute directs what must happen with the property of the company even if outside of the statute that conduct would be a breach of fiduciary obligations.

NETTLE J: It does result though in a distinction, a real difference between windingup and bankruptcy, does it not, assuming Johnson is correct.

MR MOORE: We say no, because there are priority creditors in a bankruptcy as well. So the property of the bankrupt must be used to pay creditors in a certain order of priority.

NETTLE J: But trust property is not included in the property of the bankrupt and thus would not go in discharge of general creditors.

MR MOORE: Yes. In our respectful submission, the law does establish that although a bankrupt with a bare legal title, holding on bare trust, that property cannot be used in any practical way to pay creditors. Where property is held on trust but the bankrupt has a beneficial interest through the right of indemnity, then that property can be used despite 116 saying trust property does not pass, the beneficial interest that the trustee has through the right of indemnity does pass.

EDELMAN J: It is exactly the same question.

MR MOORE: Yes, it is exactly the same question, yes.

GORDON J: We are driven back to identify with precision what is the property that is being dealt with. Then, the second question is having identified it in the way you have it is property of the company. When it hits the brick wall of 433 is it subject to any change in character

MR MOORE: Yes.

NETTLE J: Just before you go from that, Dr Moore, if you are right about – I put that incorrectly if Enhill is correct, it would result in a different position a company is windingup than would obtain under Re Johnson in bankruptcy.

MR MOORE: If Re Johnson is correct.

NETTLE J: Yes. It has not been suggested for over a hundred years – over a hundred years that it is wrong. I will just add, whereas Chief Justice Allsop’s analysis avoids that difficulty and therefore appears more preferable.

MR MOORE: Yes, it does.

GORDON J: It feels more preferable for another practical reason, does it not, and that is this: that where you have and it may be a rare case but it may exist multiple trusts administered by the one corporate trustee either by variations in size, function or whatever, it seems odd that you would have a nonallocation according to the proper allocation of trust assets to – or the result of obtaining access to the trust test it is to meet those trust creditors.

MR MOORE: Only if – unless the statute has that effect.

GORDON J: We are driven back to the same questions you and I were asking before.

MR MOORE: Yes. One might prefer that to say for reasons of simplicity, for reasons that all of the creditors dealt with the trustee on the basis of getting only a personal right from the trustee it is administratively far easier for one to deal with one pool rather than however many. But, if the Act does not have that result and does not change the character of the property then the answer is what fell from Chief Justice Allsop.

GORDON J: In Part 1.

MR MOORE: Yes. But the one thing that - the reason to choose Re Suco Gold over Re Enhill, or Chief Justice Allsop in Jones v Matrix over Re Enhill, provides no reason not to apply the statutory priorities, at the same time giving full faith to the character of the property that comes into the insolvency.

GORDON J: So when you look at your propositions about context, all of those matters of context are equally applicable in terms of application, whether you are doing the first part of Chief Justice Allsop or whether you are doing the Re Suco Gold approach?

MR MOORE: Yes, exactly. Your Honours, if we fail to persuade the Court that the statutory authorities priorities apply either on Re Enhill or Re Suco Gold, Jones v Matrix, Chief Justice Allsop approaches, then the priorities might still apply, not because the statute is engaged directly but because, when a court is directing a receiver, giving directions to a receiver in a case such as this, equity would follow the law.

We say the Court would not get to that stage, the Court’s reasoning, because in our respectful submission the proper conclusion is the statute is engaged, even if it carries with it the characteristics of the property held on trust, so that it can only be used to pay creditors of that trust. The statute would still apply directly.

But there is an argument, and it found favour in the Full Court in Jones v Matrix with the other two judges and Chief Justice Allsop in the alternative, that even if the statute is not engaged directly it can inform and guide the directions that the court gives to a receiver following the maxim that equity follows the law.

The law cannot be said to be settled in a case like this as to how a court would direct a receiver if a statute is not engaged directly. Options discussed in the cases and in some of the articles are threefold. First in time – that is one option that equity might have adopted, and I think there is some academic commentary in support of it, thus creditors being subrogated to the trustee’s rights. Trust creditors who come along first in time get that right earlier than others and they should get priority.

