Austec Wagga Wagga Pty Limited v Rarebreed Wagga Pty Limited
[2012] NSWSC 343
•13 April 2012
Supreme Court
New South Wales
Medium Neutral Citation: Austec Wagga Wagga Pty Limited v Rarebreed Wagga Pty Limited [2012] NSWSC 343 Hearing dates: 3 April - 4 April 2012 Decision date: 13 April 2012 Jurisdiction: Equity Division Before: Stevenson J Decision: Mr Chamberlain be appointed trustee of the Trust pursuant to s 70 of the Trustee Act.
Catchwords: TRUSTS - trustees - appointment - purported appointment - power of appointment - fraud on the power Legislation Cited: Trustee Act 1925
Corporations Act 2001
Real Property Act 1900Cases Cited: Fitzwood Pty Ltd v Unique Goal Pty Ltd (2001) 188 ALR 566
Hillcrest (Ilford) Pty Ltd v Kingsford (Ilford) Pty Ltd (No 2) [2010] NSWSC 285
Re Burton; Wily v Burton (1994) 126 ALR 557
Vacuum Oil Co Pty Limited v Wiltshire (1945) 72 CLR 319
Wells v Wily (2004) 50 ACSR 103; [2004] NSWSC 607Texts Cited: Jacobs' Law of Trusts in Australia, 7th ed (2006)
Young et al, On Equity, (2009)Category: Principal judgment Parties: Austec Wagga Wagga Pty Ltd (1st plaintiff)
Mr Christopher Chamberlain (2nd plaintiff)
Rarebreed Wagga Pty Ltd (1st defendant)
Mr John Cullen (2nd defendant)
Mrs Christine Cullen (3rd defendant)Representation: Mr M J Dawson (plaintiffs)
Mr R McKeand SC and Mr C M Wilson (1st and 2nd defendants)
Mr J M Ireland QC (3rd defendant)
TressCox Lawyers (plaintiffs)
Creaghe Lisle (1st and 2nd defendants)
Denniston & Day (3rd defendant)
File Number(s): SC 2011/405400
Judgment
Introduction
Before the Court is the plaintiffs' Amended Originating Process filed on 22 March 2012 and the first and second defendants' Interlocutory Process filed on 21 March 2012.
The matter for determination is who, or what entity, ought henceforth be the trustee of a discretionary trust established by a Deed of Settlement on 8 March 1995, known as the "Cullen Family Trust" ("the Trust").
Until 14 July 2011 the first plaintiff ("Austec") was the trustee of the Trust.
On that day the second defendant ("Mr Cullen") purported to remove Austec and to appoint the first defendant ("Rarebreed") as trustee of the Trust.
Eleven days later, on 25 July 2011 the second plaintiff ("Mr Chamberlain") was appointed liquidator of Austec. Mr Chamberlain is a registered liquidator and trustee in bankruptcy.
Austec and Mr Chamberlain seek an order pursuant to s 70 of the Trustee Act 1925 (the Act) that Mr Chamberlain be appointed trustee of the Trust.
The third defendant, ("Mrs Cullen"), supports Mr Chamberlain's appointment.
Mr Cullen and Rarebreed contend that either Rarebreed should remain trustee or, alternatively, that Mr Andrew Bowcher, chartered accountant, be appointed trustee.
Background
On or about 25 November 1991 Mr and Mrs Cullen commenced co-habitation.
They were married on 2 April 1993.
On 3 July 1993 Mr and Mrs Cullen became the sole directors and equal shareholders of Austec.
By a Deed of Discretionary Trust dated 8 March 1995 ("the Deed") made between Peter Michael Cummins, as settlor and Austec as trustee, the Trust was created.
Austec has played no role and has conducted no business otherwise than as trustee of the Trust.
The beneficiaries of the Trust include Mr and Mrs Cullen and their children.
By clause 6(i)(a) of the Deed, power to appoint a new trustee was vested in Mr Cullen.
Clause 6(iii) of the Deed provided that: -
"The power to appoint a new trustee as in the clause contained shall not be exercised in favour of (...) the person exercising the power of appointment (...) [I]n the event that the first appointor shall become the subject to a legal disability including being declared bankrupt (...) [the] power of appointment and removal vest in the first appointor shall vest in the trustee. Upon the first appointor ceasing to be subject to a disability including the sequestration order ceasing to have effect then the power of appointment and removal previously referred to shall thereafter cease and revest in the first appointor." (emphasis added).
