In the Matter of ICS Real Estate Pty Ltd (in liq)
[2014] NSWSC 479
•29 April 2014
Supreme Court
New South Wales
Medium Neutral Citation: In the Matter of ICS Real Estate Pty Ltd (in liquidation); and In the Matter of Independent Contractor Services (Aust) Pty Ltd (in liquidation) [2014] NSWSC 479 Hearing dates: Friday 11 April 2014 Decision date: 29 April 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: In proceedings 2013/381266, the Court orders that:
(1) Pursuant to Corporations Act, s 511, the liquidator would not be justified in treating the amounts standing to the credit of the company ICS Real Estate Pty Ltd (in liquidation) in its bank accounts as beneficially owned by the company, nor any amounts collected by the liquidator since his appointment in respect of invoices rendered by the company as beneficially owned by the company;
(2) Pursuant to Corporations Act, s 511, the liquidator would not be justified in treating the claiming contractors and agents' representatives in respect of whom invoices have been rendered by the company as unsecured creditors in the liquidation of the company;
(3) The plaintiff's costs of the application be paid out of the amount standing to the credit of the company in its bank accounts or collected by the liquidator since his appointment.
In proceedings 2013/381272, the Court orders that:
(1) Michael Lee be added as defendant and appointed pursuant to UCPR r 7.6(2)(c) to represent the class of general beneficiaries of the Independent Contractor Services Trust;
(2) Pursuant to Corporations Act, s 511, the liquidator would not be justified in treating the amounts standing to the credit of the company Independent Contractor Services Pty Ltd (in liquidation) in its bank accounts as beneficially owned by the company, nor any amounts collected by the liquidator since his appointment in respect of invoices rendered by the company as beneficially owned by the company;
(3) Pursuant to Corporations Act, s 511, the liquidator would not be justified in treating the claiming contractors and agents' representatives in respect of whom invoices have been rendered by the company as unsecured creditors in the liquidation of the company;
(4) The plaintiff's costs of the application be paid out of the amount standing to the credit of the company in its bank accounts or collected by the liquidator since his appointment;
(5) The defendant's costs of the application be paid out of the amount standing to the credit of the company in its bank accounts or collected by the liquidator since his appointment.
Catchwords: CORPORATIONS - external administration - voluntary administration - liquidator's application for judicial advice - whether judicial advice should be given where it will affect substantive rights - where parties potentially affected are notified and representative order made - held, advice should be given - whether liquidator justified in treating certain property purportedly held on trust by company as beneficial property of company - whether trust arrangement a sham - held, not a sham.
TRUSTS AND TRUSTEES - Creation of trust - purpose to reduce taxation - where discretion had invariably been exercised to distribute income to those beneficiaries whose work had generated it - whether true intention that there be no discretion - whether true intention that relationship was employment not trust - held, not a shamLegislation Cited: (CTH) Corporations Act 2001, s 511
(NSW) Trustee Act 1925, s 63
(NSW) Uniform Civil Procedure Rules 2005, 7.6(2)(c)Cases Cited: Crawford v Oswald Park Pty Ltd (in liq) [2006] NSWSC 987
Dean-Willcocks v Soluble Solution Hydroponics (1997) 42 NSWLR 209
Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141; (1997) 148 ALR 146; (1997) 24 ACSR 617
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471; (2004) 211 ALR 101; (2004) 79 ALJR 206
In re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 48 ACSR 97
In re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426
In the matter of 7 Steel Distribution Pty Limited (in liq) (receivers and managers appointed) [2013] NSWSC 669
In the matter of Dalma No 1 Pty Limited (in liquidation) (ACN 111 772 260) [2013] NSWSC 1335; (2013) 279 FLR 80; (2013) 95 ACSR 641
In the matter of Ian James Purchas as liquidator of Astarra Asset Management Pty Ltd (in liq) [2011] NSWSC 91
Karger v Paul [1984] VR 161
Lewis v Condon [2013] NSWCA 204; (2013) 304 ALR 410
Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd [2007] FCA 1443
Purchas, in the matter of RSP Group Pty Limited (in liq) [2006] FCA 1329
Re G B Nathan and Co Pty Ltd (In Liq) (1991) 24 NSWLR 674; (1991) 5 ACSR 673
Re S&D International Pty Ltd (in liquidation) (No 7) [2012] VSC 551; (2012) 92 ACSR 38
Re Southern Cross Airlines [2000] 1 Qd R 84