The second alternative in the cases is equity is equality, but the third is that equity follows the law. In our respectful submission, there would not be a distinction between – I think my learned friend gave as an answer to the proposition why would not equity follow the law in directing a receiver in a case like this, that that would give rise to a distinction between what happens in bankruptcy and what happens in statutory windingup.

Our answer is there would not be a difference because there is a statutory order of priorities, not in terms of 433 but equivalent to 556. That is in section 109 in the Bankruptcy Act, giving employees priority in a bankruptcy. So equity would follow the law, in our respectful submission, both in bankruptcy and in a liquidation.

We note that that appears to us to be what happened in Vacuum Oil where, although the ranking of priority was not in issue in the High Court, it was noted on page 332 of the report - page 1459 of the authorities - where wages were paid before other trust creditors.

But the one thing we concede this third limb of our argument cannot do is to appropriate the interest of a secured creditor. Equity, in our respectful submission, could replicate 556. Section 556 says, “You have all these unsecured creditors; here’s the order of priority in which they be paid”. If you go outside of the statute and the receiver is appointed on behalf of all the trust creditors and comes to court to say, “Please tell me how to pay these trust creditors; they’re all unsecured”, equity could and should – and we say would – say to the receiver, “Pay them in the same order of priority as if the Act directly applied, because equity follows the law”.

But we can see that if one of those trust creditors was a secured creditor with a floating charge or a circulating security, it would not be open to a court of equity to say to the receiver, “Ignore that proprietary security and pay employees unsecured creditors before the secured creditor”. The only way that could be done, in our respectful submission, is to apply the Act directly, and of course we say the Act is applied directly in this case.

NETTLE J: It would not be enough for the purposes of 433 that in a windingup equity would follow the law and compel the order of priorities set down in 556 to be followed?

MR MOORE: If 433 is not engaged directly

NETTLE J: But assume it is because there is a floating charge. It would be enough, would it not, that 443 says, “Do what would be done in windingup” and what would be done in windingup is that equity would follow the order of priorities?

MR MOORE: This is in a bankruptcy, your Honour is asking?

NETTLE J: Well, in a windingup.

MR MOORE: In a windingup, if 433 is engaged it must be followed and the secured creditor, for the purposes of the floating charge, must stand after the employees. I am positing a situation where the Court has held, which we say the Court should not hold, but if the Court holds that in the circumstances of this case 433 is not engaged and it is a matter of discretion for the Court to tell the receiver how to distribute the proceeds of realising assets held on trust in relation to which the trustee had a right of indemnity, a discretion could not, in our submission, be exercised so as to deprive a secured creditor of its security rights. That could only be achieved through the conclusion that the Act is engaged and 433 applies. I hope I have made that clear.

Our primary submission of course is that the Court does not get to what happened in Jones (Killarnee), which was not a 433 case. That was just 556. There was not a circulating security in Jones (Killarnee), and so two of the judges said, “Well, we don’t think” – I think Justice Farrell said she will follow Amerind, this case, Court of Appeal, because she regarded her Honour as being bound by that decision. But her Honour said that, apart from Amerind, she would have held the Act, 556, is not engaged in a trust case and it is a matter for the court to direct a receiver as to how to distribute the proceeds of the assets, but in doing so equity would follow the law, always, as we read her Honour’s judgment.

Justice Siopis seems to say, “Yes, it is open to equity to follow the law”, but his Honour seems to adopt an approach of having to consider the question on a case by case basis every time a trust case like this comes up in a 556 context. We understand his Honour’s reasons. A receiver would have to be appointed by the court to sell the trust assets and seek directions as to how to distribute the property and it would be open in such a directions hearing for the court to say, “Follow the statute as a matter of discretion”. But of course Chief Justice Allsop said, “There is no discretion at all. The Act is engaged. You do not need to consider exercising some discretion as to how to tell a receiver to distribute the proceeds because the Act has already spoken and decided that question”.

That particular third limb of our argument, if the first two were rejected, Re Enhill is rejected and if Chief Justice Allsop in Jones v Matrix is rejected by the Court, the appropriate order would be, in my respectful submission, a remittal to the trial judge to await the outcome of the marshalling claim in order to decide what are the proper directions to give to the receivers.

