Insolvency 09 September 2010

Administrators out of pocket: Court declines to award full reimbursement of costs to administrator

09 September 2010

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Administrators of corporate trustees beware: there are limited ways of recovering fees for work done in respect of insolvent trusts. The decision of Palmer J inTrio Capital Limited v ACT Superannuation Management Pty Ltd – [2010] NSWSC 941 declined to permit Administrators to have access to the property of solvent trusts that were administered by the same bodies that administered the insolvent trust schemes. As a consequence, the fees incurred in respect of the insolvent trust schemes were, to the extent they could not be recovered from the general assets of the trustee, borne by the Administrators.

Given this clarification of the law, an Administrator should always ensure that a trustee company has sufficient assets to cover its costs before accepting a retainer to act as an administrator of a insolvent trust. If it does not, the Administrator will not be entitled to seek reimbursements of its costs from other trusts which are also managed by the trustee. 

Facts of the case

The plaintiffs were joint and several Administrators of Trio Capital Limited. Trio was the responsible entity of 12 managed investment schemes registered under Chapter 5C of the Corporations Act 2001 (Cth). 

Many of the schemes invested in the acquisition of “impaired assets”, which were in fact assets which were, in the judge’s view, “elusory, worthless or untraceable”. Many of the schemes suffered heavy losses and some had no assets left. 

In undertaking their work, the Administrators were first paid out of the assets of Trio Capital (the trustee) but these assets were not sufficient to pay all expenses and remuneration. The administrators then sought to obtain court approval for access to the scheme assets to reimburse them for the work they had performed. If they had performed work in respect of an insolvent scheme then they sought leave to have that work paid for by a solvent one. 

Reimbursement of administrator’s fees from trust property

The Court, exercising its inherent jurisdiction in the administration of trusts, has authority to authorise the Administrator to pay himself or herself out of scheme assets for remuneration and costs incurred in the administration of the scheme. An administrator may seek a direction from the court pursuant to section 447D of the Corporations Act for this discretion to be exercised.

The Court’s discretion should be “sparingly exercised” or exercised “in exceptional cases”. As stated in the leading judgment of Re Duke of Norfolks Settlement Trusts [1982] CH 61, Fox LJ said:

“In exercising that jurisdiction the court has to balance two influences which are to some extent in conflict. The first is that the office of trustee is, such as, gratuitous; the court will accordingly be careful to protect the interests of the beneficiaries against claims by the trustees.  The second is that it is of great importance to the beneficiaries that the trust should be well administered.”

However, there is an overriding general principal that the trustee of several separate trusts cannot charge the beneficiaries of one trust with the costs and expenses incurred in relation to work done for the benefit of another trust. 

Why was the application refused?

Justice Palmer concluded that it would not be right for the Administrators to be granted an exception to the general law, thereby allowing them to prefer their own interests to the interests of the members of the solvent trusts. His Honour therefore declined to grant the leave sought.

Instead, the Administrator’s costs were apportioned as follows:

1.To the extent that the trustee’s assets were sufficient to pay a proportion of the administrator’s “remuneration” and “expenses”, those assets were used to pay, in the same proportion:

  1.  the costs relating to the administration of the trustee;

  2.  the administrator’s costs relating to the insolvent schemes; and

  3.  the administrator’s costs for the solvent schemes.

2.  The outstanding administrator’s costs that were attributable to a particular scheme could only be paid out of the assets of that scheme. If that particular scheme was insolvent then the administrator was not be able to recover that money from other trusts. 

If you would like further details regarding this decision or the administration of insolvent trusts generally, please contact Penelope Pengilley on (03) 9321 9949 or Chris Brodrick on (03) 9321 9804.