Alphena Pty Ltd (in liq) v PS Securities Pty Ltd atf Joseph Family Trust
[2013] NSWSC 447
•29 April 2013
Supreme Court
New South Wales
Medium Neutral Citation: Alphena Pty Limited (In liq) v PS Securities Pty Ltd as Trustee of the Joseph Family Trust [2013] NSWSC 447 Hearing dates: 9 April 2013 Decision date: 29 April 2013 Jurisdiction: Equity Division Before: Kunc J Decision: Declarations made. Assessment of liquidator's remuneration referred to Registrar.
Catchwords: COMPANIES - Members' voluntary winding up - Former trustee of family trust - Appropriate scale for assessment of liquidator's remuneration.
TRUSTS AND TRUSTEES - Former trustee's lien over trust assets - Equitable jurisdiction to allow remuneration to liquidator of former trustee to be paid from trust assets.Legislation Cited: Corporations Act 2001 (Cth)
Legal Profession Act 2004 (NSW)
Supreme Court Act 1970 (NSW)Cases Cited: 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (In liq) (1999) 30 ACSR 377; 17 ACLC 500
Garra Water Investments Pty Ltd (In liq) v Ourback Yard Nursery Pty Ltd [2012] SASC 44
Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd [2004] NSWSC 1224; (2004) 213 ALR 373
Hu v PS Securities Pty Limited as trustee of the Joseph Family Trust and Alphena Pty Limited (In liq) [2011] NSWSC 303
Parbury & Ors (in their capacity as joint and several administrators of Trio Capital Limited (Admins apptd) & Ors v ACT Superannuation Management Pty Limited & Ors [2010] NSWSC 941; (2010) 79 ACSR 425
St Justins Properties v Rule Holdings Pty Ltd [1980] FCA 11; (1980) 40 FLR 282
Re Berkeley Applegate (Investment Consultants) Pty Ltd (In liq); Harris v Conway [1989] 1 Ch 32
Re Eastern Capital Futures Limited (In liq) [1989] BCLC 371
Re GB Nathan & Co (In liq) (1991) 24 NSWLR 674
Re Grimthorpe [1985] Ch 615
Re Lord (as liquidator of Maureen Michael Management Pty Ltd (In liq)) [2005] NSWSC 1044; (2006) 55 ACSR 539
Re Suco Gold Pty Ltd (In liq) (1982) 33 SASR 99
Re Sutherland (French Caledonia Travel Service Pty Limited (In liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361
Re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297
Re Walker & Anor [2009] NSWSC 557; (2005) ACSR 11Category: Principal judgment Parties: Alphena Pty Limited (In liquidation) (Plaintiff)
PS Securities Pty Limited ACN 141 021 445 as Trustee of the Joseph Family Trust
(Defendant)Representation: M.K. Condon SC (instructed by Sage Solicitors)
D.L. Cook (instructed by Mooney & Kennedy)
Sage Solicitors (Plaintiff)
Mooney & Kennedy (Defendant)
File Number(s): 2011/72723 Publication restriction: Nil
JUDGMENT
Summary
The Plaintiff, Alphena Pty Limited ("Alphena") was formerly the trustee of the Joseph Family Trust ("the Trust"). The Defendant, PS Securities Pty Limited ("PS Securities") is the current trustee of the Trust. In these proceedings Alphena seeks to vindicate its right of indemnity as a former trustee out of the assets of the Trust now held by PS Securities.
The parties ultimately only presented two issues for determination by the Court.
The first issue was the appropriate scale for determining the remuneration of Alphena's liquidator for services performed referable to Alphena's status as trustee of the Trust, including enforcement of Alphena's rights of indemnity from the assets of the Trust. In my view, the approach ordinarily adopted by the Registrar in determining the remuneration of an Official Liquidator should apply in the circumstances of this case.
The second issue was whether Alphena should have its legal costs of defending certain litigation, more fully described below, paid by PS Securities out of the assets of the Trust. It should, assessed on the ordinary basis.
The facts
The facts are uncontroversial and I find them to be as follows.
The Trust was established by a Deed of Settlement made on 31 January 1995 which appointed Alphena as trustee of the Trust. Clause 8(8) of that deed provided:
"The office of trustee shall ipso facto be determined and vacated if: ... (c) if the trustee being a company shall enter into liquidation whether compulsory or voluntary (not being a voluntary liquidation for the purposes of amalgamation or reconstruction) or have a Receiver or Manager appointed; or make or enter into any composition or scheme of arrangement with its creditors".
Shortly after the establishment of the Trust, Alphena, in its capacity as trustee, purchased commercial premises at West Ryde which at all material times have been the sole asset of the Trust.
On 20 November 2009 Ms Helena Hu obtained a District Court judgment against Alphena in its capacity as trustee in the sum of $419,176.62. Alphena was also ordered to pay Ms Hu's costs of those proceedings on an indemnity basis.
On 9 December 2009 PS Securities was appointed as co-trustee of the Trust. The appointment of PS Securities as a co-trustee was made in anticipation of the possibility that Alphena was at risk of liquidation or some other form of administration due to Ms Hu's judgment debt.
On 14 December 2009 Ms Hu served a statutory demand on Alphena pursuant to s459E(2)(a) of the Corporations Act 2001 (Cth) ("the Act") requiring payment of her judgment debt.
