Garra Water Investments Pty Ltd (in liq) v Ourback Yard Nursery Pty Ltd - [2012] SASC 44

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
GARRA WATER INVESTMENTS PTY LTD (IN LIQUIDATION) v OURBACK YARD NURSERY PTY LTD & ANOR
[2012] SASC 44
Judgment of The Honourable Justice Gray
26 March 2012
EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - INDEMNITY, LIEN AND REIMBURSEMENT - RELEVANT PRINCIPLES
EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - CARRYING ON BUSINESS - PERSONAL LIABILITY OF TRUSTEE
EQUITY - TRUSTS AND TRUSTEES - APPLICATIONS TO COURT FOR ADVICE AND AUTHORITY - PETITION OR SUMMONS FOR ADVICE
CORPORATIONS - WINDING UP - LIQUIDATORS - DUTIES AND LIABILITIES - IN VOLUNTARY WINDING UP - OTHER MATTERS
The plaintiff claims an indemnity, a lien and an equitable tracing of trust assets - the plaintiff was the trustee of a family trust - the plaintiff placed in liquidation - the plaintiff in liquidation continued as trustee - the liquidator gave notice that the plaintiff claimed a right of indemnity, a lien and an entitlement to equitable tracing - the plaintiff replaced as trustee - the plaintiff claimed to continue as a bare trustee - the plaintiff claimed that the indemnity, lien and right to trace extended to the reasonable cost and expenses of the liquidator in the winding up including the administration of the plaintiff both as trustee and as bare trustee - the defendant claims the plaintiff should have applied to the Court for authorisation to deal with the trust assets - whether plaintiff required to apply to the Court - whether the plaintiff entitled to an indemnity, lien, and tracing of the trust assets.
Held: no requirement for the plaintiff to seek authorisation from the Court - plaintiff entitled to an indemnity, lien and tracing of the trust assets - on the material before the Court the proper and reasonable expenses cannot be ascertained - matter referred to a Master for determination.
Trustee Act 1958 (Vic) s 36(2) and s 63, referred to.
In Re Suco Gold Pty Ltd (in liquidation) (1982) 33 SASR 99, applied.
Re Baker deceased; Rouse v Attorney-General for Victoria [1961] VR 461, distinguished.
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271; Federal Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) (2008) 173 FCR 472; In re Universal Distributing Company Ltd (in liquidation) (1933) 48 CLR 171, considered.

GARRA WATER INVESTMENTS PTY LTD (IN LIQUIDATION) v OURBACK YARD NURSERY PTY LTD & ANOR
[2012] SASC 44
Civil
GRAY J.

In these proceedings, Garra Water Investments Pty Ltd (in liquidation), claims an indemnity against the assets of a trust, an equitable charge or lien over the assets of the trust, an equitable tracing of trust assets and consequential orders.
The plaintiff was the former trustee of the Garra Family Trust following the plaintiff’s liquidation. The defendant, Ourback Yard Nursery Pty Ltd, replaced Garra Water Investments Pty Ltd (in liquidation) as trustee.
Both parties sought the determination of what was said to be a preliminary issue relating to the interpretation of a trust deed. That issue related to the extent of an indemnity provided to the plaintiff, the trustee. I expressed concern over the “splitting of the trial” but ultimately agreed to proceed and, if convenient, to determine the issue of interpretation and then consider the ultimate resolution of proceedings.
The trial of the within action proceeded on affidavit evidence, the agreed books of documents and agreed statements of fact. No oral evidence was called. As the trial unfolded, it became clear that it was necessary to consider a number of questions of fact to ensure that the issue of interpretation was not determined in a hypothetical context. To this end, during the course of the trial, a number of further facts were agreed from the bar table. The primary facts are not in dispute, although the inferences that the parties sought to draw from those facts differed.
In discussing the background of the dispute and in setting the context for the determination of the issues in the trial, I have drawn on the affidavit evidence, the agreed documents and the agreed statements of fact.
On 1 August 2003, the plaintiff was appointed trustee of the Garra Family Trust by the deed of settlement establishing the Garra Family Trust. The appointor and the sole specified beneficiary of the trust was Enzo Garra.