From 1996 Austec, as trustee of the Trust, carried on a business ("the Business") as an electrical wholesaler under the name "Australec Switchgear". The nature of the Business was the importation and supply of electrical components. The Business was (and still is) carried on from premises owned by Austec at 11 Lawson Street, Wagga Wagga ("the Property").
Mr Cullen ceased to be a director of Austec on 16 March 1999. On 6 December 2000 he was made bankrupt. He was discharged from bankruptcy on 7 September 2003.
At or around the time Mr Cullen became bankrupt, Mrs Cullen became the sole director and shareholder of Austec. That remains the position to this day. Mr Cullen did not resume his role as director after being discharged from bankruptcy on 7 September 2003.
According to the financial statements of Austec, the company expended the following amounts on "research and development" during the financial years ended 30 June 2001 to 30 June 2009: -
2001
$125,251.25
2002
$242,000
2003
$365,000
2004
$705,186.34
2005
$330,000
2007
$316,088.32
2008
$215,712
(No figure appears to be available for the year ended 30 June 2006).
The plaintiffs contend that the purported expenses for "research and development" were "fictitious". It is common ground that Austec did not in fact spend or incur a liability for "research and development" as asserted in its accounts (or at all), and that the consequence of this is that the Trust is now exposed to a liability to the Australian Taxation Office ("ATO") in the order of millions of dollars.
Mr and Mrs Cullen separated in January 2004. They were divorced on 14 May 2010.
On 27 July 2010 Mrs Cullen commenced proceedings against Mr Cullen in the Family Court of Australia seeking orders for property settlement.
On 1 December 2010 the Family Court made the following order: -
"That the Husband and Wife do all acts and things and sign all documents to forthwith cause the Company Accountant, Peter Cummins to appoint Lloyds Business Brokers ('the Selling Agent') to do the following;
a.Value the business known as Australec Switchgear and operated by the Cullen Family Trust of which Austec Wagga Wagga Pty Ltd (ACN 055 828 816) is Trustee ('the business') and such valuation to include all real estate, intellectual property, stock plant and equipment, both in Australia and/or China and New Zealand;
b. Market and sell the said business on such terms and conditions as the parties agree in writing and in default of agreement, as determined by the Family Court;
c.The costs of the sale shall be paid by the business; and
d.On settlement of the sale the proceeds are to be invested in an interest bearing account in the joint names of the parties, pending further order of the court."
Lloyds Business Brokers have been appointed as selling agent and have conducted negotiations with some interested parties. No sale of the Business has yet been affected.
Mrs Cullen's proceedings remain on foot in the Family Court, pending determination of these proceedings.
Although Mr and Mrs Cullen separated in January 2004, and were divorced in May 2010, it seems that until early 2011 they maintained some kind of business relationship and some degree of cooperation in regard to the conduct of the Business.
There is a dispute between Mr and Mrs Cullen as to which of them was responsible for the inclusion in the Trust's financial statements of the purported "research and development" expenses. I am not called on to resolve that dispute in these proceedings. That will, or may, be a matter for the Family Court in due course.
In his affidavit evidence in these proceedings, and initially in cross-examination, Mr Cullen asserted that he first became aware of the issue in around March 2011. However a document that he signed on 20 November 2010 showed that he was aware of the issue at least by that date.
However that may be, Mr Cullen claimed that Mrs Cullen prevented him having access to Austec's bank account in around March 2011 and claimed that, at around that time, Mrs Cullen locked him out of a part of the Business premises.
According to a letter written later by Mr Cullen's solicitors, Mr Cullen "caused doors and access gates to be bolted and padlocked" in late April or early May 2011 after: -
"...he discovered that [Mrs Cullen] had gained access to [Mr Cullen's] computer and obtained information including privileged correspondence between himself and his legal advisors. We understand that the padlocks were installed at around that time to prevent [Mrs Cullen] repeating such actions."
On 4 May 2011 Mrs Cullen withdrew $600,000 from Austec's bank account. On 15 June 2011 Mrs Cullen withdrew a further $1 million from that account. There was no dispute before me that Mrs Cullen thereby applied Trust funds for her own purposes. Part of the funds were used to buy a property in Victoria. Again, I am not asked to deal with the consequences of this conduct. It is, or may, be a matter to be dealt with by the Family Court.