On 5 January 2010 Alphena entered into a members' voluntary winding up pursuant to the provisions of Part 5.5 Division 2 of the Act. On that day, in accordance with s495 of the Act, Alphena in general meeting appointed Ozem Azzam Kassem and Andrew James Barnden of Cor Cordis Chartered Accountants as joint liquidators of Alphena. Subsequently, Mr Barnden ceased to be a liquidator of Alphena.
By reason of cl 8(8)(c) of the Deed (set out in paragraph 6 above), Alphena ceased to be a trustee of the Trust upon the appointment of the liquidators. PS Securities continued as sole trustee.
On 2 March 2010 PS Securities became the new registered proprietor of the Trust's commercial premises at West Ryde.
On 14 April 2011 Justice Ward of this Court delivered judgment in Hu v PS Securities Pty Limited as trustee of the Joseph Family Trust and Alphena Pty Limited (In liq) [2011] NSWSC 303 ("the Hu proceedings"). Her Honour dismissed Ms Hu's application for leave to bring proceedings against PS Securities in the name or on behalf of Alphena to enforce, as trustee, a right of indemnification out of the Trust's assets for debts incurred by Alphena, including Ms Hu's judgment debt.
By a further judgment in the Hu proceedings on 3 May 2011 ([2011] NSWSC 362), her Honour made certain costs orders which I will discuss more fully below.
Procedural background
By the time these proceedings were called on for final hearing, the parties had gone a considerable distance in resolving the disputes between them. They and their legal advisors are to be commended for doing so.
As matters developed during the course of the hearing, only two issues were ultimately left for determination.
The first issue was agreed by the parties to be:
Is the appropriate scale for determining the fees and disbursements claimed by the plaintiff set out in Exhibits 3P and 4P the ordinary scale for a liquidator's remuneration or the special indemnity scale of a trustee?
I shall refer to that issue as "the assessment issue".
By way of further explanation, Exhibit 3P is a spreadsheet which the parties have agreed sets out details supporting a claim by the liquidator of Alphena in the sum of $112,456.00 in respect of work undertaken in connection with the Trust, including steps taken to enforce Alphena's right of indemnity. PS Securities concedes that it is liable to pay to Alphena so much of that claim as is allowed in an assessment process to be undertaken by the Registrar under delegated authority. The assessment issue requires me to determine what test or scale the Registrar should use in assessing that claim.
Exhibit 4P sets out the disbursements incurred by the liquidator of Alphena which the parties have also agreed are to be the subject of the same process of assessment.
The second issue was formulated by the parties as follows:
Are the Sage legal costs, the subject of an agreed fact, costs that were incurred in the ordinary administration of the company's winding up or are such costs reasonably and necessarily incurred pursuant to the company's right of indemnity as a former trustee?
I shall refer to this as the "legal costs issue".
The "Sage legal costs" referred to in the legal costs issue are evidenced by Exhibit 2P, which is an invoice from Sage Solicitors to the liquidator of Alphena in the sum $41,379.49.
The agreed fact referred to in the legal costs issue is
That in respect of Exhibit 2P, the fees reflected in that invoice are those fees charged by Sage legal to the plaintiff liquidator, in respect of work done in relation to the Hu proceedings. The Hu proceedings related to proceedings brought by the judgment creditor, Ms Hu, in the Supreme Court for leave to commence proceedings against the defendant under the indemnity, which were heard by Justice Ward. The fees charged by Sage legal do not include anything other than work done in relation to the Hu proceedings. (see Transcript page 10)
Power to determine the assessment issue and the costs issue
Having isolated the issues for determination, it is necessary to identify any specific power being relied upon. This will make clear whether, and if so to what extent, a discretion is being engaged. If it is, then the nature of the discretion will necessarily inform the matters which the Court can properly take into account in exercising that discretion judicially.
It is useful to recall the distinction between jurisdiction and power. Jurisdiction means the authority the court has to decide a matter. Power goes to the exercise of that authority. Without authority there can be no valid exercise of power: St Justins Properties v Rule Holdings Pty Ltd [1980] FCA 11; (1980) 40 FLR 282 at 284.
Jurisdiction is clear. The primary relief claimed in the Further Amended Statement of Claim is:
A declaration that the Plaintiff is entitled to be indemnified (the "right of indemnity") out of the assets of the Joseph Family Trust ("the Trust") for (ii) the remuneration properly due to the liquidators of the Plaintiff, together with all costs and disbursements incurred by them, arising out of services performed by them referable to the plaintiff's status as trustee of the Trust and/or the enforcement of the plaintiff's rights as a trustee or former trustee of the Trust (including the Plaintiff's right of indemnity).
Alphena now presses for declarations reflecting favourable answers to the issues posed for determination. The generality of the court's jurisdiction under s23 of the Supreme Court Act 1970 (NSW) and, more specifically, s75 of that Act in relation to declaratory relief answer the question as to jurisdiction.
Insofar as the Court is dealing with an aspect of the remuneration that may be due to a liquidator, the inquiry as to any specific power being relied upon directs attention to how remuneration is fixed in the context of a members' voluntary winding up. The answer to that is s459(1) of the Act, which provides that "the company in general meeting must appoint a liquidator or liquidators for the purpose of winding up the affairs and distributing the property of the company and may fix the remuneration to be paid to him, her or them".
