Commissioner of Taxation v Nicholas John Ross Silverthorne as trustee for Silverthorne Trust
[2018] WASC 385
•7 DECEMBER 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: COMMISSIONER OF TAXATION -v- NICHOLAS JOHN ROSS SILVERTHORNE as trustee for SILVERTHORNE TRUST [2018] WASC 385
CORAM: ARCHER J
HEARD: 17 SEPTEMBER 2018
DELIVERED : 17 SEPTEMBER 2018
PUBLISHED : 7 DECEMBER 2018
FILE NO/S: CIV 3193 of 2016
BETWEEN: COMMISSIONER OF TAXATION
Plaintiff
AND
NICHOLAS JOHN ROSS SILVERTHORNE as trustee for SILVERTHORNE TRUST
MAUREEN KAYE SILVERTHORNE as trustee for SILVERTHORNE TRUST
First Defendants
ARGENTA ROSE PTY LTD as trustee for SILVERTHORNE TRUST
Second Defendant
Catchwords:
Rights of indemnity of former trustees - Is it a provable claim - DOCA - Subrogation - Section 260-5 Notice - Is leave to proceed required
Legislation:
Corporations Act 2001 (Cth)
Taxation Administration Act 1953 (Cth)
Result:
Declaration made that leave to proceed not required
Category: B
Representation:
Counsel:
| Plaintiff | : | I D Martindale SC & C H Thompson |
| First Defendants | : | J E Scovell |
| Second Defendant | : | No appearance |
Solicitors:
| Plaintiff | : | Jackson McDonald |
| First Defendants | : | JHK Legal (VIC) |
| Second Defendant | : | JHK Legal (VIC) |
Case(s) referred to in decision(s):
Arkmill Pty Ltd v Tippers & Co Pty Ltd [2006] QSC 248; (2006) 58 ACSR 616
Australian Gypsum Industries Pty Ltd v Daelsun Holdings Pty Ltd [2015] WASCA 95; (2015) 197 FLR 1
BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336
Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346
Ceramco Java Pty Ltd v Wendy Wilson Concepts Pty Ltd [2001] QSC 204
Clyne v Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1
Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42
Deputy Commissioner of Taxation v Lai Corporation Pty Ltd [1987] WAR 15
Franknelly Nominees Pty Ltd Abrugiato [2013] WASCA 285
Hamilton v National Australia Bank Ltd (1996) 66 FCR 12
J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172
Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 354 ALR 436
Kupang Resources Ltd v International Litigation Partners Pte Ltd [2015] WASCA 89
Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 22 ACSR 169
Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509
Lewis v Nortex Pty Ltd (in liq) [2013] FCAFC 56; (2013) 211 FCR 483
Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360
Re Grant and Grant Pty Ltd [1983] 2 Qd R 314
Southern Wine Corporation Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236; (2005) 31 WAR 162
ARCHER J:
Introduction
By originating summons, the Commissioner of Taxation sought to be subrogated to the rights of indemnity held by Mr and Ms Silverthorne as former trustees of the Silverthorne Trust (Trust).[1] I will refer to Mr and Ms Silverthorne as 'the former trustees'. I will refer to the Commissioner's claim as the 'subrogation claim'.
[1] In the originating summons, the Commissioner sought to be subrogated to the right of indemnity of 'the defendants', but this was obviously a typographical error. The Commissioner seeks to be subrogated to the rights of indemnity of the first defendants.
Subsequently, on 7 February 2018, administrators were appointed to the then trustee of the Trust, Argenta Rose Pty Ltd. On 12 June 2018, Argenta Rose executed a deed of company arrangement (DOCA).
Section 444E(3) of the Corporations Act 2001 (Cth) (Act) provides that a person bound by a DOCA cannot proceed with a proceeding against the company except with the leave of the court.
The former trustees submit that the Commissioner is bound by the DOCA and therefore needs leave to proceed. They further submit that leave should not be granted.
In addition, the former trustees submit that, even if the Commissioner does not need leave to proceed, I do not have the power make a declaration to that effect under s 444E of the Act.
Finally, the former trustees also challenge whether the Commissioner has standing to seek the declaration sought. The former trustees argue that the Commissioner is not a creditor of the former trustees in their capacities as trustees. If the Commissioner is not, he cannot seek to be subrogated to the former trustees' rights of indemnity.