On 23 June 2011, Mr Cummins (who had acted as Austec's accountant) wrote to Mr Cullen's solicitors: -
"I refer to the above client and the John Cullen Family Trust of which he is a beneficiary. As you are aware the trust commenced on 8th March 1995.
Over the years the director has advised an amount as owing to Sam Chung and his associated companies in China, for research and development costs.
However to date no repayment has ever been advised as having been made off that debt. Mrs Cullen has confirmed the balance outstanding each year. As at the 30th of June 2010 the account balances are
Sam Kwok International Group $5,931,000.00
Mai Chung Metal Works $559,331.15
Should these loans not be repayable for any reason the balance must be returned as income (under an extraordinary item) in the year of income that the advice is received. Just to confirm the above - if a determination is made that the loan accounts are not to be repaid then the accrued loan will have to be returned as income on the date that the determination is made.
Income tax liabilities will accrue to the beneficiaries on the extraordinary income as shown in their income tax returns. The taxation rate applicable to this income would be at the rate of 46.5 cents for each dollar of income (estimated liability $3,018,003.90).
Please advise the loan account balance as at the 30th of June 2011."
On 24 June 2011 Mr Cullen opened a bank account through which, at least from 18 July 2011, he conducted and still conducts the Business.
On 6 July 2011 Mr Cullen's solicitors wrote to Mrs Cullen's solicitors referring to the bolting and padlocking of the doors and access gates to which I have referred and continued: -
"We note that in the telephone conversation between yourself and the writer on 30 June last we raised with you the very significant tax issue that our client has brought to our attention. We enclose herewith a copy of a letter we have received from PM Cummins & Co in relation to the tax liability.
Your suggestion that our client be appointed Director of the business in substitution of your client would, on the face of it, appear to be little more than the transfer of a poisoned chalice. Our client believes that the most important issue at this stage is to rectify the potential liability...
We note that you assert that the doors of the business have remained closed since 29 June 2011, this is not true. Our client continues to run the business as he has at all times.
In the meantime our client has concerns that your client may have acted in removing funds from the company account. Would you please provide us with full statements for the company's bank accounts for the period 1 January 2011 to date".
On 8 July 2011 Mrs Cullen purported to appoint the second defendant, Mr Chamberlain, as administrator of Austec.
It is common ground that this purported appointment had no legal effect.
On 12 July 2011, Mr Cullen spoke to his solicitor, Mr Finch who made a note: -
"I explained that I received a letter from [Mrs Cullen's solicitors] advising that they were putting the company into administration. We had some discussions in relation to the business set-up and it appears that the Cullen Family Trust is actually the owner of the business, Australec Switch Gear.
In short, I have asked him to get me a copy of the [Trust] Deed and see what we can do."
About an hour later Mr Finch had a further conversation with Mr Cullen and made this note: -
"Advised that I had had the opportunity to read the Trust Deed. He does have the unfettered power to remove [Austec] as Trustee of the Trust and we are going to discuss that with Peter Cummins tomorrow..."
On 14 July 2011 a number of events took place.
First, Rarebreed was registered at the Australian Securities and Investments Commission. Mr Dean Sanbrook was appointed the sole director and shareholder.
Mr Sanbrook was, and is, an employee of the Business. He is employed as a storeman. He is 25 years of age and has worked in the Business since leaving school.
Also on 14 July 2011 Mr Cullen purported to appoint Rarebreed as trustee of the Trust in place of Austec.
On 25 July 2011 Mrs Cullen, as the sole member of Austec, resolved:
"That as the Company in the opinion of the Directors will not be able to pay its debts within twelve (12) months, the Company be would up by a Creditors Voluntary Winding Up".
By a deed made between Mr Cullen and Rarebreed on 14 October 2011, those parties purported to confirm Rarebreed's appointment as trustee of the Trust. That deed recited the background as follows: -
G."[Mr and Mrs Cullen] have become estranged and separated and are currently involved in acrimonious property division proceedings in the Family Court of Australia. [Mrs Cullen] has abandoned her involvement in the operation of the Business and the Business has been operated by [Mr Cullen] alone since about May or April 2011.
