Colbran, in the matter of Balsub Pty Ltd (in liquidation)

Balsub Pty Ltd was a small business company with a structure many Australian operators will recognise. It ran Subway restaurant franchises in Victoria as trustee of the Balms Family Trust, but it employed the staff working in those restaurants in its own right. That meant the same company was wearing two legal hats at once.

That arrangement may work while the business is trading, but it can become difficult in insolvency. Once Balsub was wound up in July 2019 on the Deputy Commissioner of Taxation's petition, the liquidators had to work out what assets existed, what debts existed, and in what capacity those debts had been incurred.

The trust deed added another complication. The earlier liquidator identified an ipso facto clause that disqualified the company from acting as trustee once it went into liquidation. Earlier court orders had already been needed to allow dealings with trust assets after that disqualification.

By the time Jonathan Colbran became liquidator in September 2021, the position was stark. The liquidator said there was no material real or personal property available for creditors. The only material potential recovery appeared to be a possible insolvent trading claim under s 588M(2) of the Corporations Act against the sole director, Mr Bradley Marks.

That possible claim was said to be worth up to $3,235,209.93. At the same time, the company had substantial unsecured claims in two categories. Some were company debts in its own right, including employee claims, the Commonwealth's Fair Entitlements Guarantee subrogated claim, tax liabilities, Telstra and Marina Radiology. Others were trustee-capacity debts, including trade creditors and a large related-party claim by the Marks Family Trust.

The commercial problem was practical and immediate. If the liquidator recovered money from the insolvent trading claim, how should that money be distributed? Should it be shared across all debts, claims and expenses of the company, or should the liquidator first separate creditors according to whether the debt had been incurred by the company personally or as trustee?

The liquidator applied under s 90-15 of the Insolvency Practice Schedule (Corporations) for a direction that he would be justified and acting reasonably if he proceeded on the basis that any proceeds of the s 588M cause of action could be applied in discharge of debts, claims or expenses of the company, irrespective of whether those liabilities had been incurred by the company in its own right or as trustee of the Balms Family Trust.

He also sought confirmation that any such proceeds could be distributed in accordance with the priorities prescribed by ss 556 and 555 of the Corporations Act. So the issue was not whether the liquidator should make a commercial call about settlement or litigation strategy. It was a legal question about the character and distribution of a statutory recovery in a liquidation involving mixed-capacity debts.

The published reasons explain the liquidator's argument in clear terms. He said s 588M(2) embodies a principle of pari passu or equal sharing. On that approach, the section was intentionally framed so that all creditors share in sums recovered by a liquidator, rather than requiring the liquidator to carve up the recovery by reference to narrower categories of debt.

The liquidator also argued that forcing a further split by trustee or personal capacity would be impractical and not contemplated by the legislation. The reasons note that, if trust creditors had to be treated differently, the liquidator would need to identify not only which debts were incurred in a trustee capacity, but also which of those debts were incurred in that capacity while the company was insolvent. The liquidator said that was not a workable reading of s 588M.

The court also had to consider whether it was appropriate to give a direction where no contradictor appeared. The reasons show that the liquidator had given notice to the Commonwealth, ASIC, the Commissioner of Taxation, the Department of Employment and Workplace Relations, and Carwellyn Pty Ltd as trustee of the Marks Family Trust, which was said to be the natural contradictor and the only significant trustee-capacity creditor. None sought to be heard.

McEvoy J granted the direction sought. The court ordered that the liquidator was justified and acting reasonably in proceeding on the basis that proceeds of the liquidator's s 588M cause of action were to be applied in discharge of debts, claims or expenses of the company within the meaning of ss 553 or 556, irrespective of whether those debts, claims or expenses were incurred by the company in its own right or in its capacity as trustee of the trust.

The court also ordered that those proceeds were to be applied in accordance with the priorities prescribed by ss 556 and 555 of the Corporations Act. In other words, the liquidator was given judicial comfort that he could treat the proceeds of the insolvent trading claim as available across the company's debts, claims and expenses without first separating them by capacity, while still observing the ordinary statutory priority regime.

The catchwords and reasons make clear that the pari passu or equal-sharing principle was central to the court's approach. The published reasons record the liquidator's submission that s 588M had been intentionally redrawn to ensure all creditors share equally in sums recovered by a liquidator, and that the conclusion sought was consistent with both the text of the Corporations Act and the equal-sharing principle that underpins s 588M and the corporate insolvency regime more generally.