EDELMAN J: But that would just be in relation to any property or proceeds that remain after any circulating security interest.

MR MOORE: Yes. Your Honour, can I then turn briefly to deal with the second issue, which is the circulating security interest question? We say that the scheme of the Act is a registration and priority of security interests. Security is held in personal property; it is not a register of property in and of itself. The Act itself, it is in volume 2 of the supplementary book, and I just want to direct your Honours’ attention to a couple of aspects of it. The Act itself on page 429 of the book, page 1 of the reprint, sets out a guide to the Act and gives an overview of how it is intended to operate. For one, prior to this case, myself

NETTLE J: What a wonderful simplification it is of the law of security.

MR MOORE: Yes. What the Act is concerned with, we say, is priority of security interests. It is not concerned with priority between unsecured claims, solvency or in the contest of unsecured priority claims, and the holder of what used to be called a floating charge.

The priority questions, those two priority questions that I have just mentioned, are the remit of the Corporations Act and that Corporations Act priority provision was expressly intended to be unaffected by the PPSA. So, we have given some references in paragraph 43 of our submissions to the explanatory memoranda which makes good that proposition that the Act was intended to maintain existing rights and maintain the status quo on questions of priority and to confirm the existing law on floating charges. So, this Act was not intended to change priority questions that had been determined previously in the Corporations Act. And, this Act makes that clear itself in various respects.

Firstly, in section 116 – if your Honours have the supplementary joint book of authorities, the PPSA Act – on page 565 of the book, 137 of the reprint, in subsection (1), the Act says:

This Chapter does not apply in relation to property while a person is a controller of the property in either of the following capacities:

(a) receiver –

And, then, the note directs the reader to:

Part 5.2 of the Corporations Act 2001 –

which contains 433. Secondly, 140 on page 593 of the book, subsection (1A):

This section does not prevent the operation of another law of the Commonwealth . . . to the extent that the law requires the amount, personal property or proceeds to be applied towards one or more obligations to persons that do not hold security interests . . . in the collateral before being applied towards any . . . of the obligations mentioned in subsection (2).

So, the Act has its own order and that is irrelevant and does not impact upon any other law of the Commonwealth that provides for priority payments. And, the example given under (1A) is 561 which is the equivalent of 433 in the liquidation:

Example: This section does not prevent the operation of section 561 of the Corporations Act 2001, which gives priority to the satisfaction of certain unsecured obligations over the claims of a secured party holding a circulating security interest in a debtor’s property.

Then 254 on page 697, for good measure there is a general respect of concurrent law. Finally I am sorry, your Honours – and then 254(2). I am sorry, your Honour, I think that is the wrong section, just delete that from my submissions. The security interest, it is important to appreciate, is, as the Court of Appeal correctly noted at 310, is the security provided to the bank by the general security deed. That is the transaction that gave rise to an interest by way of security in the personal property of Amerind. In our submission, all of the requirements of section 433 were met in the following circumstances.

Firstly, the Bendigo Bank had an interest, as I said, in Amerind’s personal property through the general security deed. Two, that general security deed was a debenture. Three, the interest was provided for by a transaction which secured payment of the amount borrowed from the bank by Amerind. Four, the Act applied to the bank’s interest, in fact, it was registered under the PPSA Act – applicant’s book of further materials at 154. Five, the bank’s interest had attached to circulating assets such as cash, stock and debts. Six, Amerind had title to those circulating assets. Seven, a receiver was appointed on behalf of the bank. Now, pausing there, all of the requirements of section 433(2) were satisfied. I think my learned friend has now conceded that those circumstances did satisfy 433(2)(a).

GAGELER J: Which limb?

MR MOORE: The first limb, a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by circulating security interest. Stop there. The limb is satisfied. One does not need to go on to read the next words, and (b) it is conceded as satisfied. The date of the appointment, the company had not been commensurately wound up or ordered to be wound up by a court. So, 433(2) is satisfied.

Then, the following circumstances are relevant and, we say, satisfied 433(3). The receiver came into possession of the circulating assets – the cash, the stock and the debts. Secondly, the assets were property of Amerind because Amerind had, as trustee through its right of indemnity, conferred on it a proprietary beneficial interest in those assets. So, we say the property of the company, in that context, is satisfied in relation to the assets in question. Those assets can be regarded, to the extent of the right of indemnity, the property of Amerind.