Re Timbercorp Limited (in liq) [2011] VSC 189
Re United Medical Protection of Queensland [2004] NSWSC 14
Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18
S & D International v MIG Property Services [2010] VSC 336; (2010) 79 ACSR 373
Scott v FCT (No 2) (1966) 40 ALJR 265
Sharrment Pty Ltd and Others v Official Trustee in Bankruptcy (1988) 18 FCR 449; (1988) 82 ALR 530Category: Principal judgment Parties: Bruce Gleeson in his capacity as liquidator of ICS Real Estate Pty Ltd (in liquidation) (plaintiff, 2013/381266)
Bruce Gleeson in his capacity as liquidator of Independent Contractor Services (Aust) Pty Ltd (in liquidation) (plaintiff, 2013/381272)
Michael Lee as representative of the beneficiaries of the Independent Contractor Services Trust (defendant, 2013/381272)Representation: Counsel:
A. Spencer (plaintiffs)
S. Golledge (defendant)
Solicitors:
Gillis Delaney Lawyers (plaintiffs)
James Conomos Lawyers (defendant)
File Number(s): 2013/381266; 2013/381272
Judgment
In each of these proceedings, which were heard together with evidence in one being evidence in the other, the liquidator of the companies ICS Real Estate Pty Ltd (in liquidation) ("ICSRE") and Independent Contractor Services (Aust) Pty Ltd (in liquidation) ("ICS") applies by originating processes filed on 19 December 2013 for directions, pursuant to Corporations Act, s 511, to the effect that he would be justified in treating certain moneys standing to the credit of those companies (and moneys owing to them) as assets of those companies, there being doubt as to whether such funds are beneficially the property of the company and are thus to be distributed in accordance with the provisions of Corporations Act, s 556, or whether they are held by the companies as trustees of two trusts - respectively the ICS Real Estate Trust ("the ICSRE Trust") and the Independent Contractor Services Trust ("the ICS Trust"), in which case they would be distributed not as assets of the companies but in accordance with the relevant trusts.
The contradictor
Mr Lee was one of multiple persons named in the originating process as persons to whom notice of the application would be given. He, and the others so named, are "general beneficiaries" of the ICS Trust, in respect of work performed by whom ICS has received, or is owed, payment. If the moneys so paid are beneficially the property of ICS, they will be distributed pari passu, and the "general beneficiaries" would, as unsecured creditors, receive a small (if any) dividend. However, if those moneys are trust property, they will not be available for creditors generally but only for the beneficiaries. Thus the general beneficiaries, including Mr Lee, have an interest in the treatment and distribution of the moneys in question that differs from that of ordinary creditors of ICS. It follows that they have an interest in the subject matter of the application, notwithstanding that it is a directions application the resolution of which would not finally determine substantive rights of third parties (including Mr Lee) [Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141; (1997) 148 ALR 146; (1997) 24 ACSR 617, 622 [25] (Lindgren J); Re G B Nathan and Co Pty Ltd (In Liq) (1991) 24 NSWLR 674, 679F; (1991) 5 ACSR 673 (McLelland J)].
Mr Lee's interest is identical to that of all others who are beneficiaries of the ICS Trust - including, it is to be presumed, the others named in the originating process. While he is not a member of the ICSRE Trust, the similarities between the two are such that his position and interest is closely analogous to that of the beneficiaries of that trust also. The submissions made on behalf of Mr Lee are not dependent upon any particular fact or circumstance unique to him. His presence at the hearing, in the role of a contradictor, was of assistance in the Court's consideration of the issues posed by the application.
Courts have often referred to the desirability of a contradictor in applications of this kind [see, for example, Purchas, in the matter of RSP Group Pty Limited (in liq) [2006] FCA 1329; In the matter of Dalma No 1 Pty Limited (in liquidation) (ACN 111 772 260) [2013] NSWSC 1335; (2013) 279 FLR 80; (2013) 95 ACSR 641, [8]; Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18]; and of the practical need to make provision for payment of the contradictor's costs [In re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 48 ACSR 97, [17]; In re MF Global Australia Ltd (in liq) ( No 2) [2012] NSWSC 1426]. It is expedient for the purpose of saving expense - having regard to all of the circumstances, including the amount at stake and the size of the class of general beneficiaries - for Mr Lee to be joined as a defendant and appointed to represent that class pursuant to UCPR r 7.6(2)(c).