The court also accepted that this was an appropriate matter for a direction under s 90-15. The reasons explain that directions can be given where there is a real legal issue affecting how a liquidator should act, and where the liquidator seeks protection from later criticism if the legal position turns out to be wrong. The court distinguished that kind of issue from a purely commercial decision, which would not usually justify a direction.

Importantly, the reasons also explain the limited effect of a direction. The direction did not finally determine every creditor's rights. Rather, it protected the liquidator if he acted on the directed basis after full and fair disclosure. The reasons note that if proceeds were later recovered, a creditor could still commence proceedings seeking declarations or orders about entitlement and distribution on a different basis.

The court further ordered that the liquidator's remuneration, costs and disbursements of the application, including legal costs, be paid from the assets of the company and trust on an indemnity basis in accordance with s 556.

This case is not authority for the broad proposition that capacity never matters. In fact, capacity mattered enough here that earlier directions had already been obtained about which debts were incurred by the company personally and which were incurred as trustee. What this case shows is that, for the specific purpose of dealing with proceeds of a liquidator's insolvent trading claim, the court was prepared to direct that the liquidator could proceed on an equal-sharing basis across the company's debts, claims and expenses, subject to the statutory priorities.

For business owners, the practical message is that mixed-capacity trading can create expensive uncertainty once insolvency starts. If one company signs some documents as trustee, employs staff personally, incurs tax liabilities in its own name, and records related-party advances loosely, a liquidator may later need court guidance just to work out how a recovery should be distributed.

The case is especially relevant to franchise operators and hospitality businesses because those businesses often use layered structures. A company may hold the franchise agreement or lease as trustee, while payroll, tax registrations, supplier accounts and equipment arrangements may not all be set up the same way. If the business fails, those inconsistencies can affect employees, the ATO, trade creditors, related parties and directors.

The judgment also shows that employee-related claims remain highly significant. The published reasons record substantial employee claims and a Commonwealth claim under the Fair Entitlements Guarantee Scheme, with the liquidator proceeding on the basis that the Commonwealth was subrogated to employee priority under s 560. So even where a trust structure sits behind the trading business, employee and statutory priority issues can still dominate the distribution analysis.

Another practical point is procedural. The liquidator sought directions before any recovery had been made and before formal proofs of debt had been called for. That is a reminder that insolvency administrations often require legal clarity early, especially where funding, litigation strategy and creditor expectations depend on how any future recovery would be shared.

If your business uses a company as trustee, the safest approach is to make the paperwork match the reality of how the business operates. This case shows how quickly uncertainty can become a major issue once a liquidator starts reconstructing the position.

Start with signing blocks and contract parties. If the company is acting as trustee, the contract should say so clearly. If the company is acting personally, that should also be clear. The same discipline should carry through to invoices, purchase orders, finance documents, leases, franchise agreements and supplier accounts.

Payroll and employment records also need attention. In Balsub, employees were treated as creditors of the company in its own right. If your business intends the employing entity to be the company personally, payroll systems, superannuation records, leave records and employment contracts should all reflect that consistently.

Tax and trust administration matter too. The judgment refers to separate ABNs being used for the trust trading activity and the company itself. Businesses using this kind of structure should make sure registrations, BAS reporting, withholding arrangements and accounting records line up with the legal capacity actually being used.

Related-party claims are another pressure point. The Marks Family Trust was the only significant trustee-capacity creditor identified in the reasons. In practice, related-party loans and advances often become contentious in insolvency. Clear contemporaneous records, loan terms and account reconciliations can reduce later disputes.

Finally, review the trust deed. In this case, the trust deed contained an insolvency-triggered clause that disqualified the company from acting as trustee on liquidation. Clauses of that kind can materially change the administration once insolvency occurs.

The company was incorporated on 24 June 2004, and the trust was established on 25 June 2004. The company was wound up on 26 July 2019 on the Deputy Commissioner of Taxation's petition. Earlier Federal Court orders concerning trust assets were made in 2020. Jonathan Colbran was appointed liquidator on 29 September 2021. The hearing of this application took place on 10 November 2023, with the last submissions dated 22 November 2023. Judgment and orders were delivered on 19 December 2023.

The published orders also record that parts of the reasons were redacted and that the unredacted reasons were suppressed from publication, except to the plaintiffs and their legal representatives. That means the public judgment gives a reliable account of the orders and the court's reasoning at a high level, but not every factual detail behind the potential insolvent trading claim or the confidential material referred to in the reasons.