There is no evidence that Alphena in general meeting fixed the remuneration to be paid to its liquidators either in relation to the matters now before the Court or the course of their administration generally.
Insofar as the present litigation arises in the context of a voluntary winding up, the parties, correctly in my opinion, accepted that there was no provision of the Act which in terms empowers the Court to determine the liquidator's remuneration in the case of a members' voluntary winding up under s495 of the Act. In Re Walker & Anor [2009] NSWSC 557; (2005) ACSR 11, Barrett J considered the position in relation to a creditors' voluntary winding up where the Court's power to determine the liquidator's remuneration under s473(3) of the Act could not, in the circumstances of that case, be engaged. His Honour ultimately concluded (at [31]) that:
If the statutory means of fixing the liquidator's remuneration prescribed by s499(3) are ultimately shown to be unworkable ... the Court will be in a position where it can, upon an appropriate application being made, itself determine the quantum of remuneration pursuant to s511(1)(a). The "question" of the quantum will be in need of determination and its determination will, in the circumstances postulated, be "just and beneficial".
Section 511 provides:
(1) The liquidator, or any contributory or creditor, may apply to the Court: (a) to determine any question arising in the winding up of a company ...
(2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms as it thinks fit or may make such order on the application as it thinks just.
In the case before me, the parties have agreed that:
(1) the liquidator of Alphena is entitled to remuneration in respect of the matters identified in the column headed "Trust" in Exhibit 3P and the disbursements identified in Exhibit 4P;
(2) an amount representing that remuneration and disbursements should be paid by PS Securities; and
(3) the amount should be assessed by the Registrar under delegation in a summary procedure analogous to the assessment of solicitors' costs that is used in a determination by the Court in a court ordered winding up under s473(3) of the Act.
In those circumstances, one power capable of being invoked (consistently with the decision of Barrett J in Re Walker) is the Court's power to determine "any question arising in the winding up of a company". On the assessment issue that "question" is the scale to be applied by the Registrar.
Section s511(2) of the Act is satisfied because in my view the determination of the question will be just and beneficial, having regard to the extent of the agreements that the parties have thus far made about how the issues in dispute between them should be resolved.
However, while s 511 is certainly one source of power, it seems to me that in the facts of the present case, the power that is being invoked is the inherent or equitable jurisdiction of the Court to allow remuneration in connection with the administration of a trust fund "which can apply so as to allow remuneration not only to a trustee, but also to someone who is for practical purposes controlling a trustee": Re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297 at [14] per Campbell J (as his Honour then was). Re Sutherland was an application by a liquidator in a creditors' voluntary winding up for remuneration from trust funds which he was administering in the course of administering and then liquidating the corporate trustee.
The same power has been relied upon in relation to a provisional liquidator (Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd [2004] NSWSC 1224; (2004) 213 ALR 373), a court appointed liquidator (Re Lord (as liquidator of Maureen Michael Management Pty Ltd (In liq)) [2005] NSWSC 1044; (2006) 55 ACSR 539) and by administrators in a voluntary administration (Parbury & Ors (in their capacity as joint and several administrators of Trio Capital Limited (Admins apptd) & Ors v ACT Superannuation Management Pty Limited & Ors [2010] NSWSC 941; (2010) 79 ACSR 425). I shall return to Re Sutherland below in considering the assessment issue.
The assessment issue - Alphena's submissions
Mr M K Condon SC's submissions on behalf of Alphena essentially focused on its position as a former trustee. Alphena primarily relied on the decision of Justice Gray in Garra Water Investments Pty Ltd (In liq) v Ourback Yard Nursery Pty Ltd [2012] SASC 44 ("Garra Water), which itself was based upon the decision of the South Australian Full Court in Re Suco Gold Pty Ltd (In liq) (1982) 33 SASR 99.
The facts before Justice Gray bear some similarity to the case at bar. The plaintiff was appointed trustee of the Garra Family Trust, which conducted a nursery and garden supply business. In the course of operating the business, the plaintiff incurred debts to a creditor which subsequently had the plaintiff company wound up. After the winding up, the work of the nursery continued to be conducted by the Garra family, notwithstanding the liquidation of the plaintiff trustee.
The Deed of Settlement for the Garra Family Trust contained a vacation of office clause in materially identical terms to that set out in paragraph 6 above. Eventually, a replacement trustee was appointed to the Garra Family Trust. The liquidator of the former trustee sought to exercise a right of indemnity over the assets of the Garra Family Trust, now under the control of the replacement trustee. A lien was also claimed over the assets of that trust in support of a right of indemnity.
Gray J analysed the matter as follows (footnotes and citations omitted):
[34] In Re Suco Gold Pty Ltd (In liq),King CJ considered that on resignation or removal, the former trustee lost none of its rights including the right of dealing with the trust property as against a new trustee to the extent required to satisfy the rights of indemnity and exoneration. A trustee retains its rights of indemnity and exoneration and these can be enforced by a liquidator against trust assets. What is not so clear is how the corporate trustee, through its liquidator, would seek to enforce these rights.