EDELMAN J: Where you are talking about the assets now you are not talking about the asset being the right of indemnity.

MR MOORE: No.

EDELMAN J: You are talking about the asset being the legal title to the money?

MR MOORE: No. It does have legal title to the money – Amerind does have legal title.

EDELMAN J: What do you mean by the “asset”? You cannot mean the thing itself. Lawyers talk about rights, not things.

MR MOORE: Yes, yes.

EDELMAN J: What is the right that you are talking about if it is not the right of indemnity?

MR MOORE: The legal title.

EDELMAN J: That is held on trust.

MR MOORE: Yes. The legal title is held subject to the trust and the beneficial proprietary interest that Octavo says a trustee with a right of indemnity has in the assets in question.

EDELMAN J: Yes, that is the characteristic of the right of the indemnity. But, you are saying there are two things that are comprised then in the property of the company. One is the right of indemnity, including its proprietary characteristics, but also you say the legal title to the asset that is held on trust is separately part of the property of the company.

MR MOORE: Yes, yes. I concede that the legal title alone would not enable a receiver or a trustee to use their property – their “thing” in question – to pay any debts it has because it does not have a right of indemnity and it does not have a beneficial proprietary interest in the assets itself.

EDELMAN J: Does it not then just come down to the right of indemnity being – with all its proprietary characteristics – being the property of the company that you are relying on.

MR MOORE: Yes, yes, it does.

NETTLE J: Dr Moore, why cannot it be that the property of the company is the legal title of the trustee but the amounts paid out, for example, under 433(c), in the event of a windingup, would be limited by the right of indemnity to paying trust creditors who were employees?

MR MOORE: Yes, it could – yes, I accept that.

NETTLE J: Is that not a better analysis because, after all, the receiver does not give two hoots about the right of indemnity

MR MOORE: No, no.

NETTLE J: he wants the res, he wants the property.

MR MOORE: Yes.

NETTLE J: But he is found by the statutory obligations to pay only out that which is prescribed under 556 which, as you said earlier today, is defined and limited by the right of indemnity.

MR MOORE: Yes, yes, I accept that proposition. But the word “property” in the third line of subsection (3), I accept must be “property of the company”, it cannot be someone else’s property, but it is property of the company here, because of the proprietary aspects of the right of indemnity.

NETTLE J: Well, if there were no right of indemnity, the property would still come into the possession of the receiver by reason that the trustee, as legal owner, had charged the asset in favour of the lender. It is just that there would be no obligation payable under 556(1)(e), (j) or (h) because there was no right of indemnity.

MR MOORE: Yes. Yes, I accept that.

EDELMAN J: I thought you had conceded earlier that “property of the company” would be read consistently with the history in bankruptcy and so on not to include rights held on trust, so if there were no right of indemnity it would not be picked up by property of the company.

MR MOORE: Your Honour, I accept that without a right of indemnity, neither section 433 nor 556 could apply to entitle a trustee or a receiver or a liquidator to use the bare legal interest to pay debts of the company.

EDELMAN J: And is that because there would be no property of the company?

MR MOORE: I think it is because, although the legal title does fall within the meaning of the term “property of the company” the Act does not intend to overreach the independent rights of beneficiaries in this context. So in one way of analysing

EDELMAN J: The long history in bankruptcy of the term “the property of the bankrupt” simply excluding legal title that is held on trust.

MR MOORE: Yes.

EDELMAN J: But you say that that was changed by the Corporations Act?

MR MOORE: Well, only in the sense that that section is not replicated in this Act and therefore “property of the company” on the plain meaning of the word, using the section 9 definition, does include the legal title, but the result, in a practical sense, would never be different because third party interests, such as the independent interest of a beneficiary, are always capable of protection. Windingup or not, the Act does not overreach those independent interests of a third party. And a liquidator would be restrained even if the liquidator had the ability to sell legal title without a right of indemnity, the liquidator would be restrained from doing so, because third party interests are protected and maintained by the statutory scheme.