At the end of the hearing of this matter, I said that I would provide my reasons on a later date. However, I stated my conclusions and made orders immediately so as not to delay the progress of the matter. I said that the Commissioner did not require leave to proceed and I made a declaration in those terms. I also said that, if I was wrong about that, I would have granted leave to proceed. What follows are my reasons for those conclusions.
Issues
The following issues arise:
1.Does the Commissioner require leave to proceed under s 444E(3) of the Act? In other words, is the Commissioner a person bound by the DOCA in relation to his subrogation claim? This in turn requires determination of the following issues:
a.If the Commissioner is bound by the DOCA in relation to a different claim,[2] does that mean he is thereby also bound in relation to his subrogation claim?
b.If not, are the former trustees bound by the DOCA in relation to their rights of indemnity? (As will be seen, if they are bound, the Commissioner will also be bound).
2.If leave is not required:
a.Do I have the power make a declaration to that effect?
b.Does the Commissioner have standing to seek a declaration?
3.If leave is required, should it be granted?
[2] As will be seen, in addition to the subrogation claim, the Commissioner also has a proof of debt against Argenta Rose in respect of the running balance account deficit in relation to the former trustees' tax liabilities as at the date of the appointment of the administrators, a sum of $47,210. In relation to this claim, the Commissioner is bound by the DOCA.
Before dealing with the issues, it is necessary to set out the history of the matter.
The history and section 260-5 Notices
The relevant history is not in dispute and was helpfully summarised in the Commissioner's written submissions and chronology.
Until 5 March 2016, Mr and Ms Silverthorne were jointly the trustees of the Trust.
It was not in issue for the purposes of this hearing that the Trust accounts recorded that large sums were owed to each of Mr and Ms Silverthorne. The draft financial statements for the Trust for the year ending 30 June 2015 record as trust liabilities an amount of $12,617,393 owing to Ms Silverthorne and an amount of $9,905,660 owing to Mr Silverthorne.[3]
[3] Affidavit of Aris Zafiriou sworn 8 December 2016 (Zafiriou Affidavit), pages 72 ‑ 73. The Commissioner referred to other evidence which supported the existence of the liabilities, including the report of the administrator, attached to the affidavit of Chelsea Lee Quirk affirmed on 13 July 2018 (Quirk Affidavit), page 76.
On 6 January 2016, the Commissioner issued notices (Notices) under s 260‑5 of sch 1 to the Taxation Administration Act 1953 (Cth).[4]
[4] Zafiriou Affidavit [65] ‑ [66] and [69] - [70] and the attachments referred to in those paragraphs.
A notice under s 260‑5 (Section 260‑5 Notice) can be issued by the Commissioner to a person (Notice Recipient) who owes or may later owe money to a taxpayer who is indebted to the Commonwealth for tax (Indebted Taxpayer). A Section 260‑5 Notice gives the Commissioner the right to recover from the Notice Recipient the amount that the Notice Recipient owes, or may later owe, the Indebted Taxpayer. The Notice Recipient is obliged to pay the Commissioner what the notice demands.[5] A Section 260‑5 Notice imposes on the Notice Recipient an obligation to pay the money forthwith.[6]
[5] Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346 [12] ‑ [14].
[6] Clyne v Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1, 23 (Mason J, with whom Aickin and Wilson JJ agreed) and 26 ‑ 27 (Brennan J); Deputy Commissioner of Taxation v Lai Corporation Pty Ltd [1987] WAR 15, 21.
The Notices were issued:
a.to Ms Silverthorne in her capacity as trustee of the Trust, requiring payment to the Commissioner of the amount owing to her by the trustees of the Trust, up to the amount owing to the Commissioner ($3,109,678.95); and
b.to Mr Silverthorne in his capacity as trustee of the Trust, requiring payment to the Commissioner of the amount owing to him by the trustees of the Trust, up to the amount owing to the Commissioner ($2,979,150.14).
The amounts claimed in the Notices were the total of the tax‑related liabilities of Ms and Mr Silverthorne respectively, at the time the Notices were issued.[7]
[7] Zafiriou Affidavit [8] ‑ [64] and the attachments referred to in those paragraphs.