[35] As noted above, the plaintiff seeks a declaration that it is entitled to a lien giving it a charge over trust property. The nature of a trustee's lien was discussed in Re Suco Gold Pty Ltd (In liq),where King CJ observed:
The trustee's lien is an equitable lien which confers on him a charge over the trust property, whether in his possession or not, for the purpose of protecting and enforcing the right of indemnity. It also confers on the trustee a right to possession of the trust property for the purpose of protecting and enforcing the right of indemnity, Jennings v Mather. The right of possession of the trustee, until his right of indemnity is exercised, is superior to those of a new trustee or the cestuis que trust. The rights conferred by the lien passed to the liquidator. They would enable him to obtain and retain possession of the trust property until the right of indemnity has been exercised, and to realize the trust property in the course of exercising it. The lien is ancillary to the right of indemnity. When the right of indemnity has been exercised by recoupment of any amounts which the trustee has paid in connection with the trust and by payment out of the trust fund of any outstanding liabilities, the lien ceases and the balance of the trust property becomes available to a new trustee or the cestuis que trust as the case may be. ...
On these principles which I have discussed, the liquidator is entitled to have recourse to the property of each trust for the purpose of meeting the costs and expenses of winding up, the petitioner's costs and the liquidator's remuneration, so far as they are incurred in relation to each trust.
I consider that the above statements of principle insofar as they may not be binding should guide the approach I take to the resolution of this proceeding
[36] The plaintiff continued as the legal owner of the business from the date of liquidation until 25 November 2008. On that date, it ceased to be the legal owner of the business as it was replaced by the defendant. The plaintiff, however, continued as a bare trustee.
[37] A bare trustee may still hold the assets of a trust. A bare trustee's duties, powers and rights are limited to protecting the trust assets. A bare trustee retains rights of indemnity and exoneration and a lien over the assets of the trust.
[38] The plaintiff remained liable to meet the debts of the business as they existed as at 25 November 2008. The plaintiff had a lien over the assets of the business to meet the indebtedness of the plaintiff. That lien extended to protect the proper and reasonable expenses of the liquidation. The liquidation continued notwithstanding the plaintiff's replacement as trustee. As noted above, the plaintiff had responsibilities. The liquidator of the plaintiff also had responsibilities including the finalisation of the winding up.
[39] In my view, the indemnity operates to protect the plaintiff in respect of the debts of the business incurred to the date on which the plaintiff was notified of the appointment of the new trustee. The plaintiff is entitled to a lien over the assets of the business and is entitled to trace those assets in support of its right of indemnity.
[40] In written submissions, the defendant accepted that the plaintiff "was and is entitled to be indemnified by the trust for expenses properly incurred in the administration of the trust". It was submitted that the costs and expenses incurred by the liquidator in the administration of the plaintiff while it remained trustee were subject to a reasonableness test. It was accepted that the liquidator was entitled to recover his proper and reasonable costs and expenses incurred while the plaintiff remained trustee.
[41] On its replacement as trustee, as discussed above, the plaintiff remained as bare trustee with limited powers and obligations. Those powers and obligations included the taking of steps necessary to protect the trust assets and to enforce the indemnity for proper purposes.
His Honour ultimately concluded as follows:
[48] The liquidator is entitled, as was conceded, to his reasonable expenses in and about the winding up of the plaintiff and is entitled to be indemnified from the company's assets as trustee for that purpose. From the date of liquidation until 25 November 2008, those costs and expenses include those properly and reasonably incurred by the liquidator in the administration of the plaintiff as trustee. From 25 November 2008 until the winding up is concluded, they include the proper and reasonable costs and expenses of the liquidator in the administration of the plaintiff as a bare trustee. Those activities extend to the finalisation of creditors' claims against the plaintiff and steps taken to preserve the assets of the plaintiff to meet those claims. The indemnity also extends to the costs and expenses of the liquidator in the finalisation of the liquidation. The plaintiff is entitled to a lien over the assets for the purposes of giving effect to the indemnity. The plaintiff is entitled to trace those assets.
Relying on the foregoing analysis, Alphena submits that its right of indemnity extended to providing for its liability to pay remuneration to its liquidator, but only to the extent that work had been done in connection with the administration of the Trust. Although the Plaintiff ceased to be a trustee on 5 January 2010, it remained at law a bare trustee entitled to enforce the right of indemnity for proper purposes. The costs associated with the exercise of that indemnity are also covered by that right of indemnity, a position which was said to be consonant with the underlying principle that trustees are not expected to do any work on their own expense and are entitled to be indemnified against the costs and expenses which they incur in the course of their office: Re Grimthorpe [1985] Ch 615 at 622, in particular Dankwerth's J's statement that "the general rule is quite plain: they are entitled to be paid back all they have had to pay out". Therefore, Alphena concluded, its liquidator is entitled to his costs and disbursements on what is, in effect, the trustee or indemnity basis. Taking its example from Part 42 r 42.25 of the Uniform Civil Procedure Rules (NSW), this meant the liquidator was entitled to all his costs and disbursements unless they were unreasonably incurred.
