Background and issues
Since the publication of decisions by the Full Federal Court in Jones (in his capacity as liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (ACN 085 230 486 (in liq)) v Matrix Partners Pty Ltd (2018) 354 ALR 436 and by the Victorian Court of Appeal in Commonwealth v Byrnes (2018) 330 FLR 149 (Re Amerind), consequential questions have arisen about how these decisions apply to other forms of external administration.
On 16 October 2018, McKerracher J delivered his decision in Ross v Manpak Holdings Pty Ltd, in the matter of Manpak Holdings Pty Ltd  FCA 1548. The proceeding was brought upon an application for directions by the administrators and it was not contradicted; it was also supported by the major and secured creditor. The decision in Manpak considered the question of whether the principles laid established in Killarnee and Re Amerind applied (and if so, to what extent) to the distribution of the proceeds of sale of trust assets pursuant to a deed of company arrangement (DOCA). In Manpak, there was a likelihood of mixed trading by the company in administration on both a trustee and non-trustee capacity, hence the issues that follow. The company entered into deed administration, and the DOCA provided for the deed fund to be distributed according to the priority regime set out in section 556 of the Corporations Act (Cth) 2001.
The relevant distinction to be made is that a DOCA is a creature of contract (although clearly mobilised in the statutory context by Part 5.3A of the Act). That being the case, in a DOCA scenario it is not the legislation giving effect to the priority regime set out in section 556 of the Act, but the voluntary contractual arrangements between creditors and deed administrator/s. While it is worth noting here that clearly in many DOCAs the manner of distribution of the deed fund specifically imports the s556 priority regime as a shorthand way of expressing the ordinary statutory priorities, that manner of distribution does not have to be so. So, one must therefore question whether - and to what extent - courts can and should direct the distribution of deed funds which are constituted by the proceeds of a trust according to the priority regime set out in the Act. This question is particularly important because in these circumstances, the court would not be simply enforcing a regime that but for the presence of trust property would otherwise apply by mandate of statute to the company’s winding up.
The application in Manpak was necessary because if the principles established in Killarnee were found not to be applicable to cases of deed administration, then the result would likely have followed that it would not be open to creditors to agree - as a matter of contract by DOCA - to distribute the proceeds of sale of trust assets in the manner of their choosing. Instead, those proceeds would remain impressed with the trust and the terms of which trust would preclude distribution other than pari passu. The issue would then have arisen whether or not such an arrangement could or should be the subject of orders by the court to enable distribution of the proceeds of trust assets pursuant to the priority regime under the Act, when that regime does not specifically apply to a company not in liquidation but rather in administration.
Court’s findings in Manpak
In Manpak, the Court found that the principles laid down in Killarnee do apply to cases of deed administration in that the administrators could properly be (and in the result were) directed to distribute the proceeds of sale of trust assets in accordance with the terms of the DOCA (which in this case essentially mirror priority regime in s556). The Court found that the reasoning in Killarnee could be (and was) applied to a DOCA scenario, on the basis that his Honour’s interpretation of that judgment was that it amounted to a displacement of equitable trust principles as they pertain to corporate insolvency generally, and not simply to the confines of liquidation.
The reasoning of McKerracher J is to the effect that the decision of the Court in Killarnee is authority for the proposition that the law of equity insofar as it conditions the exercise of a corporate trustees right of indemnity has been displaced not just by Part 5.6 of the Act (dealing with liquidation) but more broadly.
The case highlights the ongoing issues surrounding trading trusts in the Australian SME context and is a helpful reminder that lawyers and insolvency practitioners must continue to question the applicability of the Killarnee principles to the different forms and phases of external administration arising under the Act, for example in the case of receiverships, or for example where a DOCA provides for distribution in a manner of priorities other than as mirrored in s556.
Readers should also note that Re Amerind is presently on appeal to the High Court.
For further advice or assistance, please contact Bonnie Scovell.
 Save that that are certain constraints on the manner of priorities, for example the requirement for eligible employee creditor consent under section 444DA
 Namely, that the proceeds of realisation of trust assets are subject to the s556 priority regime
 Because that decision specifically dealt with the deliberate legislative abrogation of the laws of equity by the s556 priority regime, the latter of which only specifically applying to companies in liquidation
 Namely, that the trustee’s right of indemnity supported by its equitable lien over trust assets is inhered with the condition that it be exercised to pay trust creditors – and only trust creditors – which in turn as a matter of equity is paid on a pari passu basis
 Noting however that a key reason for this determination was that the DOCA itself provided for distributions aligned with the s556 priority regime
 See Re Amerind: Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth & Ors  HCA Trans 156, Case M137/2018.