Background
ICSRE was incorporated on 15 November 2006. Mr Peter Watson became a director on incorporation and remained so until April 2012. On 4 October 2012, the directors (at that time, Michael Smith, Llewellyn Graham and Derek Wallbridge) resolved to appoint a voluntary administrator. On 8 November 2012, a meeting of creditors resolved that ICSRE be wound up.
ICS was incorporated on 7 April 2006. Mr Peter Watson became a director on incorporation and remained so until April 2012. On 4 October 2012, the sole director Mr Michael Smith resolved to appoint a voluntary administrator. On 8 November 2012, a meeting of creditors resolved that ICS be wound up.
ICSRE and ICS were respectively parties to trust deeds, both dated 16 November 2006, constituting the ICSRE Trust and the ICS Trust. Each trust is, according to the terms of the trust deed that constitutes it, a discretionary trust, the objects of which are described as "general beneficiaries" or "beneficiaries", including a "primary beneficiary".
Other than the name of the trustee company and the trust, the two trust deeds are in identical terms. The sum of $50 was settled on the trustee company, which consented to act as trustee. The trust fund comprises the settled sum and "... all moneys investments and property paid transferred to or accepted by the trustee as additions to the trust fund ..." (cl 1(37)). The trustee holds the income and the capital of the trust on trust for the beneficiaries and may, in its absolute discretion pay, apply, allocate or set aside all or part of the income or capital of the trust fund for any of the general beneficiaries (cll 4.1 and 5.1).
General beneficiaries - also referred to as "beneficiaries" (cl 1(6)) - were defined to include the "primary beneficiary" (cl 1(17)). The "primary beneficiary" was ICS Administration Pty Ltd ("Administration"), which was also the appointor of each trust. (Administration, which was incorporated on 30 October 2006, went into voluntary administration on the same day as the companies, and is now also in liquidation; the liquidator of the companies is also the liquidator of Administration). In addition, the trustee could by written resolution determine to include any person as a "general beneficiary", provided that the person had made a donation of at least $50 to one of several charities prescribed in a schedule to the trust deed in the six months prior to that resolution; and such determination could operate retrospectively (cl 1(17)).
If the trustee is a corporation it may exercise its discretion by a resolution of the board of directors or shareholders, or it may delegate that task to a representative (cl 9.2). If the trustee being a corporation goes into liquidation, the trustee shall be disqualified from holding office and the trusteeship is thereby terminated (cl 11.3.2). Accordingly, the companies are no longer trustees (except as bare trustees pending replacement).
Both companies carried on business under similar models, whereby they supplied persons whom they had retained to entities (such as real estate agencies, and information technology and engineering consultancies) to deliver services on behalf of those agencies or consultancies.
The clients of ICSRE were the operators of real estate agencies. Their relationship with ICSRE was governed by three agreements: a "commercial agreement" (which entitled ICSRE to charge the relevant client agency a management fee); a "deed of partnership" (the sole purpose of the partnership being to comply with the Property, Stock and Business Agents Act 2002, s 31(4)); and a "service agreement", by which ICSRE agreed to engage "agents' representatives", approved by the client agency, to deliver real estate consultancy, sales and marketing services on behalf of the client agency to its clients. ICSRE was liable for all remuneration to be paid to the agents' representatives, and for workers compensation insurance. The client agency agreed to pay ICSRE a fee (which involved an "advance on commission" of a regular weekly payment, offset against a share of the selling commission, which was shared, according to a formula, between ICSRE and the client agency), and ICSRE agreed to submit invoices to the client agency for moneys owed to ICSRE, which the client agency agreed to pay within seven days.
The clients of ICS were consultancies that provided consultants (mainly in the fields of information technology and engineering) to companies such as banks that required the services of external contractors. An example was Infopeople Pty Ltd, which supplied consultants to the Commonwealth Bank. Such client consultancies entered into an agreement with ICS, under the terms of which ICS provided a consultant to deliver services on behalf of the consultancy to the end user (for example, the bank). The consultant remitted timesheets to ICS, from which ICS raised invoices to the client consultancy. The bank account into which electronic payments could be remitted was identified in the invoices as "ICS Trust". At least in some cases, ICS also charged the consultancy a management fee.