NETTLE J: What do you say about Justice Needham’s musings that 553E, or whatever the equivalent was back then, might be taken to incorporate 116(2)(a) of the Bankruptcy Act?

MR MOORE: Your Honour, in our respectful submission, it does not because that section appears only to replicate the rules with regard to provable debts. But, your Honour, I hasten to add the result in practice

NETTLE J: Is the same. I follow.

MR MOORE: is exactly the same. So whether 116 is read into this Act or not, the result is exactly the same.

GORDON J: And we are driven back to the fact that the character of the property does not change.

MR MOORE: Yes, exactly. On this circulating security asset question, can I direct your Honours’ attention – I think I took your Honours to 561, which I have referred to as the liquidator’s equivalent to 433. So when there is no receiver but a liquidator is conducting entirely administration of the company’s assets in a windingup, if a liquidator comes across a circulating security interest the same priorities to pay employees first before the holder of the old floating charge must be obeyed by the liquidator as well.

This does use the phrase that my learned friend wants to seize upon to say that it is the right of indemnity that must be characterised as the circulating asset. We say even on this section that proposition cannot be made good. So what the section says is unless you can pay these priority creditors, the end, on page 274:

payment of that debt or amount must be made in priority over the claims of a secured party in relation to a circulating security interest created by the company and may be made accordingly out of any property comprised in or subject to the circulating security interest.

Now, in our respectful submission, the fact that the Act says in that section at the end:

may be made . . . out of any property comprised in or subject to the circulating security interest

simply raises exactly the same question as we have debated in relation to 556, when you are paying ordinary priority unsecured creditors in the order of priority you do that out of property of the company.

That phrase is satisfied whenever a trustee has a right of indemnity either on the approach that the trustee is itself to be regarded as having a proprietary interest affected by the characteristics that come into the windingup or because the phrase “out of any property”, one just focuses on the right of indemnity, is to be read in the way that Justice Edelman posited, namely by use of the right of indemnity. But it does not have the effect of needing to ask and answer the question: is the right of indemnity itself subject to the circulating security interest?

What is subject to the circulating security interest are the assets in question which are converted into a fund. Only floating assets in the old language comprised the fund. Once one has that fund one asks is it property of the company within the meaning of the Act and the answer already given in relation to 556 is, yes, trustee with a right of indemnity, its only beneficial interest in the assets in question, does hold that beneficial interest as its property or alternatively the right of indemnity is the property and that is used to pay the amounts in question.

Even if it is necessary to ask was the right of indemnity itself a circulating asset, in our respectful submission the answer is yes. If it is necessary to ask that question, the only sensible way we say it can be answered is by looking at the assets to which the right relates. In this context one can only be speaking of circulating assets. The right is a right in relation to and in each asset of the trust. That is what Octavo said at 367 and Bruton at paragraph 43. The trustee has a right in all of the trust assets through its right of indemnity.

So, in this context, when one is speaking of a fund generated only by realising circulating assets, the right of indemnity follows the characteristics of those assets because it is a right in those very assets or at least a right in relation to those very same assets. There is no rational reason, we say, why Parliament would have intended to give employees priority under 556 but not 433 simply because the right of indemnity cannot itself classify it as a circulating security interest or a circulating asset.

Now, in our respectful submission, harmony is given to the Act by the Court of Appeal’s conclusion which was it is simply not necessary when applying 433 in a trust context to characterise the right of indemnity as itself a circulating asset or if it is necessary to do so it was to be regarded as a circulating asset.

Your Honours, can I just say this in conclusion. The most that can be said, in my respectful submission, of the submissions for the appellant is that they give rise to a constructional choice - a choice of construction, one of which has the result that the statutory priority regimes apply, and one of which does not. In the context where employees have for centuries had, for strong reasons of social policy, enshrined in statute these two forms of priority in insolvency there is very little for the appellant’s submissions to commend.

The result will be, if the appellant is correct, that employees lose their priorities entirely. They do not get priority over other unsecured creditors and they do not get priority over a secured creditor with a floating charge of circulating security. That last result means that the holder of a circulating security can, to the detriment of employees, scoop the insolvency pool entirely. That is something that Parliament, in our respectful submission, would never intend and did not intend.