An indemnity was provided by clause 14 of the trust deed:
The trustee will be entitled to be indemnified out of the assets for the time being comprising the trust fund against liabilities incurred by it in good faith in the execution or attempted execution or as a consequence of the failure to exercise any of the trusts authorities powers and discretions hereof or by virtue of being the trustee hereof BUT the trustee will not in any circumstances be entitled to any indemnity or reimbursement or recompense for the beneficiaries or any of them notwithstanding that such beneficiaries may have in trust in any part(s) of the trust fund.
The plaintiff through the trust carried on the business of nursery and gardens supplies. Mr Garra and his wife, Pina Garra, conducted the day to day operations of the business. Mr Garra was the sole director of the plaintiff. The plaintiff, as trustee, was the legal owner of the business.
In the course of the business, goods were supplied under contract by a South Australian entity, Team Poly Pty Ltd. A dispute arose as to the monies due to Team Poly. This led to Team Poly, as petitioning creditor, taking winding up proceedings in the Supreme Court of South Australia. On 14 October 2008, Peter James Lanthois was appointed the official liquidator of the plaintiff by order of the Supreme Court of South Australia. By virtue of this appointment, Mr Lanthois assumed control of the plaintiff as its liquidator.
The liquidator, following his appointment, attended the plaintiff’s business premises in Victoria and generally reviewed the operation of the business and its records. However, the liquidator did not seek to take over the day to day conduct of the business. It was common ground between the parties that after the plaintiff was placed in liquidation the day to day workings of the nursery continued to be conducted by Mr and Mrs Garra. It appears that the nursery has continued to operate to the present time, notwithstanding the plaintiff’s liquidation.
On 16 October 2008, the liquidator forwarded to Mr Garra a request for a report as to the affairs of the plaintiff, and a request for the books and records. On or about 20 February 2009, Mr Garra provided a report that particularised the assets of the trust as having a value of $400,713.00 and unsecured creditors amounting to $463,125.00. Mr Garra asserted the existence of a further asset of the plaintiff being the right of indemnity from the trust assets with a gross value of $463,125.00 less a deficiency of $62,413.00 leaving an asserted realisable value of $400,712.00.
Mr Garra particularised the unsecured creditors as follows: ANZ Bank $105,955.00, CBA Bank $34,159.00, Australian Tax Office GST $4,511.00, Trade Creditors $66,676.00, Sundry Creditors $62,994.00 and a loan from E&P Garra $188,830.00.
The trade and sundry creditors were itemised in an annexure to the report. They included an amount of $13,907.80 being a debt owing to Team Poly, the petitioning creditor. Mr Garra certified that the particulars contained in the report were true to the best of his knowledge and belief.
As noted above, Mr and Mrs Garra continued to operate the business with the approval of the liquidator. Over time, most of the unsecured creditors listed in the report as to the affairs were paid from the proceeds of the ongoing nursery business. The payments were made by Mr and Mrs Garra without reference to or the express approval of the liquidator. The debt to the CBA Bank was compromised and settled by Mr and Mrs Garra on 3 July 2009 and the debt to the ANZ Bank was settled by them on 10 August 2010.
At trial it was accepted that the debt to Team Poly was still outstanding and that there had been no repayment of the loan to Mr and Mrs Garra that was said to be outstanding. It was unclear whether there was any remaining indebtedness to the Australian Taxation Office.
Returning to the chronology, on or about 22 October 2008 Mr Garra exercised his power of appointment pursuant to clause 19.1 of the trust deed and appointed the defendant as trustee of the Garra Family Trust.
Clause 19.2 of the trust deed provides for the determination and vacation of the office of a trustee:
The office of a trustee will be ipso facto determined and vacated if such trustee being an individual will be found to be a lunatic or of unsound mind or if his estate will be sequestrated or if he enters into an arrangement with his creditors or he will without the consent of the other trustees remain out of the place in which this trust fund is for the time being administered for more than twelve (12) months or if such trustee being a company will enter into liquidation whether compulsory or voluntary (not being merely a voluntary liquidation for the purposes of amalgamation or reconstruction).