H.By letter dated 8 July 2011 [Mrs Cullen's] family law solicitors advised [Mr Cullen's] family law solicitors of her intention to have Austec placed into external administration.
I.By written notice dated 14 July 2011 [Mr Cullen] invoked his power to remove Austec as trustee of the Trust and appointed Rarebreed as trustee in its place.
J.Rarebreed by written consent dated 14 July 2011 consented to the appointment as trustee.
K.Christopher Mel Chamberlain (hereinafter referred to as ('Chamberlain') was appointed liquidator of Austec pursuant to a Creditor's Voluntary Liquidation on 25 July 2011.
L.Chamberlain through his solicitors has questioned the validity of Rarebreed's appointment as trustee of the Trust - specifically referring to the requirements of section 6 of the Trustee Act 1925 (NSW).
M.Neither the purported invalidity of both Austec's removal and replacement by Rarebreed raised by Chamberlain is conceded by [Mr Cullen] or Rarebreed but for more abundant caution it is declared as follows:".
On or about 27 May 2010, Mr Cullen lodged a caveat ("the Caveat") on the title of the Property claiming a "Beneficial Interest by virtue of a Trust Deed".
Matters not in issue
There is no issue that I should make: -
(a) a declaration that Austec is entitled to be indemnified for all debts, damages, obligations or other liabilities incurred arising or awarded by or against Austec in the execution of any power, duty, discretion or authority in respect of all actions, claims, demands and costs whatsoever relating to or concerning the Trust, properly incurred by Austec in its capacity as trustee of the Trust;
(b) a declaration that the assets of the Trust are charged in favour of Austec for such sum as will fully indemnify and exonerate Austec for all debts, damages, obligations or other liabilities incurred arising or awarded by or against Austec in the execution of any power, duty, discretion or authority in respect of all actions, claims, demands and costs whatsoever relating to or concerning the Trust, properly incurred by Austec in its capacity as trustee of the Trust;
(c) an order pursuant to s 74 of the Real Property Act 1900 that Mr Cullen withdraw the Caveat from the title of the Property, being the land contained in Folio Identifier 3/607742;
(d) an order that the costs of Austec in these proceedings be paid from the assets from the Trust on the trustee basis; and
(e) an order that the costs of the winding up of Austec be costs and expenses in the administration of the Trust.
Matters in dispute
The following matters are in dispute: -
(a) whether the purported appointed by Mr Cullen of Rarebreed as trustee of the Trust was ultra vires the power of appointment, or a fraud on the power of appointment;
(b) if so, should the Court exercise its power under s 70 of the Act to appoint Rarebreed, Mr Chamberlain, or Mr Bowcher as trustee of the Trust; and
(c) whether Mr Chamberlain should be appointed as a receiver of the assets of the Trust.
The purported appointment of Rarebreed as trustee of the Trust
As I have set out above, by clause 6(i)(a) of the Deed, Mr Cullen was empowered to appoint a new trustee of the Trust. However, by reason of clause 6(iii) of the Deed, such power was not to be exercised by Mr Cullen in his own favour. The clause provided that the power of appointment was not to be exercised "in favour of (...) the person exercising the power of appointment".
This prohibition is consistent with, and indeed reflects, the law that the power to remove and appoint a trustee must be exercised for the benefit of the beneficiaries of the Trust, and not for the benefit of the appointor.
Thus is Re Burton; Wily v Burton (1994) 126 ALR 557 at 559-560 Davies J held: -
"When the power is contained in a deed of trust, the donee of the power is even more constrained to act in the interests of the persons for whose benefit the power was conferred. Thus, in Re Skeats' Settlement (1889) 42 Ch D 522, Kay J held that, as a power of appointing new trustee was fiduciary power, the donee of the power may not exercise it so as to appoint himself. At 527, His Lordship said:
...the universal rule is that a man should not be judge in his own case; that he should not decide that he is the best possible person, and say that he ought to be the trustee.
Naturally no human being can be imagined who would not have some bias one way or the other as to his own personal fitness, and to appoint himself among other people, or excluding them to appoint himself, would certainly be an improper exercise of any power of selection of a fiduciary character such as this is.
See also Re Newen; Newen v Barnes [1894] 2 Ch 297 at 308-9.
Statutory provisions, such as s 6(3) of the Trustee Act 1925 (NSW), which permit such an appointment to be made, do not affect the underlying equitable principle."