It also has this, we say, quite unjustified and bizarre consequence. A bank dealing with an employer company and taking a circulating security is better off if the employer company is acting as trustee than if the employer company is acting in its own right. In the former, when the company is acting as trustee, the bank can take everything. In the latter, on my friend’s analysis, it is only when the company is acting in its own right that 433 is engaged, and the bank must stand behind employees in relation to circulating assets.

That, in my respectful submission, the notion that a bank would be better off dealing with a trustee company shows just how stark the outcome is that the appellant contends for. It is not justified, in my respectful submission, by the text, the context or the purpose of the legislation. If your Honours please, those are my submissions.

KIEFEL J: Yes, thank you. Mr Williams, anything in reply?

MR WILLIAMS: Yes, if I may. There have not been centuries of employees being entitled to priority in respect of trusts. The concept, the idea that we are now grappling with is actually quite new. The idea that one might use the trustee’s right of indemnity as a means to avoid the outcome that might previously and did previously obtain which is that if a trust was wound up all creditors ranked pari passu this is a new concept being grappled with and we would say for the first time in this Court and in relatively recent times in Australian courts with a view to achieving an outcome which in the context of trust law is actually new.

Our learned friends say look at the result. It would be unjust if we have what the appellant contends for and insofar as there is a constructional choice where that is all that is left to decide between, that may be a powerful argument but you only get there if you are not satisfied that one constructional choice is otherwise preferable to the other simply by analysing a text of the legislation which is where the appellant invites you to go.

When one examines the text of the legislation, one finishes up with an argument which we say aligns corporate and individual bankruptcy insolvencies of trustees and preserves trust law where there is no express overriding of it. It is telling, we think, and I submit, that in the end in an exchange with Justice Edelman not long ago, my learned friend was driven to accept that mere legal title to the trust assets really does nothing for the trustee or the receivers in the context of section 433.

Without the availability of the right of indemnity section 433, my learned friend accepts, cannot operate in favour of the employee creditors so as to defeat the entitlement of relevantly the secured creditor in relation to the circulating assets of the trust and of the company. So, once you are driven to that and to that acknowledgment then it becomes plain that when one is looking at what is being attached to by section 433(3) it is the right of indemnity that is critical.

Now, it is only those assets that are governed by – or that are subject to circulating security interests which are caught by section 433(3) that I think my learned friend accepts. But in going to section 561 which he, I think, quite accurately described as the equivalent of section 433 in the context of a court ordered windingup, my learned friend, in fact, we would say, highlighted why the operation of section 433(3) ought to be confined in the way that I originally submitted.

If you go to 561, and it appears in volume 1 of the supplementary book at page 274 and following, my learned friend took you to the concluding words starting at the bottom of 274 and going over the page:

payment of that debt or amount must be made in priority over the claims of a secured party in relation to a circulating security interest created by the company and may be made accordingly out of any property comprised in or subject to the circulating security interest.

Those words are important because although section 433(3) is perhaps expressed in less direct and conveniently accessible terms, if they are indeed functional equivalents, as I think both parties suggest here that they are, then they must operate the same way and the way in which 561 is expressed plainly says that it is the property comprised in or subject to the circulating security interest which is the source of the payments.

NETTLE J: It is the asset, the cash. That is what is the subject of the circulating security interest.

MR WILLIAMS: But it also has to be property of the company.

NETTLE J: Well, it is.

MR WILLIAMS: The cash is not the property of the company, we say. The property of the company is the right.

NETTLE J: Because it is held on trust.

MR WILLIAMS: Because it is held on trust.

NETTLE J: That is the question, is it not?

MR WILLIAMS: Yes. The property of the company is the right in relation to the cash and the right in relation to the stock and so on. So it is in fact the content of that right that must be looked at. So what 433, like 561, does not enable you to do is to trace into any property – sorry, to obtain priority for let us say employee creditors, whether over other creditors or over the debenture holder, out of assets which are not subject to a circulating security interest, that is to say assets which are not circulating assets.

I will not go back over the whole of the process by which that is an essential element of there being a circulating security interest over something but it has to be a circulating asset. So only the circulating assets are available to be dealt with under section 433(3). There have to be two elements before they can be distributed on the priority basis. They have to be the property of the company and they have to be circulating assets. The cash, the inventory and so on are circulating assets but they are not the property of the company.

