The Federal Court has ruled that the ATO did not have priority under the Bankruptcy Act 1966 in relation to part of a Superannuation Guarantee Charge (SGC) payable by a bankrupt trustee.

The bankrupt had operated a Subway franchise as trustee of his family trust. Shortly after he sold the business, he was made bankrupt on a debtor’s petition. The ATO was one of Mr Lee’s creditors in his capacity as trustee (for unpaid superannuation contributions and the trust’s tax liability), but also one of Mr Lee’s personal creditors (for a personal tax debt).

The claim in respect of the superannuation liability was the subject of a SGC with the result that the ATO was entitled to the payment of that amount as a priority pursuant to s 109(1)(e) of the Bankruptcy Act 1966. However, the ATO’s priority amount was capped at $100,969, leaving a shortfall of $27,605 to be recovered as a non-priority trust debt. A central issue for the Court was whether Mr Lee’s right of exoneration (indemnity) as trustee was “property of the bankrupt” and whether the priority regime applied to the right of exoneration. If so, the ATO would be entitled to priority over the other trust creditors in respect of the $27,605 SGC shortfall.

Derrington J said that the right of exoneration cannot be exercised other than by causing trust funds to be applied to meet trust debts. It cannot be used to meet the claims of non-trust creditors. Further, while the right of exoneration may be property of the bankrupt, it is incapable of producing “proceeds” within the meaning of ss 108 and 109 of the Bankruptcy Act. Accordingly, the Court found ATO was not entitled to priority.

Derrington J also ruled that where creditors have received partial payment of their debts by use of the right of exoneration, s 108 of the Bankruptcy Act required the “proceeds” to be applied in favour of the non-trust creditors until that point was reached where their debts have been paid in the same proportion as the trust creditors’ debts. Thereafter, the remainder of the proceeds (if any) were to be applied proportionately across all debts.

(Lane (Trustee), in the matter of Lee (Bankrupt) v DCT [2017] FCA 953, Federal Court, Derrington J, 18 August 2017.)

[Austlii website: [2017] FCA 953; LTN 159, 22/8/17; TM August]

Catchwords from Austlii Report

BANKRUPTCY AND INSOLVENCY – trustee in bankruptcy’s right to insolvent trustee’s right of exoneration – discussion of the nature of the right of exoneration – whether the funds are to be distributed to all creditors or only to trust creditors – whether right of indemnity “property divisible among the bankrupt’s creditors” or trust property

BANKRUPTCY AND INSOLVENCY – trustee’s right of indemnity – whether bankruptcy changed the nature of the right of exoneration – whether the priority regime in s 109 of the Bankruptcy Act 1966 (Cth) applies to the use of the right of exoneration – trust creditors paid pari passu – whether the right of exoneration ought to be exhausted before dividends are paid – “hotchpot” principle considered

BANKRUPTCY AND INSOLVENCY – costs expenses and remuneration of trustee in bankruptcyuse of the right of indemnity to meet the costs expenses and remuneration of bankruptcy trustee consideration of Berkeley Applegate principles – consideration of Universal Distributing principles – reasonableness of remuneration of trustee

TRUSTS AND TRUSTEES – trustee’s right of indemnity nature of the trustee’s right of indemnity – trustee’s equitable lien supporting the right of exoneration – whether trustee’s right of indemnity is trust property

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