Further in Fitzwood Pty Ltd v Unique Goal Pty Ltd (2001) 188 ALR 566 (reversed on other grounds at [2002] FCAFC 285) Finkelstein J held at [98]: -
"I am prepared to accept that a power of removal of a trustee may be a fiduciary power that must be exercised for the benefit of the beneficiaries and not for the benefit of the donee of the power, at least when the donee is not a beneficiary, although much will depend upon the terms of the trust instrument: Re Skeats' Settlement (1889) 42 Ch D 522 at 526; [1886-90] All ER Rep 989 at 990; Inland Revenue Commissioners v Schroder [1983] STC 480 at 500."
In Hillcrest (Ilford) Pty Ltd v Kingsford (Ilford) Pty Ltd(No 2) [2010] NSWSC 285, Biscoe AJ considered a clause relevantly indistinguishable from clause 6(iii) of the deed and held at [42]: -
"The prohibition in (...) the trust deed is not limited to an appointment of the person exercising the power of appointment. The prohibition extends beyond that by the words 'in favour'. Those words should be given their normal meaning. The Macquarie Dictionary (3rd ed) gives the following meaning to 'in favour of': 'in support of; on the side of; to the advantage of'. Similarly, the Shorter Oxford Dictionary (5th ed) gives the following meaning to 'in favour of': 'on behalf of, in support of, on the side of, to the advantage of'."
I agree with these observations and consider that they apply, directly, to the present case.
In my opinion, by purporting to appoint Rarebreed as trustee of the Trust, Mr Cullen was purporting to exercise the power in his own favour - that is "in support of" or "on the side of" or to "the advantage" of himself.
In my opinion, the evidence reveals that Mr Cullen was motivated to appoint Rarebreed by two things. The first was Mrs Cullen's purported appointment of Mr Chamberlain as administrator of Austec. The second was Mr Cullen's suspicion that Mrs Cullen had removed funds from Austec's bank account. Thus, immediately on receipt of Mrs Cullen's solicitor's letter of 8 July 2011 enclosing the purported appointment of Mr Chamberlain as administrator, Mr Cullen's solicitor asked for a copy of the Deed to "see what we can do".
Mr Cullen received advice that he had "unfettered power" to remove Austec as trustee and, in my opinion, Mr Cullen proceeded on that basis.
According to Mr Cullen's solicitor's letter of 14 July 2011: -
"[Mrs Cullen's] actions in appointing Mr Chamberlain as Administrator of the Company have placed at risk the viability and potential value of the business. In these circumstances our client is of the opinion that he has no choice other than to remove [Austec] as trustee of the Trust."
In his affidavit evidence in these proceedings, Mr Cullen said that, faced with Mrs Cullen's purported appointment of Mr Chamberlain as administrator; -
"I decided that the best way in which to protect the Business as a going concern was to remove Austec as trustee and appoint another. I did this on 14 July 2011."
But Mr Cullen did not purport to appoint a neutral, independent party, as trustee. Rather he purported to appoint as trustee a company, Rarebreed, whose sole director and shareholder was Mr Sanbrook who was an employee of the Business.
Mr McKeand SC, who appeared for Mr Cullen and Rarebreed accepted that Mr Cullen had "an influence" on Rarebreed and that Rarebreed was "subject to guidance" by Mr Cullen.
In my opinion, this is not a sufficient description of the relationship between Mr Cullen and Mr Sanbrook.
Mr Cullen said that he had "been authorised by Rarebreed to act on its behalf" and agreed that he alone was the signatory on the bank account, opened on 24 June 2011 into which, since 18 July 2011, the income of the Business has been deposited.
Mr Ireland QC, who appeared for Mrs Cullen, made the following submissions, which I accept to be an accurate statement of the effect of the evidence: -
"The participation of Rarebreed and Mr Sanbrook has been neither genuine nor independent. Mr Sanbrook has given no evidence in these proceedings. Mr Sanbrook is a 25 year old man who has worked as a storeman in the business since he was 17. He has acted under direction from Mr Cullen for the whole of his working life and has been a subordinate to Mr Cullen's management of the business. Mr Cullen's management of the business has continued through the period of his wife' s participation as sole director and shareholder of Austec and now Mr Sanbrook's supposed participation as sole director and shareholder of Rarebreed. In fact, Mr Cullen is now calling the shots. He controls the finances. Mr Sanbrook is not a signatory on the bank account which operates the business. All of the income of the business is under the direct and exclusive control of Mr Cullen."