A person who wished to be placed as an "agent's representative" ("representative") by ICSRE applied to become a general beneficiary of the ICSRE Trust by completing an application form, certifying that he or she had made the required charitable donation, and acknowledging that (unless ICSRE agreed to hire him or her as an employee) he or she was not an employee, and had no right or entitlement to any income or capital of the trust. The applicant also supplied bank account details for a "primary" and "secondary" beneficiary, and instructions as to how any distribution were to be split between the primary and secondary beneficiary. Representatives agreed to pay ICSRE a fee of 4% of income earned through ICSRE, up to a maximum of $10,000 per year.
A person who wished to be placed as a consultant ("contractor") by ICS applied to become a beneficiary of the ICS Trust in substantially the same manner, making similar acknowledgements. Contractors agreed to pay ICS a fee (being, in the case of one example tendered, 4.5% of income earned through ICS).
It appears that in excess of 2,500 persons have been admitted as general beneficiaries of the ICS and ICSRE trusts in this way.
Administration, which provided administrative and support services to ICSRE and ICS, outsourced its invoicing and distribution function to CXC Global Pty Ltd ("CXC"), which processed payments to the representatives and contractors. In the case of ICSRE, a representative would inform ICSRE of the completion of a sale which he or she had facilitated, and CXC would raise an invoice on behalf of ICSRE, addressed to the client agency for ICSRE's share of the sales commission, to be remitted to ICSRE's account at the National Australia Bank. All such payments were made into that bank account. Upon receipt, CXC matched the payment to the invoices issued by it on behalf of ICSRE and automatically - without further approval from the management of ICSRE or ICS - paid the balance (after deducting GST and an agreed percentage as a management fee) to, or as directed by, the representative concerned, typically on the day after the payment was received. No instance has been identified where a receipt was not distributed to the representative whose work had generated the commission, in accordance with the payment instructions in the beneficiary application and acknowledgment form, and so far as the evidence goes this appears to have been the practice from the outset. There is nothing to indicate that there was any specific exercise of discretion in respect of any individual payment.
In the case of ICS, the contractors would furnish a timesheet to ICS, pursuant to which invoices would be rendered on behalf of ICS by CXC. Once payment had been received from the client consultancy, ICS made a distribution to the contractor - weekly, fortnightly or monthly, depending on the contract. Again, there does not appear to have been any instance where a receipt in respect of work performed by a contractor was not distributed to that contractor in accordance with the payment instructions in the application and acknowledgment form.
On 29 June 2012, the board of ICSRE passed a circular resolution to the effect that "all contractors engaged by the Trust during the year ended 30 June 2012, who are beneficiaries of the Trust be distributed an amount (exclusive of GST) such that they receive an amount equal to their contractual entitlements for the year". On the same day, Mr Smith, as sole director of ICS, adopted an identical resolution.
In respect of ICSRE, the liquidator has collected $63,854.45, of which a balance of $27,983 remains in the bank account. The total of the claims made by representatives is $59,088.14, of which the largest single claim is $22,559.18, by one Mr Ochremienko. There are further amounts outstanding, which the liquidator does not expect to recover. In respect of ICS, the liquidator has collected $232,122.03. The total of the claims made by contractors is $228,605.79, of which the largest single claim is $43,807.50, by Mr Lee. Again, there are further amounts outstanding, which the liquidator does not expect to recover.
The questions
Against that background, the liquidator seeks directions as to two related matters:
(1) a direction that he would be justified in treating the amounts standing to the credit of ICS and ICSRE in their bank accounts as beneficially owned by those companies, and any amounts collected by the liquidator since his appointment in respect of invoices rendered by ICS or ICSRE as beneficially owned by those companies; and
(2) a direction that he would be justified in treating the claiming contractors and agents' representatives in respect of whom invoices have been rendered by ICS or ICSRE as the case may be, as unsecured creditors in the liquidation of ICSRE.
According to its terms, the trust deed bound the trustee to hold the moneys received on trust, in accordance with the terms of the deed. However, the liquidator submits that the directions sought should be given on the basis that the purported discretionary trusts are shams, and that the true underlying relationship between the companies and the representatives or contractors involved no trust but was contractual only. Thus the directions sought do not involve mere procedural or discretionary issues, but impinge on legal rights: in a practical sense, giving the directions sought will impact on the legal rights of the "beneficiaries".
