Distribution of trust assets under a DOCA: the latest guidance from the Federal Court

The Federal Court has confirmed that there is no difference between liquidation and deed administration of a corporate trustee in relation to dealings with trust assets and the distribution of proceeds of those assets for the benefit of creditors.[1]

Background

Manpak operated as the trustee for the MP Unit Trust, which carried on the business of a product wholesaler. Under the Trust Deed, Manpak would be disqualified from holding office if it suffered an Event of Default, which included the appointment of an administrator.

Following the execution of a DOCA and the plaintiffs’ appointment as Deed Administrators, the plaintiffs sought to sell Manpak’s assets held in its own capacity and in its capacity as trustee. In doing so, the plaintiffs sought declaratory relief from the court regarding their proposed distribution of the sale proceeds.

Distribution of Trust Assets

Consistent with the principles set out in Killarnee[2] and Amerind[3], the Court confirmed that the Deed Administrators of a trustee company are (like liquidators of corporate trustees) entitled to:

(a) realise the trust assets of the trust after obtaining the Court’s approval of any sale of those assets, given that a former trustee lacks a power of sale;

(b) distribute the resulting proceeds, including in payment of their remuneration and costs; and

(c) pay trust creditors, with priority creditors to be paid according to the waterfall provision set out in s 556 of the Corporations Act 2001 (Cth).

The Court also confirmed that any realisation of assets held by the company in its non-trustee capacity can only be paid to general (non-trust related) creditors.

The High Court is due to hear an appeal against the Amerind decision shortly. We will issue a further update once that decision has been delivered.