In my opinion, Mr Cullen purported to appoint Rarebreed as trustee so that in the face of the increasingly acrimonious relationship he had with Mrs Cullen, he could assume control of the Business.
He may well have believed that it was in the best interests of the Business that he take such control, and he may be right about that.
But that is not the point. By reason of clause 6(iii) of the Deed he was not permitted to exercise his appointment in his own favour. I think it plain that he has purported to do so.
For the same reasons, my opinion is that Mr Cullen's purported appointment of Rarebreed as trustee of the Trust was a fraud on the power of appointment.
As Young et al in On Equity, (2009) Lawbook Company at [8.880] pointed out: -
"In the present context, 'fraud' does not necessary denote conduct that will be termed 'fraud' at common law. Rather, fraud on a power means, in the words of Lord Parker in Vatcher v Poull 'that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified, by the instrument creating the power' Vatcher v Poull is the leading case on fraud on a power, and the above passage has been considered on many occasions since, particularly in Commonwealth v Colonial Coming, Spinning and Weaving Co Limited, where Higgins J cited Lord Parker's words with approval, and went on to note that fraud on a power was established by showing that the execution of a power was for purposes foreign to the power'." (citations omitted).
In my opinion, Mr Cullen's purported appointment of Rarebreed was not a step taken by him to promote the objects of the trust. Rather, it was to ensure that he achieved control of the Trust and thus the Business.
It follows, in my opinion, that Mr Cullen's purported appointment of Rarebreed was of no effect.
Thus, Austec remains trustee of the Trust.
Should Austec be replaced as trustee?
Should that position remain, or should some other party be appointed trustee?
Before me, the suggested candidates were Rarebreed, Mr Chamberlain and Mr Bowcher.
I will consider each possibility in turn. But first I will briefly summarise the issues facing the trustee of the Trust.
Outstanding issues
A pressing issue is the claim by the ATO arising from the expenses claimed by Austec as trustee of the Trust for "research and development".
In his letter of 23 June 2011, Mr Cummins estimated that the Trust is likely to have a liability in the order of $3 million on this account. During 2011, the ATO conducted a "risk review" and then an audit of the Trust's taxation position. No amended assessments have yet been raised by the ATO and the current position is that the Trust's liability for further income tax has not yet been quantified. The evidence suggests that the ATO will complete its investigations by 30 June 2012.
Both Mr Cummins and Mr Chamberlain have been communicating with the ATO about the Trust's taxation liability.
Another issue relates to a property that Mrs Cullen purchased in Victoria using part of the $1 million she withdrew from Austec's account on 15 June 2011.
Another issue is the steps that should be taken on the Trust's behalf to recover from Mrs Cullen the $600,000 she withdrew from Austec's account on 4 May 2011.
A further issue is to deal with and regularise claims being made on Austec and the Trust by certain Chinese manufacturers for "research and development" costs.
A further issue is to finalise the sale of the Business pursuant to the orders made by the Family Court in December 2010.
Who should be trustee?
Rarebreed?
Mr McKeand accepted that Rarebreed could not be described as being a "disinterested" trustee.
I agree. In my opinion, for the reasons I have set out above, Mr Cullen intended that Rarebreed represent his interests and purported to appoint Rarebreed in order that he achieve control of the Trust and the Business. I have determined that Mr Cullen's purported appointment of Rarebreed as trustee was contrary to the prohibition in clause 6(iii) of the Deed and a fraud on the power of appointment created by clause 6(i)(a) of the Trust Deed.
In those circumstances it would be quite inappropriate, in my opinion, for Rarebreed to be appointed trustee.
Mr McKeand submitted that Rarebreed had been carrying on its role as putative trustee "to no one's criticism", and that no harm was likely to be done were Rarebreed to, in effect, remain as trustee.
This was because, it was submitted, the Family Court would in due course, be called upon to adjudicate on the dispute between Mr and Mrs Cullen and would thus, as it were, exercise ultimate supervisory jurisdiction over the conduct of Mr Cullen and Rarebreed.
However, I do not think I should in this way abdicate responsibility for the proper control of the Trust to the Family Court.