The power to appoint a new trustee is invested in the appointor by virtue of clause 19.1:
The appointer if name[d] and described in the Schedule (and on the death of the last surviving individual appointer and his or her legal representatives and in the case of a company named as appointer then any person or company duly appointed by it so as to act) will have power to appoint in writing a new or additional trustees or trustee hereof (but not including the excluded person) and to remove any trustee hereof provided that if there is no appointor named or described in the Schedule or if at the time in question there is no appointor with the power to appoint a new or additional trustees or trustee and to remove any trustee the said powers will be exercisable by the trustee named in the Schedule or in the event of there being more than one the survivor of them and after the death of the survivor his or her legal personal representatives and in the case of a company the liquidator will have the said powers.
Notice of the appointment of the replacement trustee, however, was not given to the plaintiff until 25 November 2008. That notice provided:
To Whom it May Concern
TAKE NOTICE that in exercise of the power contained in clause 19.2 of the deed of settlement made 1 August 2003 between Karen Chalmers as Settlor of the one part and Garra Water Investments Pty Ltd (ACN 105 758 594) as the Trustee of the other part ENZO GARRA as the appointor or duly appointed pursuant to clause 19.1 of the said deed HEREBY APPOINTS OURBACK YARD NURSERY PTY LTD (ACN 133 827 871) of 28 Benaud Close Keilor East Victoria 3033 as the Trustee of the trust in place of Garra Water Investments Pty Ltd which has been removed.
Dated this 22 day of October 2008
Signed Enzo Garra
[Emphasis in original.]
The parties at trial agreed that this notice had the effect that the plaintiff was removed and replaced by the defendant as trustee as and from 25 November 2008. Mrs Garra was the sole director of the defendant.
Until 25 November 2008, the plaintiff was the legal owner of the assets of the business, including any goodwill, and as owner, was liable for the debts of the business. As and from 25 November 2008, the defendant became the legal owner of the business as trustee and debts incurred after that date were its responsibility. The defendant accepted that the plaintiff remained the legal owner of the business in its capacity as trustee until 25 November 2008.
The investigations of the liquidator revealed that while trustee the plaintiff acted only as a trustee of the trust and in no other capacity and that all assets were held by it as trustee of the trust and all liabilities incurred were incurred as trustee of the trust.
The principal assets of the plaintiff were stock, plant and equipment of the nursery business and of the goodwill attaching to that business. Until notice of the appointment of the defendant was served, the plaintiff continued as trustee. On its replacement by the defendant, the plaintiff continued as a bare trustee. The plaintiff retained responsibilities to attend to any outstanding indebtednesses and with restricted rights with respect to the assets of the trust. The rights of exoneration and indemnity were not affected and the creditors’ rights of recourse against the assets of the trust also remained unaffected.
The liquidator gave notice on 18 November 2008 that a right of indemnity was claimed over all of the assets of the plaintiff in existence at the date of liquidation; a lien over the assets of the trust as at the date of liquidation and an entitlement to an equitable tracing of the proceeds from the sale, transfer or other assignment of the assets, the subject of the right of indemnity and of the lien. As noted above, the liquidator, however, formed the view that it was appropriate, during the period that the plaintiff continued to act as trustee, to leave the day to day running of the nursery business in the hands of Mr and Mrs Garra.
The defendant contended that the plaintiff was obliged to apply under section 63 of the Trustee Act 1958 (Vic) for authorising its dealings with the trust property. Section 63 provides:
Power of Court to authorize dealings with trust property
(1)Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorized to be expended, and the costs of any transaction are to be paid or borne as between capital and income.
(2)The Court may from time to time rescind or vary any order made under this section, or may make any new or further order.
(3)An application to the Court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.
It was common ground that no application for directions had been made.
The terms of section 63 provide a discretion in the Court to consider an application by trustees. There is nothing in the wording of section 63 that obliges a trustee to seek the authorisation from the Court. The defendant referred to the decision of Re Baker deceased; Rouse v Attorney-General for Victoria.[1] A review of this decision does not disclose support for the proposition that the trustee is obliged to seek authorisation under section 63 in circumstances where the trustee has power to act in accordance with the terms of the particular trust deed or according to the general law.
[1] Re Baker deceased; Rouse v Attorney-General for Victoria [1961] VR 641.
Where a corporate trustee incurs a liability it has a right of indemnity out of trust assets. The corporate trustee has an equitable lien or equitable charge over trust assets securing that right of indemnity. Where a trustee is still to incur a liability it has a right of exoneration out of the assets of the trust in respect of any prospective liability. The rights of indemnity and exoneration from trust assets only have application where the trustee is acting in its capacity as trustee of the trust. A corporate trustee has a right to deal with trust assets in accordance with the terms of the trust for the purpose of satisfying any liabilities in respect of which the rights of indemnity and exoneration attach. This includes the power to sell trust assets.