This being a creditors voluntary winding up, applications by liquidators for directions are authorised by Corporations Act, s 511. Generally speaking, applications under s 511 are treated in the same manner as applications for directions in a court ordered winding up under s 479(3) [Dean-Willcocks v Soluble Solution Hydroponics (1997) 42 NSWLR 209, 212; Crawford v Oswald Park Pty Ltd (in liq) [2006] NSWSC 987, [10]; S & D International v MIG Property Services [2010] VSC 336; (2010) 79 ACSR 373, [7]; In the matter of Ian James Purchas as liquidator of Astarra Asset Management Pty Ltd (in liq) [2011] NSWSC 91, [33]; In the matter of 7 Steel Distribution Pty Limited (in liq) (receivers and managers appointed) [2013] NSWSC 669, [20]].
The jurisdiction to give directions is analogous to the judicial advice jurisdiction under (NSW) Trustee Act, s 63. The effect of such a direction, to the effect that the liquidator would be justified in taking a particular course of action - whether under s 479(3) or under s 511 - is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty [Astarra Asset Management, [36]; Re Timbercorp Limited (in liq) [2011] VSC 189, [3]; Re S&D International Pty Ltd (in liquidation) (No 7) [2012] VSC 551; (2012) 92 ACSR 38, [88]]. In Re GB Nathan & Co Pty Ltd, McLelland J, as he then was, observed (at NSWLR 679F) that:
... the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the directions.
However, the sections are not identical. Notably, while s 479(3) authorises only "directions in relation to any particular matter arising under the winding up", s 511(1)(a) empowers the court to "determine any question arising in the winding up of a company", provided that it will be just and beneficial to do so. Under s 479(3), the Court's only power is to give directions to the liquidator, and this does not extend to making orders binding upon or affecting the rights of third parties [see Editions Tom Thompson, 622; Re Southern Cross Airlines [2000] 1 Qd R 84], although such an application can be reconstituted as an inter partes proceeding for the determination of substantive rights [Re GB Nathan & Co, NSWLR 680; Editions Tom Thompson, 627; Re Willmott Forests Ltd (No 2), [44]-[45]]. But the power under s 511(1)(a), "to determine any question arising in the winding up", is wider and accommodates the determination of substantive rights, although the court would not do so without affording potentially affected parties an opportunity to be heard [Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd [2007] FCA 1443, [50]-[51] (French J); Re Willmott Forests Ltd (No 2), [46]-[45]].
It is not suggested on behalf of Mr Lee that the nature of the issues involved is such that the Court should decline to give directions to the liquidator. The liquidator is confronted with a substantial dilemma, and the administration will likely be delayed unless some guidance is given. In Re United Medical Protection of Queensland [2004] NSWSC 14, Austin J said:
Where, however, the liquidator encounters difficulty in the course of administration of the winding up outside the sphere of commercial judgment, such as to make it reasonable for him or her to seek the protection of a direction, the court will ordinarily assist and it may even be the liquidator's duty to approach the court.
In Re Tavistock Iron Works Co (1871) 24 LT 605, Lord Romilly MR said (at 605):
The duties of an official liquidator are very plain and simple. Generally they may be thus stated: he is to do everything he can to augment the disposable assets of the company; in all extraordinary cases he is to take the directions of the court as to the course to be adopted, and in so doing he is to assist the court as much as he can with the information he has acquired.
In the present case, rather than leaving resolution of the question to an inter partes suit - especially where each individual beneficiary has only a limited interest in the fund, such that it would not be cost effective for many of them to pursue individual claims, it is preferable that the issue be resolved in a proceeding of which all have notice, are afforded an opportunity to participate if they wish, and there is a representative of their interests. Notice of these proceedings has been given, in a form approved by the Court, to all the "general beneficiaries"; and Mr Lee is to be joined to represent the interests of the general beneficiaries of the ICS Trust, which are for all material purposes indistinguishable from those of the beneficiaries of the ICSRE Trust. In those circumstances, the circumstance that the directions sought would practically affect substantive entitlements to property would not deter me from giving them, if they are otherwise appropriate, on an application under s 511.
Are the trusts shams?
The doctrine of "sham" has at its core the concept of a dichotomy between the true transaction and/or relationship between the parties, and the manner in which it is overtly represented. In Scott v FCT (No 2) (1966) 40 ALJR 265, Windeyer J said (at 279):
On the other hand, if the scheme, including the deed, was intended to be a mere facade behind which activities might be carried on which were not to be really directed to the stated purposes but to other ends, the words of the deed should be disregarded ... A disguise is a real thing: it may be an elaborate and carefully prepared thing; but it is nevertheless a disguise. The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction. ..."