I must decide who is the appropriate trustee of the Trust, and I think it plain that it cannot be Rarebreed.
Austec (in liquidation)?
Austec is in liquidation.
The authors of Jacobs' Law of Trusts in Australia, 7th ed (2000) at [1551] expressed the view that, in the normal course, a corporate trustee in liquidation should be replaced by a new trustee.
However in Wells v Wily [2004] NSWSC 607; 50 ASCR 103 Austin J said at [26] and [31]: -
"One can understand that, once a certain stage has been reached in the liquidator's administration of the affairs of a corporate trustee in liquidation, the company has come so close to dissolution that is inevitably necessary to replace it as trustee, at any rate where the trust is to continue and not itself be wound up. Where, however, the liquidation of the corporate trustee has just commenced, and particularly where it seems likely that it will be necessary to realise the trust assets in order to pay trust creditors, there may be good reasons to leave the administration of the trust, for the time being, in the hands of the liquidator - unless to do so would give rise to a conflict between the liquidator's duties of a liquidator and his or her duties as trustee. To that limited extent, I respectfully disagree with the learned authors of Jacobs. I prefer the view of HAJ Ford, M Bryan and WA Lee, Principles of the Law of Trusts (looseleaf), at [14110], that in some cases it may be appropriate for a new trustee to be appointed where the corporate trustee is in liquidation, but in other cases it may be better to allow the liquidator to administer the trust and the liquidation, for a time, concurrently.
...My conclusion is that the court will not replace a corporate trustee in insolvent liquidation as a matter of course, but rather will approach the question with an open mind, and assess where the balance of interest lies, in the exercise its discretion."
In my opinion there is, in this case, a factor which does point to the desirability of the trustee of the Trust not being a company in liquidation. That matter is the impending sale of the Business.
Although the orders of the Family Court of 1 December 2010 require that Mr and Mrs Cullen cause Mr Cummins to engage Lloyds Business Brokers to market and sell the Business, the fact remains that the Business is an asset of the Trust.
Thus the vendor of the Business must be the trustee of the Trust. It may well be that a sale at the best price possible will be impeded if the vendor trustee is a company in liquidation. The perception may be generated that, in those circumstances, the vendor is both willing and anxious to sell at the best price available.
That this perception may already be abroad is shown by an email sent to Lloyds Business Brokers by a prospective purchaser on 16 December 2011, in the following terms: -
"I confirm I still have an interest in the business but I have struggled to get information and from what I understand the business value has been destroyed by what has happened and everyone in the market is talking about a total collapse of the operation which is very bad for ongoing business especially financial accounts. They have no interest in dealing with the business they have no confidence [in] or do not think will be around in the long term."
Although it is not possible to be certain about these matters, it may well be that this perception would be exacerbated by virtue of the fact that the Business operates from a rural regional community.
In those circumstances, my opinion is that the interests of the trust would be best served if the trustee were not a company in liquidation. It follows that Austec should be replaced as trustee.
Mr Chamberlain or Mr Bowcher?
In my opinion, the best interests of the Trust will be served if an independent professional person is appointed trustee.
So far as concerns Mr Bowcher, it was common ground that he is a disinterested, appropriately qualified and experienced person to be trustee.
Mr Chamberlain is in the same position.
In addition, Mr Chamberlain has already become familiar with the matter. Were Mr Bowcher to be appointed trustee he would have to duplicate much, if not all of the work done already by Mr Chamberlain, and at the cost of the Trust.
Further, as Mr Dawson, who appeared for the plaintiffs, pointed out, were Mr Bowcher to be appointed as the trustee, it would not result in Mr Chamberlain ceasing to be liquidator of Austec. As Mr Dawson said: -
"We would just have another insolvency practitioner in the mix".
Mr Chamberlain, as liquidator of Austec, would still have to deal with the ATO. Austec is the taxpayer and the party that has incurred such tax liability as is ultimately found to exist: Vacuum Oil Co Pty Limited v Wiltshire (1945) 72 CLR 319 at 324 per Latham CJ. Further, Mr Chamberlain, as liquidator of Austec, would have to have deal with the claims that are evidently to be made against Austec by Austec's Chinese component suppliers.
Mr Chamberlain was cross-examined by Mr McKeand concerning the circumstances in which he advised a creditors' voluntary winding up and the steps he took between the date on which he was appointed liquidator (25 July 2011) and the date of the first meeting of creditors (5 August 2011) to ascertain the financial position of Austec.