In Octavo Investments Pty Ltd v Knight the High Court discussed these general principles in the context of the bankruptcy of a trading trustee, Stephen, Mason, Aickin and Wilson JJ observed:[2]
… It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co. Pty. Ltd. v. Wiltshire. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co. Pty. Ltd. v. Wiltshire. The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorized to use for the purposes of carrying on the business: Dowse v. Gorton.
[Footnotes omitted.]
[2] Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 367.
The creditors of a corporate trustee in a winding up are entitled to claim in the winding up and to rank on the basis of any provable claim they have against the trustee. This claim will be met by the trustee out of the trust’s assets through the trustee’s right of indemnity if sufficient assets are available. The trustee’s rights of indemnity and exoneration are not lost on winding up. However, to be payable out of the assets of the trust the creditor’s claim must relate to a liability incurred by the trustee in its capacity as trustee of the trust in respect of which rights of indemnity and exoneration attach.
In In Re Suco Gold Pty Ltd (In Liquidation), King CJ discussed the origins of a trustee’s right of indemnity:[3]
Equity implied into every trust deed a right in the trustee to be indemnified out of the trust property in respect of liabilities incurred in the performance of the duties of his office: per Lord Eldon in Worrall v. Harford. There is now the statutory right of indemnity quoted above and in the present case the express provisions of the Deeds also quoted above. The nature of the right of indemnity is expressed by Stirling J. in In re Blundell; Blundell v. Blundell:
What is the right of indemnity? I apprehend that in equity, at all events, it is not a right of the trustee to be indemnified only after he has made the necessary payments to his solicitor, or to the autioneer, or to the stockbroker—but that he is entitled to be indemnified, not merely against the payments actually made, but against his liability ...
It seems to me, therefore, that a trustee has a right to resort in the first instance to the trust estate to enable him to make the necessary payments to the persons whom he employs to assist him in the administration of the trust estate; that he is not bound in the first instance to pay those persons out of his own pocket, and then recoup himself out of the trust estate, but that he can properly in the first instance resort to the trust estate, and pay those persons whom he has properly employed by the proper remuneration out of the trust estate.
The right of indemnity which a trustee possesses is therefore in essence a right to resort to the trust property for the protection and preservation of his personal estate against liabilities which he has incurred in the proper performance of the trust. It has a twofold aspect as appears from the passage cited above from In re Blundell. If the trustee has discharged the liability, he is entitled to recoup himself out of the trust property. If he has not discharged the liability, he is entitled to resort to the trust property for the purpose of discharging the liability thereby freeing his personal estate from the burden of the liability. I refer generally to the valuable article by Professor H. A. J. Ford, Trading Trusts and Creditors' Rights (1981) 13 Melbourne University Law Review p. 1.
[Footnotes omitted.]
The statutory right of indemnity referred to by King CJ has its parallel under Victorian legislation – section 36(2) of the Trustee Act 1958 (Vic). The express provisions of the trust deed in the present case providing the right of indemnity are set out earlier in these reasons.
[3] In Re Suco Gold Pty Ltd (in liquidation) (1982) 33 SASR 99, 104-105.

King CJ further discussed the right of indemnity and how that right passes to a liquidator of a corporate trustee:[4]
The right of indemnity, it is true, exists for the trustee's own benefit and it passes to the trustee in bankruptcy or the liquidator. The proceeds of that right of indemnity are therefore part of the estate divisible among the creditors. It seems to me, however, that the right of indemnity can only produce proceeds for division among the creditors generally if the trustee has discharged the liabilities incurred in the performance of the trust and is therefore entitled to recoup himself out of the trust property. If he has not discharged the liabilities, the right of indemnity entitles him to resort to the trust property only for the purpose of discharging those liabilities. He may apply the trust moneys directly to the payment of the trust creditors or he may take it into his own possession for that purpose. If he takes trust property into his possession to satisfy his right to be indemnified in respect of unpaid trust liabilities, it seems to me that that property retains its character as trust property and may be used only for the purpose of discharging the liabilities incurred in the performance of the trust. The exercise of the right of indemnity is for the benefit of the trustee in that it relieves him of liability for the trust debts. If the trustee is bankrupt, or being a company is in liquidation, the trustee in bankruptcy or liquidator can exercise the right of indemnity which vests in him as part of the property of the bankrupt or insolvent company. If the trust liabilities have been discharged, the trustee in bankruptcy or liquidator is entitled to recoup the bankrupt estate out of the trust property and the proceeds of the right of indemnity become part of the property divisible among the creditors. If the liabilities have not been discharged, the trustee in bankruptcy or liquidator may, by reason of the right of indemnity which vests in him, apply the trust property to the payment of the trust liabilities, thereby exonerating the bankrupt estate to the extent of the value of the available trust assets. In the latter circumstances there cannot be proceeds of the right of indemnity which are available for distribution among the general body of creditors.