The assessment issue - PS Securities' submissions
Mr D Cook of Counsel, who appeared for PS Securities, attacked Gray J's ultimate finding at [48] of Garra Waters that the costs incurred after the date the former trustee ceased to be a trustee were also part of the costs of the administration of the plaintiff as a bare trustee and therefore covered by the indemnity. It was submitted that his Honour was incorrect in finding that a corporate trustee which had been removed from office continued to be a trustee, bare or otherwise, once the trust property was no longer legally owned by it.
Applying that criticism to the facts of the present case, PS Securities submitted that once legal ownership of the Trust's property passed from Alphena to PS Securities, Alphena ceased to be any kind of trustee and work done by its liquidator thereafter could not be said to be administration of any trust. In pursuing its rights to an indemnity against trust assets, the former trustee, so it was submitted, was engaging in a self-interested exercise which did not entitle it to remuneration from the Trust assets on any basis, let alone the trustee basis.
Finally, PS Securities submitted that if the liquidator were entitled to be remunerated from the Trust assets, the Registrar should be directed to proceed as though it were a determination by the Court of liquidator's remuneration under s472 of the Act, in particular taking into account the factors set out in s473(10) to determine whether or not the remuneration claimed is reasonable.
Resolution of the assessment issue
I do not accept Alphena's submissions on the assessment issue. In my opinion, Alphena's approach impermissibly conflates the position of the trustee (or former trustee) and its liquidator. What is at issue in the present proceedings is the remuneration (if any) to which the liquidator is entitled for seeking to enforce the former trustee's personal right to seek indemnity from the Trust assets. The liquidator is not the trustee. His work remains liquidator's work, albeit in this case in relation to a former corporate trustee. While his remuneration for that work is recoverable by Alphena from the Trust assets pursuant to the company's right of indemnity, that does not mean the rate of remuneration is to be assessed on some higher notional basis such as the trustee basis used in assessing solicitors' costs.
A distinction must be drawn between the former corporate trustee and its liquidator. This distinction was noted by Campbell J in his principal judgment in the Re Sutherland litigation, namely Re Sutherland (French Caledonia Travel Service Pty Limited (In liq)) [2003] NSWSC 1008; (2003) 59 NSWLR 361 at [201] ("French Caledonia Travel"):
When a company which carries on no activities other than being a trustee of a trading trust goes into liquidation, the proper costs and expenses of the liquidator can be met from the assets of the trust; Re Suco Gold Pty Ltd (In liq) (1983) 33 SASR 99. King CJ reached this conclusion on the basis that a trustee had a personal right to be indemnified from the trust assets for expenses the trustee has incurred in the administration of the trust and a lien over the trust's assets to secure the right of indemnity. The trustee also has a personal right to resort to the trust property and pay expenses of administration of the trust from the trust assets, without first paying those expenses himself. When a trustee which is a corporation goes into liquidation, those personal rights, and that lien, are assets which are divisible in the liquidation. (King CJ says they pass to the liquidator - (at 104, 105, 107, 109). This is not, with respect, strictly correct, as the rights of the company remain with the company, and the liquidator acquires powers to deal with the assets of company in lieu of the directors, but this detail does not affect the validity of the main thrust of his Honour's argument.) (emphasis added)
In this case, keeping a clear distinction between the rights of the corporate trustee and its liquidator is, it seems to me, an essential part of the analysis. One then must add, and this proposition could not be and was not disputed by any party, that a former trustee retains its personal right as against a new trustee to seek indemnity out of the trust assets. Understood in this way, PS Securities' criticism of Gray J's reliance upon the former trustee having the status of a bare trustee is also answered. I think there is force in Mr Cook's submission that it is difficult to describe a former trustee as a bare trustee when it has parted with all of the property which was the subject of the trust. I think it is also difficult to characterise a former trustee as being a bare trustee of its own right of indemnity out of the trust assets (if that is what Gray J did).
However, it is not necessary for me in these proceedings to reach a concluded view as to the correctness of the approach adopted by Gray J. Being a bare trustee still possessed of trust assets is certainly sufficient to explain the basis of a right of indemnity out of trust assets. In addition, when the personal nature of that right is understood, it is clear that it necessarily survives even the loss of status as bare trustee where that can be said to have occurred.
What then of PS Securities' submission that a former trustee should not be remunerated for its time and trouble in pursuing its right to indemnity against trust assets? In my opinion, pursuing the right to indemnity is itself part and parcel of the right itself. If, as is undisputed, the former trustee has a lien over the trust assets to secure its right of indemnity, I see no reason why in principle that right (and the consequent lien) should not extend to the costs of and incidental to the enforcement of that right. I have neither been referred to, nor found, any authority to the contrary.
When the separate identity of the owner of that right (the former trustee) and the person giving effect to it on behalf of the former trustee (the liquidator) is recognised, the liquidator's work in taking steps to enforce the company's right of indemnity against the new trustee is seen as an incident of the winding up, albeit one that engages the Court's power to allow the remuneration in relation to that work to be paid from the trust fund.
The conclusions I have just expressed are consistent with another jurisdictional basis identified by Campbell J in Re Sutherland at [15]:
In permitting remuneration to a liquidator who administers trust funds, the decision in [Re Berkeley Applegate (Investment Consultants) Pty Ltd (In liq); Harris v Conway [1989] 1 Ch 32] also invoked another equitable principle, applicable outside trust law as well as inside it, that (at 50):
... where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property.