By issuing the Notices, the Commissioner became a creditor of the former trustees in their capacities as trustees in respect of the money the subject of the Notices.[8]
[8] Kupang Resources Ltd v International Litigation Partners Pte Ltd [2015] WASCA 89 [185] ‑ [187] (Buss JA, as his Honour then was, with whom McLure P and Newnes JA relevantly agreed at [1] and [199]).
By a deed of appointment dated 5 March 2016, the former trustees resigned from office and Argenta Rose was appointed as the trustee of the Trust in their place.
In April 2016, the Commissioner obtained judgments against:
a.Ms Silverthorne for approximately $3 million; and
b.Mr Silverthorne for approximately $2.9 million.
In May 2016, Mr and Ms Silverthorne each signed authorities under s 188 of the Bankruptcy Act 1966 (Cth). In August 2016, each entered into personal insolvency agreements.
On 21 December 2016, the Commissioner issued an originating summons seeking a declaration that he be subrogated to the former trustees' rights of indemnity from the Trust in the amount of $6,088,829.09 (the total of the two amounts set out in the Notices). The Commissioner also sought orders that the former trustees and Argenta Rose pay him that sum, interest and costs.
Because Argenta Rose is now the trustee of the Trust, the former trustees' rights of indemnity must be enforced against Argenta Rose.[9]
[9] Under cl 14.3 of the trust deed of the Trust (Trust Deed), the appointment of the receivers and managers to Argenta Rose caused it to automatically vacate office as trustee. There is a suggestion that cl 14.3 was subsequently removed from the Trust Deed. However, whether or not the clause has been removed does not affect the analysis of the issues that arise in this case. Even if Argenta Rose was ejected by cl 14.3, it would remain a bare trustee of the assets of the Trust: Lewis v Nortex Pty Ltd (in liq) [2013] FCAFC 56; (2013) 211 FCR 483 [77]. Whether or not cl 14.3 was removed will determine the extent of the rights of those who control Argenta Rose and the DOCA administrator. However, it does not affect the analysis of the former trustees' rights of indemnity.
As noted above, administrators were appointed to Argenta Rose on 7 February 2018 and Argenta Rose subsequently executed a DOCA.
Mr Silverthorne was the 'proponent' of the DOCA. Under the DOCA, the proponent was also the 'director' who took control of Argenta Rose on execution of the DOCA.
There are a number of interesting features of the DOCA,[10] but it is unnecessary to deal with them for present purposes.
[10] See the Quirk Affidavit, page 159.
Does the Commissioner require leave to proceed?
By s 444E(3) of the Act, the Commissioner will need leave to proceed if he is 'a person bound by' the DOCA in relation to his subrogation claim.
Who is bound by a DOCA?
The only persons bound by a DOCA are those who are creditors within the meaning of s 444D(1) of the Act.[11]
[11] Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509 [52].
Section 444D(1) provides:
A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).
The 'day specified in the deed under paragraph 444A(4)(i)' is 'the day (not later than when the administration began) on or before which claims must have arisen if they are to be admissible under the deed'.
The 'creditors' in s 444D(1) are all persons who have a 'debt' or 'claim' provable under s 553(1) in a winding up.[12]
[12] Australian Gypsum Industries Pty Ltd v Daelsun Holdings Pty Ltd [2015] WASCA 95; (2015) 197 FLR 1 (Australian Gypsum) footnote 15 to [177] (Newnes & Murphy JJA). See also [68] ‑ [69] (Buss JA, dissenting in the result) and Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 22 ACSR 169, 175.
Therefore, the only persons who require leave to proceed under s 444E are those who would have a provable claim under s 553(1) in a winding up. I will refer to such claims as 'provable claims'.
What types of actions require leave?
Section 444D(2) of the Act relevantly provides that a DOCA does not prevent a secured creditor from realising or otherwise dealing with the security interest.[13] A security interest is defined to include 'a charge, lien or pledge'.[14]
[13] This is subject to exceptions, not relevant here.
[14] Section 51A of the Act.
In other words, even if a secured creditor has a provable claim, a secured creditor is entitled to 'stand outside' the DOCA and realise or otherwise deal with the security.[15]
Is the Commissioner bound by the DOCA in his capacity as a creditor of Argenta Rose?
[15] Australian Gypsum [228] (Newnes & Murphy JJA). See also [203] ‑ [204], [225] ‑ [227] (Newnes & Murphy JJA) and [65], [83] (Buss JA).
