The decision of Francis (Trustee), in the matter of Fotios (Bankrupt) v Helios Corporation Pty Ltd  FCA 199 (“Francis”) is a useful examination of identifying and determining the priority of competing claims to trust assets.
Michael Fotios, the trustee of the Michael Fotios Family Trust (“Family Trust“), became bankrupt. Helios Corporation Pty Ltd (“Helios“) was appointed as the replacement trustee. Helios subsequently went into voluntary administration. It appeared, on all the available evidence, that there was a net deficiency in the trust.
The trustees in Mr Fotios’ bankruptcy commenced proceedings on behalf of Mr Fotios’ creditors against the Family Trust to subrogate his right as trustee to seek exoneration from the trust assets. Orders were made by consent in those proceedings appointing the administrators of Helios as receivers of the property of the Family Trust. The receivers subsequently brought an application for orders and directions by way of judicial advice regarding issues of priority of entitlement to the trust assets.
An expert valuation report revealed that there were about $5.1 million to $8.4 million in unpaid entitlements owing to a number of parties as beneficiaries of the Family Trust.
Further, Renee Fotios, the bankrupt’s wife, brought a claim as a creditor of her husband to subrogate the rights of the Bank of Queensland (“BOQ”) against Mr Fotios in respect of a property at 12 Kathleen Street, Trigg (“Trigg Property”). Mr and Ms Fotios had been registered proprietors of the Trigg Property. Mr Fotios had secured borrowings over the Trigg Property in his capacity as trustee from the BOQ. Mr and Ms Fotios personally guaranteed the loan and mortgaged their joint interests in the Trigg Property.
After Mr Fotios was bankrupted, the joint tenancy was severed, and the trustees in bankruptcy sold the Trigg Property. The surplus from the proceeds of sale were divided equally between the trustees in bankruptcy and Ms Fotios. The trustees in bankruptcy used the proceeds to discharge the Family Trust’s obligations to the BOQ.
Ms Fotios had also entered into a loan deed with Helios on 9 August 2021. Ms Fotios asserted she had a valid security interest over the Family Trust assets. The security interest was registered on the PPSR.
The Court was asked to consider issues including:
1. Whether it has power to give the advice further sought by the receivers;
2. What advice should be given, specifically regarding:
(a) claims to unpaid present entitlements;
(b) the Trigg Property;
(c) the application of statutory priorities; and
(d) the claimed security interest of Ms Fotios.
In considering the relevant issues, the Court affirmed a number of principles, namely that:-
- The loss of the office of trustee does not result in the loss of the right to indemnity (Coats v McInereny (1992) 7 WAR 537) .
- A former trustee’s rights have priority over a new trustee in the absence of some vitiating factors, so the priority of claims would first be in favour of the trustee in bankruptcy and then the administrators of Helios (Re Application by Hughes; Richardson v Aileen Pty Ltd  VSC 104) .
- A court appointed receiver has a right of indemnity supported by an equitable lien (Coad v Wellness Pursuit Pty Ltd (in liq)  WASCA 68) .
- The Court has inherent jurisdiction to provide judicial advice to receivers it has appointed in respect of matters which are withing the scope of the appointment.
Claims to unpaid present entitlements
After considering the terms of the trust deed, His Honour Justice Colvin was persuaded that “advice should be given” to effect that the receivers were justified in treating any unpaid present beneficiary entitlement as a debt claimable by the creditor of the relevant trust for which there was an entitlement to an indemnity against the trust property on the basis of subrogation to the trustee’s right of exoneration.
The Court agreed with the receivers that Mr Fotios had not paid anything toward the purchase of the Trigg Property in his capacity as trustee. Further, the guarantee to the BOQ had not been provided in his capacity as trustee, but instead in his personal capacity.
Ms Fotios paid the liability of Mr Fotios to the BOQ that had been incurred by him in his capacity as trustee. Accordingly, Ms Fotios was entitled to be subrogated to the BOQ’s claims as a creditor of Mr Fotios in his capacity as trustee and for the debt to be exonerated from the trust assets.
Application of statutory priorities
The Court confirmed that the receivers were justified in dealing with the trust assets by applying the statutory priority regimes under the Bankruptcy Act 1966 (Cth) and Corporations Act 2001 (Cth).
Priority of the Trustee’s right of indemnity
Under s73 of the Personal Property Securities Act 2009 (Cth), the priorities afforded by registration are subject to a priority interest arising ‘by operation of general law’.
A trustee’s right of exoneration or recoupment arises by operation of the general law. The Trust Deed also recorded the trustee’s entitlement to an indemnity. Accordingly, the Court considered whether the terms of the Deed operated with the consequence that the rights at general law did not remain.
Justice Colvin stated that the general law right was preserved by the Deed because either a trustee cannot contract out of its existence or alternatively because the provision in the Trust Deed did not manifest an intention to affect the general law right.
Accordingly, Justice Colvin held that Mr Fotios’ right of indemnity as trustee had priority over Ms Fotios’ interest in the trust property arising out of the loan deed.
The Court also ordered that the receivers’ remuneration be up to a total of $300,000 and they be paid in priority to other claims.
~ by Alexandra Culshaw, Lawyer