In my view, the passage cited by Campbell J from Re Berkeley Applegate supports the conclusion that a former trustee is entitled to receive from the trust fund not only what is necessary to satisfy its right of indemnity, but the costs incurred in enforcing that right of indemnity.
This leaves for decision the ultimate question of the scale to be applied by the Registrar in assessing the remuneration and costs in respect of which Alphena's liquidator is entitled to be indemnified from the Trust assets.
On this question, Garra Water does not in any event really assist Alphena. This is because it was conceded in that case that the liquidator was entitled to his proper and reasonable costs and expenses of the liquidation after the new trustee had been appointed. There was no suggestion that a full indemnity or trustee basis type of assessment should be undertaken.
Neither the parties' nor my own research has found any authority where there was argument about the appropriate scale. For example, in Re Sutherland it appears again to have been accepted that the ordinary basis for assessing a liquidator's remuneration should be applied.
In French Caledonia Travel [207]-[210], Campbell J considers the principle in Re Berkeley Applegate (to which I have referred in paragraph 54 above) at greater length. While it is not necessary for me to reproduce those lengthy paragraphs in this judgment, it is instructive to refer briefly to the relevant cases which Campbell J touches upon in that passage.
In Re Berkeley Applegate the liquidator sought an order for remuneration "in such sum as to the court shall seem just". However there was no issue before the court at that stage whether any particular item claimed by the liquidator should be allowed (see [1989] 1 Ch 32 at 41G - 42C). Therefore, that case does not assist on the current question.
In Re Eastern Capital Futures Limited (In liq) [1989] BCLC 371, Morritt J acceded to the liquidators' application that their remuneration out of the trust assets should be in accordance with a general scale under the relevant insolvency regulations. There does not appear to have been any suggestion in that case that a special scale should be applied. Similarly, McClelland J (as his Honour then was) in applying the principle in Re Berkeley Applegate in Re GB Nathan & Co (In liq) (1991) 24 NSWLR 674 at 686-689 proceeded on the basis that while remuneration was payable to the liquidator out of the trust assets, the ordinary level of remuneration applied.
Finally, in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (In liq) (1999) 30 ACSR 377; 17 ACLC 500 at 509, Finklestein J said (at 385):
These cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them. (emphasis added)
The approach which has apparently been adopted in the authorities to which I have just referred and the general principle that I have identified above that in undertaking work in relation to trust assets the liquidator nevertheless does so in his capacity as a liquidator, bring me to the conclusion that insofar as any scale is to be applied by the Registrar, it ought to be that which the Registrar regularly applies in assessing an Official Liquidator's remuneration under s473 of the Act.
This means that the Registrar should allow such costs and disbursements of the liquidator of Alphena as are reasonable, taking into account the matters referred to in s473(10). Subject to any further argument by the parties as to the form of the orders, I propose to give effect to this conclusion by giving a direction in the same form as that given by Campbell J in Re Sutherland at [22] that the Registrar assess the liquidator's application for remuneration constituted by Exhibits 3P and 4P as though it were an application by an Official Liquidator for approval of his or her remuneration.
I should also record that because Re Sutherland was not referred to by anyone during the hearing before me, I gave the parties leave to put any submissions to me about it in writing. I have had regard to those further submissions.
PS Securities urged that if, contrary to their primary case, I found that the liquidator was entitled to remuneration I should follow Re Sutherland. That is what I have done.
Alphena sought to distinguish Re Sutherland by referring me to cl 8(2)(b) of the Trust's Deed of Settlement, which provides that if a trustee is a person engaged in a profession, that trustee is "entitled to charge and be paid from time to time all usual professional charges ...". I do not think that reference assists Alphena for two reasons. First, as I have said, the liquidator is not the trustee. Second, it begs the question of what "usual" professional charges might be and, contrary to Alphena's submission, does not support an inference that the settlor intended remuneration to be on the "trustee basis" of assessment.
The costs issue - some further facts
The Hu proceedings were instituted on 23 December 2010 with the filing of a Statement of Claim by Ms Hu against Alphena and PS Securities. Ms Hu, as an unsecured creditor of Alphena, asserted an entitlement to be subrogated to Alphena's right of indemnity out of the Trust assets for the debt incurred by Alphena in defending the District Court proceedings on behalf of the Trust or to exercise on behalf of Alphena that right of indemnification in order to permit it to satisfy the District Court judgment debt which Ms Hu had obtained.
Thus far, the Hu proceedings have been the subject of three judgments in this Court.
By judgment [2011] NSWSC 98; (2011) 82 ACSR 234, Ward J made a freezing order against PS Securities as trustee of the Trust to preserve the assets of the Trust pending determination of the Hu proceedings.
On 7 March 2011 these proceedings were commenced by the filing of a Statement of Claim by Alphena against PS Securities seeking to vindicate Alphena's right of indemnity from the assets of the Trust.
On 25 March 2011 Ward J heard the next phase of the Hu proceedings, which she disposed of in judgment [2011] NSWSC 303 on 14 April 2011. The most important of the issues which her Honour had to determine on that occasion was whether Ms Hu should be given leave to proceed in Alphena's name against PS Securities to vindicate Alphena's right of indemnity in relation to Ms Hu's judgment debt. Her Honour refused to grant that leave.