The Commissioner has a proof of debt against Argenta Rose in respect of the tax‑related liability of Argenta Rose, as at the date of the appointment of the administrators, a sum of $47,210.[16] This debt claimed against Argenta Rose is not related to the subrogation claim made in the originating summons. However, the debt would be a provable claim in a winding up. Therefore, the Commissioner is bound by the DOCA in relation to this debt.
[16] Quirk Affidavit [4] and pages 13 ‑ 14.
This raises the issue as to whether the Commissioner is thereby bound by the DOCA for all purposes. This is an issue because of the language used in s 444D(1) and s 444E of the Act.
By s 444E of the Act, the Commissioner will need leave to proceed with his subrogation claim if he is 'a person bound by' the DOCA.
By s 444D(1), a DOCA binds 'all creditors of the company, so far as concerns claims arising' on or before a particular date. As noted earlier, 'creditors' here means those who would have a debt or claim provable under s 553(1) in a winding up.
Two interpretations are open.
1.First, that s 444E identifies a person, not a person with a particular type of claim. In other words, if a person has any claim that would be provable in a winding up, that person would need leave in relation to any other claims held by that person, even if that other claim would not be provable in a winding up.
2.Alternatively, that s 444E, read with s 444D(1), identifies a person in relation to a particular type of claim. Section 444D(1) provides that creditors are bound, 'so far as concerns' their provable claims. On this construction, a person with both a provable claim and a claim that is not provable is a person bound by the DOCA only in relation to the provable claim but is a person not bound by the DOCA in relation to the other claim.
There is apparently no authority directly on this point.[17] The Commissioner submitted that the second interpretation should be adopted by parity of reasoning with the reasoning in J & B Records Ltd v Brashs Pty Ltd.[18] In J & B Records, Hodgson J concluded that a person who had claims arising on or before the date specified in the DOCA and who also had claims arising after that date would be bound by the DOCA in relation to the former claims but would not be bound in relation to the latter claims.[19]
[17] ts 50.
[18] J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172.
[19] J & B Records (182B). See also Hamilton v National Australia Bank Ltd (1996) 66 FCR 12, 30 ‑ 31. J & B Records has been cited in other cases, but not in relation to this point, including by the Court of Appeal in Australian Gypsum [100] (Buss JA), [204] (Newnes & Murphy JJA).
It is unnecessary to consider this in detail or to explore the extent to which the statutory purposes might influence the proper interpretation. This is primarily because, even if I rejected the Commissioner's submission, I would grant leave to the Commissioner to proceed. Refusing leave would mean that the Commissioner would be unable to pursue his subrogation claim simply because he also has a provable claim, in a much smaller amount.
In addition, the former trustees did not contend that the first construction is correct.[20] There was therefore no contradictor on this point.
[20] ts 48 ‑ 49. See also First Defendants' Submissions in Opposition filed 4 September 2018 (Former Trustees' Submissions) [9].
Having made those observations, I accept the Commissioner's submission for the purposes of determining whether leave is required. Section 444E is aimed at capturing provable claims. It would be anomalous if a large claim that was not provable would be captured simply because the claimant also had a small provable claim. I conclude that the Commissioner is not bound by the DOCA in relation to his subrogation claim simply because he has a provable claim in relation to Argenta Rose's tax debt.
The Commissioner is bound by the DOCA if the former trustees are bound
As I will explain, the Commissioner will be bound by the DOCA if the former trustees are bound. This is because the Commissioner seeks to be subrogated to the former trustees' rights of indemnity.
Subrogation
By the subrogation claim, the Commissioner seeks to access assets of the Trust to satisfy the former trustees' right of indemnity so that the former trustees can in turn satisfy the debts assigned to the Commissioner by the Notices.[21]
[21] Applicant's Outline of Submissions dated 22 August 2018 [17].
Creditors of a trustee have no direct access to the assets of the trust. Such creditors have no debtor other than the trustee; they are not owed anything by 'the trust'. However, creditors may be subrogated to the trustee's right of indemnity from the trust assets.[22]
[22] Franknelly Nominees Pty Ltd Abrugiato [2013] WASCA 285 [211]; Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 354 ALR 436 (Re Killarnee) [34]; Commonwealth v Byrnes [2018] VSCA 41; (2018) 30 FLR 149 (Re Amerind) [21] ‑ [22], [26], [57(2)].