Whilst it may be that there were further steps Mr Chamberlain could have taken during that period (for example to ascertain the state of Austec's bank account) I do not think that the manner in which Mr Chamberlain has conducted the liquidation of Austec reveals any reason to be concerned about the manner in which he would perform the role of trustee of the Trust.
One matter I have to take into account is Mr Cullen's declaration that: -
"If Mr Chamberlain is to be appointed trustee pending the Family Law proceedings being finalised I will not work with him or co-operate with him. I will walk away from the business".
Mr Cullen said that he would not "co-operate or work with Mr Chamberlain" because: -
(a) Mr Chamberlain was "appointed by [Mrs Cullen's] solicitor";
(b) Mr Chamberlain "accepted his appointment under a creditors' voluntary liquidation" when there was no evidence produced to Mr Cullen that Austec was insolvent;
(c) Mr Chamberlain accepted his appointment knowing there was a family law dispute in progress;
(d) Mr Chamberlain allegedly refused Mr Cullen and his advisors with access to bank statements and other information.
Mr Cullen said: -
"If the court deems it necessary to change the trustee of the Trust I would agree to work and co-operate with another suitable person other than Mr Chamberlain".
Mr Cullen also said: -
"If I were to leave the business the business would no longer have my expertise, client contacts or connections with the manufacturer in China. I believe that the goodwill of the business is attached to me. Without my inclusion in the sale process I do not believe that the best price for the business will be realised".
In my opinion it would be inappropriate for the Court to be influenced by this in terrorem evidence.
I do not consider that any of the matters advanced by Mr Cullen, as reasons why he would not cooperate with Mr Chamberlain, have substance.
In particular, Mr Cullen's criticism that Mr Chamberlain accepted appointment as liquidator of Austec when "there was no evidence that Austec was insolvent" cannot be sustained.
On 23 June 2011 Mr Cummins had advised that Austec faced a taxation liability in the order of $3 million, to which would have to be added interest, and any penalties. The financial statements of Austec for the years ended 30 June 2008 to 2010 also revealed a liability to Chinese supplies in the order of a little under $6 million.
Mr Chamberlain deposed:
"At the time I was approached by [Mrs Cullen] to accept the appointment as liquidator of [Austec], I was aware that [Austec] had a significant potential liability of several million dollar to the Australian Taxation Office. I was also aware of two Chinese creditors of [Austec] who claimed to be owed several million dollars. I formed the view that [Austec] may have been insolvent and that it was appropriate for me to take an appointment as liquidator".
Mr Chamberlain was not challenged in cross-examination about this evidence. It was not suggested to him that it would have been possible for Mrs Cullen, as the sole director of Austec, to make a declaration of solvency for the purposes of s 494 of the Corporations Act 2001 (Cth).
I propose to appoint Mr Chamberlain as trustee of the Trust.
In those circumstances, Mr Cullen should think carefully about what consequences may follow if he carries out his threat to not cooperate or work with Mr Chamberlain.
Decision - Mr Chamberlain should be appointed trustee of the Trust
In these circumstances I propose to order, pursuant to s 70 of the Act, that Mr Chamberlain be appointed trustee of the Trust.
It would follow that I should make a vesting order of the kind sought in paragraph 7 of the Amended Originating Process.
The plaintiffs seek, alternatively, an order that a receiver be appointed to the assets of the trust.
At the moment, it does not appear to me that the assets of the Trust are in jeopardy, although, as I have said, Mr Cullen has been banking Trust income into an account in his own name.
However, as Mr McKeand has submitted, there is no suggestion in the evidence that Mr Cullen has sought to take any personal advantage of that circumstance. Mr Cullen said in evidence that he had maintained the account "meticulously" and under the guidance and supervision of his accountant. There is no evidence to suggest that this evidence was not correct.
However, in view of Mr Cullen's stated position that he will not cooperate with Mr Chamberlain, I will propose to grant Mr Chamberlain liberty to apply for such further orders as he considers appropriate if difficulties are encountered after he commences to exercise his powers and responsibilities as trustee of the Trust.
I will invite the parties to bring in short minutes to reflect these reasons and stand the matter over for directions in the near future.
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Decision last updated: 13 April 2012
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