It is unnecessary for me to set out in any detail the arguments advanced before her Honour for and against the granting of leave. As might be expected, those arguments are fully set out in her Honour's judgment. It is sufficient that I record that the main reason advanced by Ms Hu as to why she should be allowed to bring proceedings in the name of Alphena was alleged delay and unwillingness on the part of the liquidator of Alphena to pursue the right of indemnity against PS Securities. It will be appreciated from paragraph 71 above that by the time Ms Hu's application came to be heard by her Honour, the present proceedings had in fact been commenced on behalf of Alphena earlier that month.
For the purposes of determining the costs issue, it is important that I record her Honour's conclusions as to why she did not grant Ms Hu leave to proceed in the name of Alphena:
[62] I am not satisfied that the delay (if it may be so characterised) in the commencement of the proceedings is such as to warrant a conclusion that the liquidators are not willing to pursue the proceedings or not intending to do so in good faith. As to the concerns raised by Ms Hu, Mr Condon submitted (and I accept the force of this submission) that any legitimate concerns she may have as to the conduct of the proceedings by the liquidators are met by the undertaking that the liquidators are prepared to give to the effect that they will prosecute the proceedings with due dispatch; and will not settle the claim against PS Securities without providing creditors at least 14 days written notice of any proposed settlement. ...
[68] I am not satisfied the liquidators' conduct is such as to warrant a departure from the ordinary position (based on sound policy reasons) that the liquidator should have the conduct of proceedings to enforce the company's claim for indemnification in respect of debts incurred by it as trustee. That is sufficient to dispose of the claims for leave whether brought under the statutory provision or in the Court's inherent or equitable jurisdiction ...
[74] ... In particular, in circumstances where the liquidators have commenced (perhaps not as diligently as Ms Hu may have wished - although the gap between her demand for proceedings to be instituted and the commencement of those proceedings by the liquidators is not lengthy) proceedings to recover trust assets from which debts owing to creditors including Ms Hu can be paid; have expressed their willingness to do so and proffered undertakings to the Court in that regard; and have apparently reached agreements with their legal representatives to enable that to be done, I consider that the conduct of the proceedings should be left with them.
On 3 May 2011 by judgment [2011] NSWSC 362, Ward J disposed of the costs arising from the previous hearing. Her Honour's conclusions on the costs of the application were:
[40] The fair outcome in those circumstances, in my view, is that while Ms Hu should bear the liquidators' costs of the day's hearing before me on 25 March 2011, she should not bear the costs of the application to that point and those costs should be left to be recouped out of the assets of the company on the winding up in the ordinary course. That does not, in my view, deny the liquidators' restorative justice in terms of their costs - it simply means that Ms Hu (the major creditor of this stage of the company) is not directly responsible for the delays of the liquidators that led to the necessity for the proceedings to be commenced in the first place. Otherwise I consider that there should be no order as to the costs of the proceedings ...
[41] ... I note that at this stage Ms Hu is the major creditor of the company and, hence, the payment out of the company's assets at the conclusion of the winding up of any shortfall between the costs now ordered to be paid and the costs incurred by the liquidators (assuming that there is a recovery against PS Securities) will indirectly be borne by Ms Hu. ...
The costs issue - PS Securities' submissions
PS Securities advanced three reasons why I should conclude that the Sage legal costs were not costs reasonably and necessarily incurred pursuant to Alphena's right of indemnity as a former trustee, so that Alphena would not be entitled to recoup those costs out of the Trust assets.
First, it was submitted that the beneficiaries of the Trust should not pay for the costs incurred by what was essentially a fight within the camp of Alphena as to who should pursue the right of indemnity. It was submitted that Alphena's defence of the Hu proceedings was not a necessary step in pursuing the indemnity, but rather a fight between two potential parties who could have claimed through subrogation or as liquidator on behalf of Alphena.
Second, it was submitted that, as I have set out above, the effect of her Honour's decision was that the costs (other than the costs of the day of the hearing itself) were to be recouped out of the assets of Alphena on the winding up in the ordinary course.
Third, PS Securities submitted that, in the exercise of my discretion (which I have identified above as being either inherent or equitable), the liquidator should not have the Sage legal costs out of the Trust assets because it was the liquidator's own delay in bringing the present proceedings that necessitated the Hu proceedings. If the liquidator had acted promptly to pursue the right of indemnity then, so it was said, the Hu proceedings would never have been commenced and the Sage legal costs would never have been incurred.
The legal costs issue - Alphena's submissions
Alphena submitted that its defence of the Hu proceedings was not an incident of the winding up, as such, but was solely concerned with its right to enforce its right of indemnity out of the Trust assets. Having regard to some of my conclusions earlier in this judgment, that submission might be more accurately expressed in terms that the liquidator incurred the Sage legal costs on behalf of Alphena in defending the Hu proceedings to defend or preserve Alphena's right to indemnity out of the Trust assets.
Resolution of the costs issue
Alphena's submissions prevail on the costs issue.
I deal with the three matters raised by PS Securities as follows.
First, I do not think that the characterisation of the Hu proceedings as a fight within the Alphena camp is accurate. Ms Hu was proposing to bring proceedings ultimately for her own benefit by using Alphena's name. Her rights and obligations in doing so would be quite different to those to which the liquidator would be subject (particularly his obligation to act in the interests of all creditors).
