Hey, that's my money! - the Priority of Bankruptcy Trustees

It is a common occurrence: you are owed a debt and you think you are protected because you hold security over some land, but the debtor is made bankrupt – maybe you will incur costs in realising the security that you cannot recover?  Then the trustee in bankruptcy steps in and before you know it, things are looking up….the trustee is selling the property, and you think you’re in a good spot. But as settlement approaches you find out that the trustee expects his or her costs to be paid in priority to your debt.

In this bulletin, we look at whether a trustee in bankruptcy is entitled to be paid remuneration and expenses ahead of a secured creditor. In other words, do trustees in bankruptcy have the same rights as liquidators? They do, but there are important limitations.

Liquidators

The basic principle taken from In re Universal Distributing Co Ltd (in liquidation) is that a secured creditor cannot take the whole of the funds realised if it stands by and lets the liquidator sell the assets, without first reimbursing the liquidator for his or her remuneration and expenses incurred in doing so. In other words, if a secured creditor receives a benefit as a result of the liquidator’s work, then the liquidator gets paid first for the costs of creating a fund for the secured creditor.

Trustees in bankruptcy

In Thackray v Gunns Plantations Ltd, which involved a claim for remuneration and expenses by receivers and managers, Justice Davies said that although the principle in Universal Distributing related to a liquidator:

 ‘……the existence of the lien does not depend on the status of the person claiming it. The categories of persons to whom the principle may apply are not closed….The underlying principle in each case is that it would be inequitable for the person who has created or realised a valuable asset, in which others claim an interest, not to have his or her costs, expenses and fees incurred in producing the asset paid out of the fund or property created.’

Whilst there have been no cases reported in Australia involving a trustee in bankruptcy’s entitlement to payment in priority, this is an accepted (though as yet untested) principle.

Key points and limitations

The key points and limitations on trustees being paid their costs in priority include:

• The remuneration and expenses claimed must be reasonable and the value of the assets is taken into account when determining reasonableness.
• If remuneration and expenses are incurred for more than one purpose (more than simply realising the assets), then the remuneration and expenses must be apportioned.
• Payment of remuneration and expenses will extend only to remuneration and expenses incurred ‘exclusively’ in the preservation, realisation and care of the assets.
• If the remuneration and expenses incurred are related to creditors’ claims but not specifically to the realisation of the assets, then the remuneration and expenses are not automatically charged against the assets.
• Acting on legal advice is no justification if the remuneration and expenses claimed are excessive or improper.
• The trustee can be required to prepare accounts to justify his or her claim.
• If the claim to priority is challenged, the court will not conduct an in-depth analysis of the actions (or accounts) of a trustee –it is a summary procedure that only requires sufficient evidence to determine whether he or she was acting properly and in accordance with his or her duty in realising the assets and that the amount claimed is fair and reasonable.

Summary

In considering where you stand in the list of priorities, don’t forget to consider the possibility of a trustee in bankruptcy being ahead of you in the queue if you don’t realise the asset yourself - otherwise you run the risk of an unhappy settlement day. And remember that you are entitled to make enquiries as to whether the costs claimed in priority to you are reasonable.

Author: Carrie Peterson