[4] In Re Suco Gold Pty Ltd (In Liquidation) (1982) 33 SASR 99, 107-108.
A liquidator has an entitlement to claim costs of expenses incurred in winding up the affairs of the trustee provided these relate to the performance of trust duties and in respect of any liability incurred, a right of indemnity exists against trust assets, and in respect of any prospective liability, a right to exoneration against those assets.
As King CJ observed in In Re Suco Gold Pty Ltd (In Liquidation):[5]
A trustee, however, has no legal right to use or apply the trust property other than for the authorized purposes of the trust. In particular he has no legal right to apply the trust property for his own benefit or for the benefit of third parties: Keech v. Sandford. I cannot escape the conviction that if a trustee, or his trustee in bankruptcy, or liquidator in the case of a trustee company, is permitted to use trust property, not for the discharge exclusively of liabilities incurred in the performance of the trust, but in the discharge of other liabilities as well, the money is being used for an unauthorized purpose and is being used, moreover, for the benefit of the trustee, and of third parties, namely the non-trust creditors.
[Footnote omitted.]
[5] In Re Suco Gold Pty Ltd (in liquidation) (1982) 33 SASR 99, 105.
King CJ then turned his attention to the position on liquidation:[6]
… On bankruptcy or liquidation, the unpaid trust creditors are entitled to stand in the shoes of the trustee and to obtain payment from the trust property. Such a right is, in my view, inconsistent with the notion that the trust property is, to the extent of the trust liabilities, property of the bankrupt divisible among the general body of creditors. The existence of the right of subrogation must mean that the trust property, to the extent of the trustee's right of indemnity, in respect of the unpaid trust liabilities, must be applied in payment of the trust creditors. Indeed this was made explicit in the joint judgment in Octavo's case where the following passage appears at p. 91: "Those creditors are nevertheless subrogated to the rights of the trustee in relation to that property and in the event of the trustee becoming bankrupt, it is those rights which are to be realized in their favour." (Italics mine). …
[Footnote omitted. Emphasis in original.]
[6] In Re Suco Gold Pty Ltd (in liquidation) (1982) 33 SASR 99, 108.
In In Re Suco Gold Pty Ltd (In Liquidation), 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.
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 In Re Suco Gold Pty Ltd (In Liquidation), where King CJ observed:[7]
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.
[Footnotes omitted.]
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.
[7] In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99, 109-110.
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.
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.[8] A bare trustee retains rights of indemnity and exoneration and a lien over the assets of the trust.
[8] See for example, Federal Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) (2008) 173 FCR 472; Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271.
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.
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.
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.
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.
It was common ground that following notice of the appointment of the defendant as the new trustee, the business continued to operate. Creditors of the business were paid out over time by the new trustee. However, it appears that debts due to bankers were not resolved for many months and, as at the date of trial, Team Poly remained an outstanding creditor and there remained for the resolution the claims of other possible creditors – Mr and Mrs Garra in regard to loans which were said to have been made to the business, and the Australian Taxation Office in regard to possible tax liabilities.
As a consequence, there were still debts outstanding as at 25 November 2009 and there was still a debt and other possible debts of the plaintiff outstanding at the time of trial. The plaintiff has a right of indemnity against the assets in respect of those debts and has a lien with rights to trace to support the indemnity. It also follows that proper and reasonable expenses of the liquidation were properly chargeable against the assets and were protected by the indemnity and the lien.