Second, her Honour's conclusion that, with the exception of the day of the hearing day itself, the costs of the proceedings should be borne as part of the costs of the winding up, is not decisive of the question before me. I am dealing with what is really the next issue, namely whether those costs which are otherwise consistently with her Honour's approach costs to be borne in the winding up, are capable of properly being the subject of indemnity out of the Trust assets. I am of the view that those costs are to be properly characterised as reasonably and necessarily incurred in connection with preserving Alphena's entitlement to enforce its right of indemnity from the Trust assets. Her Honour was, as will be apparent from the passages I have extracted above, primarily influenced by what she described as the ordinary position that the liquidator should have the conduct of proceedings to enforce the company's claim for indemnity. In defending the Hu proceedings by seeking to uphold that "ordinary position" in my opinion the liquidator has incurred expense reasonably and necessarily in relation to the vindication of the right of indemnity.
Finally, insofar as discretion is concerned, the parties agreed that I should accept as facts in these proceedings the matters found by her Honour in judgment [2011] NSWSC 303. The difficulty for PS Securities in this approach is that her Honour did not expressly make a finding of delay against the then liquidators of Alphena. Nor, having regard to the matters recited in her Honour's judgment, would I be prepared to do so. I am unable to identify anything recorded in her Honour's judgment that would lead me to exercise any discretion that I have in the matter against the liquidator being entitled to recover the Sage legal costs out of the Trust assets.
Therefore, insofar as I am exercising a discretion in relation to the question, and in circumstances where Ward J made no adverse findings of delay, misconduct or otherwise against the then liquidators of Alphena in relation to the Hu proceedings, I am satisfied that the liquidators incurred the Sage legal costs reasonably and necessarily in connection with Alphena's right of indemnity such that they are entitled to be indemnified in respect of those costs out of the Trust assets.
There are three further matters which arise from the conclusion I have just expressed.
First, it is not apparent from the evidence whether the Sage legal costs set out in Exhibit 2P include the costs of the hearing day which Ward J ordered should be paid by Ms Hu. To the extent that the costs of that day are included, it will be necessary for the liquidator of Alphena to pursue (or otherwise compromise) those costs from Ms Hu. The entitlement to an indemnity out of the Trust assets in relation to the costs of that day will only attach to the extent that the liquidator is unable to recover them from Ms Hu.
Second, the parties, correctly in my opinion, have acknowledged in further written submissions which I gave leave for them to provide after the hearing, that if the Sage legal costs fell within the indemnity, I should make a declaration that PS Securities was liable to indemnify Alphena in respect of any liability in relation to those costs. I propose to do so. The intent of such a declaration, accepted by the parties, is that PS Securities would thereby become a third party payer under s302 of the Legal Profession Act 2004 (NSW) with all the rights as such under s 350 thereof. In the present case this includes a right to debate before a costs assessor whether Alphena has any liability to Sage Solicitors at all by reason of the terms of any applicable costs agreement.
Third, it follows from the preceding paragraph that I must also determine the scale on which the Sage legal costs are to be assessed. In my view, the declaration I propose to make constitutes an order of the Court under Part 42 r 42.2 of the Uniform Civil Procedure Rules (NSW) so that unless I otherwise order those costs will be assessed on the ordinary basis. I would not otherwise order. Even if Part 42 r 42.2 were not applicable I would reach the same conclusion in the exercise of discretion pursuant to the inherent, equitable or any other applicable jurisdiction.
While I am of the view that those costs were reasonably and necessarily incurred to defend or preserve Alphena's right of indemnity out of the Trust assets (thereby entitling them to be paid out of Trust assets), they are liquidator's costs rather than trustee's costs, incurred in upholding what was described by Ward J as the ordinary position that the liquidator should have the conduct of Alphena's claim. In my view, with respect, her Honour was correct in her orders on 3 May 2011 to describe the costs Ms Hu was ordered to pay on a party/party basis as "the liquidator's costs". Conformably with her Honour's approach I consider that the costs incurred to Sage Solicitors should be assessed on the ordinary basis. An application for indemnity costs was made by Alphena before her Honour, but not on the basis that Alphena (or the liquidator) was entitled to such an order because it or he was acting as a trustee or former trustee.
The form of relief
Declarations and directions to the Registrar should be made comfortably with these reasons.
In addition, Alphena presses for a declaration that it has a lien over the Trust assets to secure its right of indemnity. In practical terms, this means a lien over the Trust's commercial premises at West Ryde.
PS Securities submits there is no need for a declaration in relation to the lien because Alphena's interests are adequately protected by a caveat which Alphena has lodged over the title to the West Ryde premises.
I accept Alphena's submission that the caveat does not give it all the protection to which it is entitled in circumstances where I have found it has an entitlement to indemnity out of the Trust assets. For example, the caveat will be of little assistance against a liquidator of PS Securities, should one ever be appointed.
I am therefore of the view that a declaration confirming Alphena's lien should also be made.
As discussed with the parties at the conclusion of the hearing, I will separately publish draft orders for the consideration and, if necessary, making of further submissions by the parties. As requested by them, I will also make provision for the hearing of submissions as to costs.
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Decision last updated: 30 April 2013
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