In Sharrment Pty Ltd and Others v Official Trustee in Bankruptcy (1988) 18 FCR 449; (1988) 82 ALR 530, Lockhart J said (at ALR 537):
A "sham" is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.
In Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471; (2004) 211 ALR 101; (2004) 79 ALJR 206 the High Court (at [46]) said that the term "sham" refers to "steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences". And recently, in Lewis v Condon [2013] NSWCA 204; (2013) 304 ALR 410, Leeming JA in the Court of Appeal said (at [59]):
That is to say, it is essential that there be an intention that the true transaction is different from that which would ordinarily be attributed to the transaction on the face of the documents.
As his Honour elaborated, in determining whether a document or a transaction is a sham, the Court is asked to identify and give effect to the parties' subjective intentions as regards their dealings or relationships, as opposed to the disguise or facade that has been adopted (at [61]). A finding that a document or arrangement is a sham is a serious matter, and requires a finding of an intention to deceive. There is a presumption against such a finding, and the court should adopt a cautious approach when dealing with such an allegation (at [62]-[63]). A transaction will not be a sham merely because it was entered for an improper purpose: often the intended (and improper) purpose is only served if the documents have the very effect that they appear to bear (at [68]-[69]).
Of relevance to the present matter, Lewis v Condon provides further guidance as to the application of the doctrine of "sham" in the context of trusts. In particular, there is no reason in principle why there may not be a genuine intention to create a trust, albeit one on quite different terms to that which has been documented. In such a case there is a valid intention to create a trust, the terms of which are not as documented but instead accord with the subjective shamming intention (at [66]). Further, a trust once validly constituted does not change its nature because the trustee and some of the beneficiaries subsequently choose no longer to abide the obligations of the trust relationship; thus a finding of sham as regards a trust, at least one where the class of beneficiaries is not closed, must focus on the intention of the parties at the time of the creation of the trust (at [81]).
The liquidator's case that the trusts were shams involves the propositions that, despite the façade presented by the trust deeds (1) the true underlying agreement between the representatives and contractors on the one hand, and ICSRE and ICS on the other, was that there was in truth no discretion to be exercised; and (2) the true arrangement was merely contractual and involved no trust.
The matters that are said to support these conclusions are: (1) that, from at least 2009, and probably earlier, every payment received by ICS or ICSRE in respect of services rendered by a representative or contractor has been distributed to or in accordance with the directions of the beneficiary whose work generated the payment; (2) that the distributions always closely followed receipt of the payment by ICS or ICSRE, without any time for the exercise of discretion by the trustee; (3) that each such distribution was made without reference to the trustee company or its directors; (4) that the records of the beneficiaries of the ICS and ICSRE trusts were intermingled, suggesting that it was never operationally necessary to identify the entire class of potential beneficiaries of one trust or the other as a preliminary to the exercise of the discretion, as all the mattered was the beneficiaries' instructions as to how payments for their benefit should be directed; (5) that in 2012 - the last year of operations - the exercise of the discretion by the directors consisted of a circular resolution (suggesting no active consideration by the Board) ratifying unspecified distributions already made (and, it should be inferred, that the same process of ratification had been adopted in previous years); (6) that the client agencies and consultancies paid moneys to ICSRE and/or ICS, which they would otherwise have used to pay the commissions or fees due to the representatives or contractors, suggesting that they believed with a high degree of certainty that the representatives or contractors would receive satisfaction from ICSRE (and thus continue to service their needs); (7) that the representatives and contractors were prepared to forego any claim to receive commission or fees from the client agencies and consultancies in favour of an apparently uncertain chance of a discretion being exercised in their favour, strongly suggesting that they believed with a high degree of certainty that they would be paid by ICS or ICSRE; and (8) that in correspondence with the liquidator, Mr Lee stated that he was paid by ICS based on the time sheets submitted by him to ICS, and that he considered himself an employee of ICS, employed at $637.20 per day, and Mr Ringold similarly stated that he expected to be paid in like fashion, suggesting that the true underlying arrangement was one of employment, not trust.
It may be accepted that these matters establish that, as a matter of fact, income received by the trustee was invariably distributed promptly to or as directed by the beneficiary whose work had generated that income, and apparently without the trustee turning its mind and giving real and genuine consideration to the exercise of its discretion in the case of each individual payment [cf Karger v Paul [1984] VR 161]. It may also be accepted that the representatives and contractors believed with a high degree of certainty that they would be paid by ICS or ICSRE.