GAGELER J: You need to read the words, or you do read the words:

property comprised in or subject to a circulating security interest -

as confined to circulating assets to which the security interest attaches?

MR WILLIAMS: Yes, I do.

GAGELER J: Is that right?

MR WILLIAMS: Yes.

GAGELER J: It is a lot of words used to refer to an otherwise defined expression. Another way of reading it is more widely, and to recognise that when you go through section 51C of the Corporations Act and end up at section 12 of the PPSA itself, “security interest” extends to any interest in personal property provided for by the transaction

MR WILLIAMS: Yes.

GAGELER J: that results in the attachment of a security interest to the circulating assets. So what I am suggesting is there may be a broader reading of the terminology upon which you seize.

MR WILLIAMS: There are other factors pointing against such a reading, your Honour. The heading of both 561 and 433 are instructive - 561 talks about the priority of employees’ claims over circulating security interests, not over assets generally or property generally, but only over circulating security interests and likewise 433, the heading is “Property subject to circulating security interestpayment of certain debts to have priority”.

Now, while recognising that there are some limitations on the use of headings, they are instructive, as are the way in which the two separate provisions are, I think both parties urge you to find, directed to achieving similar results, that taken together they lead harmoniously to an outcome where both of the requirements that I mentioned must be satisfied in each case. There must be the property of the company which is being used to provide for the employees’ priority, and that property of the company has to be subject to a circulating security interest.

KIEFEL CJ: Or comprised in the interest.

MR WILLIAMS: My learned friend says the word “debenture” solves his problem, because if you go back to 433(3), he says, well, if you look at the chapeau to 433(3), it ends with the words “interest in respect of the debentures”. That, at best, is equivocal. Many debentures, including the general security agreement here, and the charge created by it, extend to a range of interests and assets. They are, in the language of time past, both fixed and floating and in relation to this particular debenture, it attaches to both circulating and noncirculating assets, because it attaches to all of the personal property; and not all personal property will be circulating.

So the word “debentures” does not solve the issue that I have identified, that there was a need to further confine the operation of section 433(3) to ensuring that the debts which get priority get priority only out of that which is provided for and that is assets, property which is subject to a circulating security interest.

Now, if we accept, arising out of the exchange between Dr Moore and Justice Edelman, that mere possession of – mere holding of legal title does not do that, and they are driven to the proposition that the only way the trustee company has an interest is through the right of indemnity, it is then that the question “Is the right of indemnity a circulating asset?” becomes critical because if it is not, then it is no different to any other noncirculating asset to which the same debenture might attach. It might be a motor car – it might be all sorts of things – that would not fall within the description of a circulating asset but which would fall within the description of personal property. And those assets are not, never have been and are not intended by subsection 433(3) to become available by operation of that section to meet on a priority basis employee claims.

My learned friend also went to section 555 and I would like to go back there if I may. You will find that in the first volume of the supplementary authorities at page 264 of the folder, page 450 of the reprint. The big number is in the bottom righthand corner; it is 264. That identifies, as he rightly pointed out, that:

Debts and claims proved to rank equally except as otherwise provided

That prompted some discussion between Bench and Bar about what was said by Chief Justice Allsop in Jones v Matrix. And I would say, arising from that discussion, what is important in section 555 is its provision for a single windingup in which all debts and claims proved rank equally.

And I would respectfully say that what Chief Justice Allsop proposed and posited in Jones v Matrix that one might have what, if I might say so, I would describe as a series of separate windingsup of each trust where there were multiple trusts where, within each trust, the creditors of that trust might be treated equally but across trusts they would not be treated equally in fact is contradicted by section 555. And section 555 is an additional powerful indication as to why that approach is actually not consistent with the statutory scheme.

Nor is this a wholly theoretical example. I think it was Justice Gordon who said you perhaps will not often have a company acting as trustee of many trusts but we do in the commercial world. Many corporate superannuation trustees find themselves, for example, in exactly that situation. The largest professional trust companies find themselves in exactly that situation. Many of them are trustees of hundreds if not thousands of separate trusts. Perhaps Justice Gordon might be more attuned with some of the misconduct that has gone on in relation to those trusts than some others of us but

KIEFEL CJ: I do not think that comment is necessary.