Subrogation is wholly derivative. A creditor's right of subrogation arises only to the extent that the trustee has a right of indemnity.[23]
[23] Franknelly [211]. See also Re Amerind [26], [57(2)].
Therefore, if the former trustees would be bound by the DOCA in relation to their rights of indemnity, the Commissioner would be bound.
Are the former trustees bound by the DOCA?
Rights of indemnity
The general principles were not in dispute. They were helpfully summarised in Franknelly Nominees Pty Ltd Abrugiato,[24] and, more recently, by Allsop CJ in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq)[25] (Re Killarnee) and by the Victorian Court of Appeal in Commonwealth v Byrnes[26] (Re Amerind).
[24] Franknelly [205] ‑ [242] (Buss JA with whom McLure P, in relation to the general principles, and Newnes JA agreed).
[25] Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 354 ALR 436 (Re Killarnee).
[26] Commonwealth v Byrnes [2018] VSCA 41; (2018) 30 FLR 149 (Re Amerind). Special leave was granted by the High Court on 16 August 2018 - [2018] HCATrans 156.
Subject to the terms of any contract, a trustee is personally liable for any debts or liabilities that are incurred in the execution of its duties and powers in the business of the trust.[27] The creditors in relation to those liabilities have no debtor other than the trustee.[28]
[27] Re Killarnee [34]; Re Amerind [20]; Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd(1992) 8 WAR 42, 52.
[28] Re Amerind [21].
Subject to the terms of the trust,[29] the trustee has a right of indemnity[30] out of the trust assets in respect of debts and liabilities incurred in the proper execution of its duties and powers under the trust.[31] The right of indemnity arises at the time when the liability is incurred.[32]
[29] Franknelly [205] ‑ [242]. In addition, while not relevant here, a trustee in default or in debt to the trust estate may not have a right of indemnity.
[30] in equity and under s 71 of the Trustees Act 1962 (WA). The terms of the trust may also include a right of indemnity.
[31] Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360, 367; Franknelly [206]; Re Killarnee [35]; Re Amerind [22]. See also s 71 of the Trustees Act 1962 (WA).
[32] Custom Credit (52).
If the trustee has used its own funds to pay the debt or meet the liability, the trustee's right of indemnity is referred to as a 'right of recoupment' or a 'right of reimbursement'. A trustee's right of recoupment is a personal asset of the trustee, unattended by equitable obligation arising from the trust.[33]
[33] Re Killarnee [35], [45].
If the trustee has not paid the debt or met the liability, the trustee's right of indemnity is referred to as a 'right of exoneration'. This is a right to use the trust assets to exonerate itself from liability that has been incurred in carrying out the duties or functions of trustee.[34]
[34] Re Killarnee [35].
In either case, the right of indemnity has priority over the claims of the beneficiaries and is supported by an equitable lien over the trust assets.[35] It amounts to a proprietary interest.[36]
Effect of winding up
[35] Octavo Investments (367); Franknelly, [207] ‑ [208]; Re Killarnee, [35], [41] ‑ [44].
[36] Octavo Investments (367, 370); Re Amerind [96], [106] ‑ [124]; Custom Credit (53). However, note Re Killarnee [50] to the effect that defining it in this way does not mean that it is the equivalent of unconstrained and general ownership.
Where a trustee company is wound up, it is necessary to determine the property of the company which can be realised by a liquidator.
Trust assets themselves are not property of the trustee company, and cannot be realised by the liquidator.[37] However, the company's right of indemnity, in the corporate insolvency context, is 'property of the company' and, upon insolvency, it is an asset to which the company liquidator has access for the benefit of the company's creditors.[38]
[37] Re Amerind [62].
[38] Re Amerind [57], [96] ‑ [124], [271] ‑ [273]. See also Re Killarnee [68] ‑ [69], [79] (Allsop CJ) and [210] - [211] (Farrell J).
There has been some debate as to whether the trustee's right of exoneration is available for all creditors of the trustee company or only those creditors whose debts were incurred by the trustee company in the execution of its duties in the business of the trust.[39] It is unnecessary to explore this issue for present purposes.