However, it does not follow that the true arrangement was that there was no discretion to be exercised by the trustee. It is at least equally consistent with the trustee having a standing policy that receipts would be distributed to the beneficiary who generated them, without excluding the possibility that it might exercise its discretion otherwise. That does not equate to an agreement that, contrary to the trust deeds, it had no discretion, or could not exercise its discretion in any other way. Even if it amounted to a breach of trust by failure to give proper consideration to the exercise of the discretion, as to which I presently venture no view, the existence of an invariable practice of distributing receipts to those who generated them does not prove that there was an underlying agreement that there was no discretion to do otherwise.
A finding that the arrangement as recorded in the trust deed and application forms was a sham in this respect would involve a conclusion that the trustee was bound, by the true arrangement between the parties, to distribute income generated by a beneficiary to that beneficiary and that the beneficiary could enforce that obligation if the trustee were to fail to do so. The trust deed and other documents contain written terms directly inconsistent with the existence of any such right of complaint or action: by their application forms, each representative and contractor acknowledged that they had no right or entitlement to any income or capital of the trust except for income or capital that the trustee in its discretion determines to distribute to them; that even if they provide services on behalf of the company to any client, they may not receive any trust distribution; and that the trustee could in its absolute discretion decide not to make any trust distributions to them in any year. While considerable emphasis was placed, on behalf of the liquidator, on the payment directions contained in the application forms, those directions were no more than details of the accounts to which such distributions as the trustee might in its discretion decide to make to the relevant beneficiary should be deposited. The liquidator also relied on the circumstance that ICS informed potential contractors, in brochures provided to them: "Your maximum risk in the event that the Trustee failed to exercise this discretion, would be one pay period, as you would not continue in this structure if this occurred", as assuring contractors that its business model depended on it exercising its discretion only in favour of the contractor who generated the income. However, that does not amount to a promise to do so; while it conveys that the likelihood of the trustee exercising its discretion in any other way was remote, it preserved the possibility that it might do so; it was not an agreement not to exercise the discretion otherwise than by distribution to the contractor whose work generated the receipt, but afforded comfort to contractors that the risk of its doing so, while present, was slight. For present purposes, there is a world of difference between the representation that was made - to the effect that a contractor was at risk as to only a single payment because, if the trustee did not exercise its discretion in his favour in respect of any one payment, the contractor could cease the arrangement; and one which was not made - that the trustee would invariably exercise its discretion in favour of the contractor. It is not sufficient that the parties might have expected that the trustee would cause the subject funds to be distributed in a particular way. Neither an expectation that the trustee will exercise its discretion in a particular way, nor a practice of its doing so, establishes a binding obligation to do so, contrary to the terms of the trust deed.
And even if the true arrangement was that there was no discretion to be exercised and that the trustee was bound to distribute income generated by a beneficiary to that beneficiary, that would not mean that there was no trust, so that the relationship was purely contractual. It would mean only that the trust was not one under which the trustee had a discretion as to distribution of the income, but one under which the trustee was bound to distribute the income to or as directed by the beneficiary who generated it. Even if the real intention were that, despite the words of the trust deed, the trustee would have no discretion as regards the distribution of income, that would not establish that the parties intended that the moneys paid or payable to the companies in respect of work done by representatives and contractors were, despite the terms of the trust deeds, not to be held on trust at all. As Leeming JA observed in Lewis v Condon, even if the true intention was that the terms of the trust be other than as documented, that does not mean that there was no genuine intention to create a trust at all, albeit on different terms.