In In Re Suco Gold Pty Ltd (In Liquidation) the issue of a liquidator’s entitlement to recover costs, expenses and remuneration were discussed at some length. King CJ adopted the reasoning of the Victorian Full Court in Re Enhill Pty Ltd.[9] In particular, King CJ reasoned:[10]
It is now necessary to consider the position of the liquidator's costs, expenses and remuneration in the light of the above principles. Although I have not found myself able to agree with certain of the reasoning in Re Enhill Pty. Ltd., it is, as a decision of the Full Supreme Court of Victoria, a highly persuasive authority for the proposition that the liquidator's costs, expenses and remuneration may be paid out of the trust property. There are clearly strong practical considerations in favour of such a course. Unless that course can be followed, the liquidation of a trustee company without assets of its own cannot proceed. It seems to me that that course can be justified by reference to the obligations of the trustee company arising out of the carrying on of the business authorized by the trusts. It is part of the duty of the trustee company to incur debts for the purposes of the trust businesses and, of course, to pay those debts. Upon winding up those debts can only be paid in accordance with the provisions of the Companies Act. This requires necessarily that there be a liquidator and that he incur costs and expenses and be paid remuneration. Section 292 provides that there be paid the costs and expenses of winding up, the taxed costs of the petitioner and the remuneration of the liquidator "in priority to other unsecured debts" (italics mine). The expression "other unsecured debts" appears to imply that the costs and expenses of winding up, the petitioner's costs and the liquidator's remuneration are regarded by the statute as debts of the company. As the company's obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity. If that reasoning is wrong, I would, like Lush J. in Re Enhill Pty. Ltd., be prepared to rely on the principle enunciated by Dixon J. in In re Universal Distributing Co. Ltd. (In Liquidation).
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. As there are no non-trust assets or liabilities, all the expenses are attributable to one or other of the trusts and must be apportioned between them. The liquidator will be able to make an estimate of the work and expense involved in the liquidation so far as it relates to each trust. Where no apportionment is possible, the maxim that equality is equity should provide the solution to the problem of apportionment.
[Footnotes omitted.]
[9] Re Enhill Pty Ltd [1983] VR 561.
[10] In Re Suco Gold Pty Ltd (in liquidation) (1982) 33 SASR 99, 110.
The passage referred to from the judgment of Dixon J is in the following terms:[11]
…If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets (In re Marine Mansions Co.). The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it (In re Oriental Hotels Co.; Perry v. Oriental Hotels Co). The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf. In re Regent's Canal Ironworks Co.; Ex parte Grissell; and see Batten v. Wedgwood Coal and Iron Co.).
In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realization of the property. In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which enure for the debenture-holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds. The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.
[Footnotes omitted.]
[11] In re Universal Distributing Company Ltd (in liquidation) (1933) 48 CLR 171, 174-175.
Counsel for the defendant drew attention to the judgment of the Federal Court in Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) where Ryan, Mansfield and Dowsett JJ observed:[12]
As the primary Judge pointed out, the liquidators are winding up a former trustee, not a "serving" trustee. In the cases to which we have referred, as far as we can see, the position was otherwise. In the present case the liquidators cannot claim to have been performing Bruton's duties as trustee. It no longer holds that position. It may still hold trust property, but as a bare trustee. Its duties, powers and rights are limited to protecting the trust assets. The liquidators' duties, powers and rights cannot be any greater than Bruton's. The liquidators are also entitled to protect and enforce Bruton's indemnity. However entitlement to the indemnity is intimately connected to payment of the relevant debts particularly, for present purposes, the tax debt. …
[12] Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472, [79]. The High Court of Australia allowed an appeal from the Full Federal Court. However the appeal was allowed on an unrelated issue concerning section 500 of the Corporations Act 2001 (Cth). The proposition cited above remains a correct statement of the law.
In my view these observations have application to the present proceeding. In particular, as there were no non-trust assets or liabilities, the proper and reasonable expenses of the liquidator could be expected to be recoverable.
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.
It is not possible on the information presently before the Court to determine the proper and reasonable expenses that are the subject of the indemnity and that matter should be referred to a Master for determination.
The trial of the proceedings should be adjourned to a date to be fixed with liberty to apply. I direct that minutes of order be prepared by the plaintiff to give effect to these reasons.