Impact of Corporations Act
[39] See Re Killarnee [45], [68] ‑ [79], [100] ‑ [101] (Allsop CJ) and [196] - [197], [210] ‑ [211] (Farrell J) and Re Amerind [261], [282] ‑ [284].
Evaluating the impact of the Act on the treatment of property of a company in the nature of a right of indemnity can involve a number of complexities.[40]
[40] See, for example, Re Killarnee [27], [102] ‑ [109]; Re Amerind [282] ‑ [284].
Where a company only acted as corporate trustee for the trust and did not conduct business in its own right, the analysis is simple. The statutory priorities in the winding up provisions apply to a trustee's right of indemnity, and its proceeds.[41]
Rights of indemnity of former trustees
[41] Re Killarnee [102]; Re Amerind [276] ‑ [281] (in Re Amerind, the trustee company had traded solely in its capacity as trustee of the trust - see [191], [261], [282]).
As noted earlier, subject to the terms of any contract, a trustee is personally liable for any debts or liabilities that are incurred in the execution of its duties and powers in the business of the trust. Accordingly, a trustee's liability is not extinguished if the trustee retires or is replaced by a new trustee.
However, neither does a trustee's right of indemnity cease upon the trustee's retirement or replacement by a new trustee. A former trustee's right of indemnity is an independent right which does not depend on any right of indemnity held by the new trustee.[42] After the loss of office, a former trustee's right of indemnity continues to be supported by a lien over the whole of the trust assets, amounting to a proprietary interest.[43]
Are the former trustees bound by the DOCA?
[42] Franknelly [210], Southern Wine Corporation Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236; (2005) 31 WAR 162 [30].
[43] Bruton [42] ‑ [43]; Re Amerind [114].
As noted earlier, a DOCA binds those persons who would have a provable debt or claim under s 553(1) in a winding up. Accordingly, the question is whether a claim by the former trustees in pursuit of their rights of indemnity would be provable in a winding up.
Two issues arise.
1.First, would a claim by the former trustees in pursuit of their rights of indemnity be a claim for a debt?
2.Second, if not, would it be another type of claim falling within s 553?
The first issue can be disposed of quickly. A former trustee's claim of indemnity is not a claim for a debt. There is not a debtor‑creditor relationship between the new trustee and the former trustees.[44] The former trustees did not contend otherwise.[45]
[44] Arkmill Pty Ltd v Tippers & Co Pty Ltd [2006] QSC 248; (2006) 58 ACSR 616 [2], [6], [9] ‑ [12]. See also Ceramco Java Pty Ltd v Wendy Wilson Concepts Pty Ltd [2001] QSC 204.
[45] ts 89.
The second issue turns on what type of claims fall within s 553.
In BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton,[46] Campbell JA, with whom McColl JA agreed, said:
[Just] because something is a 'claim' in one sense of the word does not necessarily mean it is a 'claim' within the meaning of s 553. The particular shade of meaning that 'claim' has in s 553, can be ascertained from the purpose of the section. That purpose is that all the legal obligations to which a company is subject should be ascertained, and each of them valued as at a common date, so that those obligations can be taken into account in a winding up or other administration that is under way. Someone has a 'claim' within the meaning of s 553 if he or she has a basis, founded on an existing legal right, for asserting a right to participate in the division of the assets of the company.
[46] BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 [105]. This paragraph (and others) were cited in Australian Gypsum [230] (Newnes & Murphy JJA). See also [78] (Buss JA).
As I will explain, a former trustee's claim of indemnity does not provide a basis for asserting a right to participate in the division of the assets of the company.
The former trustees submitted that Re Killarnee settled the law in this area, and that it was now clear that a trustee's right of indemnity is part of the property of the company in a winding up. On the current state of the law, I could not disagree.[47] However, this does not assist the former trustees. This is because the former trustees' rights of indemnity would not be part of the property of Argenta Rose in a winding up.
[47] I note that special leave was granted by the High Court in relation to Re Amerind on 16 August 2018 - [2018] HCATrans 156.
Argenta Rose has an asset in the form of its own right of indemnity (assuming it incurred debts or liabilities in the proper execution of its duties and powers as trustee). Separately, and independently of that, the former trustees have a right of indemnity. Argenta Rose is not personally liable for the liabilities incurred by the former trustees. It is not personally liable to indemnify the former trustees in relation to those liabilities. Accordingly, it does not have any right of indemnity in relation to a claim for indemnity by the former trustees. The assets of Argenta Rose do not include a right of indemnity from such a claim.