Ultimately, an affirmative answer to the questions posed requires a conclusion, not merely that the trustee was not intended to have a discretion, but that no trust was intended at all. Of the matters referred to on behalf of the liquidator and mentioned above, really only one lends any support to the proposition that no trust was intended, namely that the views expressed by Mr Lee and Mr Ringold and their expectations in respect of their remuneration suggest that, not only did they not view their entitlements as dependent on the exercise of a discretion by ICS, but their experience of the way they were renumerated was indistinguishable from that of an employee. However, those were not contemporaneous views, but views expressed after the companies went into liquidation, at a time when it may have appeared in the interests of the representatives and contractors to claim to be employees and thereby secure standing as priority creditors. By their application forms, the representatives and contractors acknowledged that they were not employees of the company or the trust, and waived any rights they might have under laws relating to employment of an employee. This was a fundamental feature of the arrangement, deliberately established for the purpose of providing advantages for the representatives and contractors. The representatives and contractors entered into the documented arrangements intentionally, in order to gain perceived benefits from structuring their working and remuneration arrangements that way. It is likely that the chief perceived benefit was taxation-related. The parties intended the representatives and contractors to enjoy those benefits, but they would do so only if their true relationship conformed with the trust deeds, and was not one of employment. Thus, the purpose of the parties would be achieved only if the trust deed had effect according to its terms. As Leeming JA pointed out in Lewis v Condon (at [68]-[69]), this does not favour treating the arrangements as a sham: often, the intended purpose is served only if the documents have the effect that they appear to bear.
There are other indicia that the companies received the payments from client agencies and consultancies as trustees: the agreement between ICS and lnfopeople, by clause 8.2, required the client consultancy to make payments into a named bank account which, as appears from examples of invoices issued by ICS, to have been styled "ICS Trust''. The account into which these payments were made and received appears to have been maintained as a separate account, distinct from ICS's operating account out of which it paid its ordinary operating expenses. Thus it appears that ICS caused the funds paid in discharge of the contractor invoices (such monies being the relevant trust property) to be held separately from the company's own property, consistent with treating such receipts as trust funds distinct from its own money.
Conclusion
In my view, the evidence does not make good the serious allegation that the trust arrangement was a sham: neither to the narrower extent of an intention that, despite the terms of the trust deeds, there was no discretion to be exercised; nor to the broader extent of an intention that, despite the terms of the trust deeds, there was no trust at all, but a merely contractual relationship.
For the purpose of the present application, it is sufficient that I conclude that the trusts were not shams. I will advise the liquidator that he would not be justified in proceeding on the basis contemplated in the questions.
It may well be necessary for a replacement trustee to be appointed, and/or for the liquidator to seek alternative directions as to how the funds in question should be administered. However, it is a consequence of my reasoning that the true terms of the trusts are as documented: in other words, that they were discretionary trusts, in that the trustee had a discretion to exercise, whether or not it regularly did so in the past. Accordingly, I would not accept that the funds in question were or are held on trust absolutely for the individual representatives or contractors whose efforts generated them.
As was accepted on behalf of Mr Lee, this was a proper application in the circumstances, and - assuming that there are no other assets in the winding up - the liquidator should have his costs from the trust moneys. Mr Lee should also have his costs out of the trust funds.
For those reasons, in proceedings 2013/381266, the Court orders that:
(1) Pursuant to Corporations Act, s 511, the liquidator would not be justified in treating the amounts standing to the credit of the company ICS Real Estate Pty Ltd (in liquidation) in its bank accounts as beneficially owned by the company, nor any amounts collected by the liquidator since his appointment in respect of invoices rendered by the company as beneficially owned by the company;
(2) Pursuant to Corporations Act, s 511, the liquidator would not be justified in treating the claiming contractors and agents' representatives in respect of whom invoices have been rendered by the company as unsecured creditors in the liquidation of the company;
(3) The plaintiff's costs of the application be paid out of the amount standing to the credit of the company in its bank accounts or collected by the liquidator since his appointment.
In proceedings 2013/381272, the Court orders that:
(1) Michael Lee be added as defendant and appointed pursuant to UCPR r 7.6(2)(c) to represent the class of general beneficiaries of the Independent Contractor Services Trust;
(2) Pursuant to Corporations Act, s 511, the liquidator would not be justified in treating the amounts standing to the credit of the company Independent Contractor Services Pty Ltd (in liquidation) in its bank accounts as beneficially owned by the company, nor any amounts collected by the liquidator since his appointment in respect of invoices rendered by the company as beneficially owned by the company;
(3) Pursuant to Corporations Act, s 511, the liquidator would not be justified in treating the claiming contractors and agents' representatives in respect of whom invoices have been rendered by the company as unsecured creditors in the liquidation of the company;
(4) The plaintiff's costs of the application be paid out of the amount standing to the credit of the company in its bank accounts or collected by the liquidator since his appointment;
(5) The defendant's costs of the application be paid out of the amount standing to the credit of the company in its bank accounts or collected by the liquidator since his appointment.
**********
Decision last updated: 30 April 2014
25
21
3