MR WILLIAMS: I am sorry, your Honour, it was meant to be amusing and it was not and I apologise.

KIEFEL CJ: Perhaps out of place.

MR WILLIAMS: I apologise, your Honour. It was meant to be an amusing reference to the

KIEFEL CJ: Yes, I understand that, still out of place.

MR WILLIAMS: May I come back to the point? You have companies which are trustees of many, many trusts and if one of those companies was to collapse this would be a very live and important question and what Chief Justice Allsop proposed if it is to be the right answer has to be reconciled with section 555 and, in my respectful submission, it cannot be reconciled with section 555 because it is not consistent with there being a windingup in which creditors rank equally, that is to say all creditors.

So whilst there may be from a policy perspective at least a superficial perhaps a real rationale or attractiveness to what his Honour proposes, it is not something which can be achieved without legislative change, in my respectful submission.

Now, the last matter I wanted to raise by way of reply, because I will not repeat everything I said earlier and call it reply, my learned friend went to Lane and referred to it briefly, the decision of Justice Derrington with which I am sure the Court is familiar, and from which I think there might also be a pending appeal.

Lane, he said, should be distinguished because the reference there in a bankruptcy context was to the expression “proceeds”. And our learned friends would have it that that takes the case significantly outside what we are talking about, because we do not have the word “proceeds” in the Corporations Act and it does not operate quite the same way.

But I would respectfully submit that once we talk about the right of indemnity being used to create a fund, and then we talk about what is to be done with that fund, then we are indeed, even if we are using a different word, we are using the same concept. So that if one describes that fund as having been created out of the right to refer to the discussion that both Dr Moore and I have had with Justice Edelman over that phrase, that it might extend to a fund created by use of the right, the analysis in Lane, in my respectful submission, is just as applicable to such a fund, whether or not the word “proceeds” is used in relation to it, because you still have a fund that has been created by use of the right.

But, in my respectful submission, the fund stands separate from the right in terms of it being an asset. The right might be described as a tool, a rake with which leaves are gathered. The fact that the rake is an asset of the company and might be sold and give rise to a fund or proceeds, however you like to call it, that might be used to meet creditors, does not mean that the leaves are also capable of meeting that description.

The leaves which are gathered by the use of the rake do not become the property of the company any more or separately from the rake. The proceeds of the rake are what you would get from selling the rake. That which is gathered in by the rake is not the same. So, while all of these analogies have the risk of being highly imperfect and I can already start to think of some of the problems with the one that I have just advanced, it is not ideal, but I am trying to draw the distinction between

EDELMAN J: Not the least because the rake cannot have an interest in a leaf.

MR WILLIAMS: That is right, but if one does focus on the right as being a tool or something similar to a tool which has intrinsic value and is owned by – beneficially owned by insofar as it is the right of indemnity, the trustee, to speak of proceeds of that tool is to speak of what can be obtained
by alienating it, realising it, but to speak of anything which can be gathered together, something which belongs to somebody else but can be gathered together by using that tool and suggest that in that way that which is gathered together also becomes in some way the property of the company able to be distributed is, we would say, to make an error of principle and, in the end, this decision has to be one of principle.

One has to come up with a regime which is applicable across all situations and capable of being applied to all situations and if the answer is that the legislature would prefer a different outcome in relation to trusts than that which has hitherto existed and existed until someone had the good idea of using the right of indemnity as a means of working a way into trust assets, then the legislature can fix that by amending the legislation, but until then we have the legislation which is before us and which falls to be interpreted.

In our respectful submission, the appellant’s respectful submission, it cannot be interpreted in such a way that it brings into the operation of a section like section 433 assets which are simply not the assets of the entity which has the creditors. There may be further questions, otherwise that is what I wanted to submit by way of reply.

KIEFEL CJ: Thank you, Mr Williams. The Court reserves its decision in this matter and adjourns to 9.30 am tomorrow for pronouncement of orders, otherwise to 10.00 am.

AT 4.02 PM THE MATTER WAS ADJOURNED