The former trustees' rights of indemnity have priority over the claims of the beneficiaries and are supported by an equitable lien over the trust assets. Each of their rights of indemnity amounts to a proprietary interest.[48] Their rights of indemnity, as former trustees, are against the assets of the Trust. Trust assets are not themselves property of Argenta Rose in a winding up (other than to the extent of Argenta Rose's own right of indemnity, which does not include an indemnity from the claim of the former trustees).
[48] See under the heading 'Rights of indemnity'.
It follows that a claim by the former trustees in relation to their rights of indemnity would not provide a basis to assert a right to participate in the division of the assets of Argenta Rose. Nor would such a claim be seeking to assert such a right. The claim would not, therefore, be a claim within the meaning of s 553. Therefore, the former trustees would not be bound by the DOCA in respect of a claim asserting their rights of indemnity, and would not require leave under s 444E to enforce those rights.
Conclusion on whether the Commissioner requires leave
I have explained why the former trustees would not be bound by the DOCA in respect of a claim asserting their rights of indemnity. Accordingly, in seeking to be subrogated to that claim, the Commissioner is not a person bound by the DOCA, and does not require leave to proceed.
Do I have the power make a declaration that leave is not required?
The former trustees submit that there is no power for the court to make a declaration under s 444E of the Act that leave is not required. However, the declaration is not sought under the Act. The jurisdiction to make a declaration in this case comes from s 25 of the Supreme Court Act 1935 (WA). In a sense, it is unnecessary to make a declaration that the Commissioner does not require leave to proceed. This is because I have concluded that the Commissioner is not a person bound by the DOCA in seeking to be subrogated to the former trustees' rights of indemnity. Therefore, leave to proceed is not required and the matter may be programmed accordingly.
Nevertheless, for the purposes of certainty, it is appropriate to make the declaration.
Does the Commissioner have standing to seek the declaration sought?
In their written submissions, the former trustees submitted that the Commissioner is not a creditor of them in their capacity as former trustees.[49] The former trustees submitted that, therefore, the Commissioner has no standing to seek a declaration that he does not require leave to proceed.[50]
[49] Former Trustees' Submissions [11].
[50] Former Trustees' Submissions [14].
As I have said, I am not persuaded that a declaration would be needed if leave is not required. If leave is not required, there would simply be no impediment to the matter proceedings. However, if the Commissioner is not a creditor of the former trustees in their capacity as former trustees, the Commissioner would not be able to pursue a claim by subrogation to the former trustees' rights of indemnity.[51]
[51] See discussion under the heading 'Subrogation'.
A few days prior to the hearing, I drew the parties' attention to Kupang Resources Ltd v International Litigation Partners Pte Ltd.[52] In that case, the court held that, by issuing Section 260‑5 Notices, the Commissioner became a creditor of the Notice Recipient in respect of the money the subject of the notices.[53] During the hearing, counsel for the former trustees indicated that he accepted Kupang settled the issue.[54] The Commissioner is a creditor of the former trustees in their capacity as former trustees.
[52] Kupang Resources Ltd v International Litigation Partners Pte Ltd [2015] WASCA 89.
[53] Kupang [185] ‑ [187] (Buss JA, as his Honour then was, with whom McLure P and Newnes JA relevantly agreed at [1] and [199]).
[54] ts 35 (my comment recording Mr Scovell's indication) and 87.
If leave is required
Finally, if I am wrong in concluding that the Commissioner does not need leave to proceed, I would grant leave.
The former trustees did not take issue with the Commissioner's summary of the principles to be applied. Rather, they submitted, in their written submissions, that leave could not or should not be given on three grounds.
First, the former trustees submitted that the Commissioner could not be given leave to proceed against Argenta Rose because the Commissioner was not a creditor of Argenta Rose 'by virtue of' his issue of the Notices to the former trustees.[55] During the hearing, counsel effectively confirmed that this was intended to assert that the Commissioner could not be subrogated to the former trustees' rights of indemnity as the Notices did not make him a creditor of the former trustees. As noted earlier, counsel for the former trustees accepted that that contention is contrary to binding authority. Counsel accepted that this meant that the first ground for refusing leave fell away.[56]
[55] Former Trustees' Submissions [35].
[56] ts 87.
Second, the former trustees submitted that the Commissioner could not be given leave because they are bound by the moratorium in the DOCA.[57] However, it is s 444D that determines who is bound by the DOCA, not the terms of the DOCA.[58] This was accepted by counsel for the former trustees during the hearing, and he accepted that the second ground for refusing leave fell away.[59]
[57] Former Trustees' Submissions [37].
[58] Lehman [52].
[59] ts 88.
Third, the former trustees submitted that leave should not be given because their rights of indemnity would be provable claims in a winding up. This submission was based on the proposition that a trustee's right of indemnity is property of the company, and can be realised by the liquidator.[60] However, as I have explained, the right of indemnity of a former trustee is not property of the subsequent trustee. The subsequent trustee does not have a right of indemnity in relation to such a claim by a former trustee.
[60] Former Trustees' Submissions [36].
During the hearing, counsel for the former trustees raised two other reasons why leave should not be granted. One was that the DOCA may not be extended, in which case it would expire shortly and the issue of leave would be academic. The second reason was that it was not known what assets would be left after an alleged security interest[61] was discharged. Neither point was mentioned in the former trustees' written submissions. Neither point was raised in conferral.[62] The failure to raise these points earlier meant it was not possible for any evidence on these issues to be obtained. In those circumstances, if I otherwise considered it was appropriate to grant leave, I would not decline to grant leave on these grounds.
[61] The Commissioner pointed out that the security deed was executed prior to the incorporation of Argenta Rose and submitted that it appeared that Argenta Rose had purported to grant a security interest over the former trustees' right of indemnity, which it was not permitted to do - ts 89 ‑ 90.
[62] ts 64 ‑ 69.
Ultimately, counsel for the former trustees said that leave was only opposed on the basis that their rights of indemnity would be provable claims.[63]
[63] ts 88.
As noted earlier, the former trustees did not contend that the Commissioner would be bound by the DOCA in relation to his subrogation claim simply because he has a provable claim in relation to Argenta Rose's tax debt. I have also noted that, if the Commissioner would be so bound, it would be appropriate to grant leave.
Putting that aside, the Commissioner would only require leave to proceed if the former trustees' rights of indemnity would be provable claims. Accordingly, the former trustees' ultimate basis for objecting to leave does not provide a reason for refusing leave. It would merely establish, if correct, that leave was required.
If leave is required because I concluded that the former trustees' rights of indemnity would be provable claims, difficult questions would remain.
In particular, assuming that the former trustees' rights of indemnity were admitted, it would be necessary to determine the priorities between their rights of indemnity on the one hand, and Argenta Rose's right of indemnity on the other. It appears that the latter issue has not yet been the subject of a court's decision. It will involve balancing many considerations, pulling in different directions.[64] A factor relevant to the grant of leave is the complexity of the legal and factual issues involved.[65]
[64] See Loxton D, In with the Old, Out with the New? The Rights of a Replaced Trustee Against its Successor, and the Characterisation of Trustees' Proprietary Rights of Indemnity (2017) 45 ABLR 285.
[65] Re Grant and Grant Pty Ltd [1983] 2 Qd R 314, 317 (McPherson J, with whom WB Campbell CJ & Sheahan J agreed).
Further, the amount of the Commissioner's claim is significant. It also appears, on the materials before me, to be a strong case.
There is no suggestion that a grant of leave would prejudice any creditors or cause an avalanche of litigation.
The Commissioner raised numerous other factors in support of a grant of leave.[66] The former trustees did not contest any of them.
[66] Applicant's Outline of Submissions filed 22 August 2018 [36] ‑ [41], Applicant's Outline of Submissions in Reply filed 11 September 2018 [34] ‑ [39] and ts 75 ‑ 76.
Accordingly, if leave is required, I would grant leave.
Conclusion
For these reasons, I concluded that the Commissioner does not require leave to proceed and made the declaration sought. I ordered that the costs of the application be the Commissioner's costs in the cause.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CG
ASSOCIATE TO THE HONOURABLE JUSTICE ARCHER7 DECEMBER 2018
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