McCallum v Pitard Consortium
[2021] VSC 369
•24 June 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2020 04704
IN THE MATTER of LES DENNY PTY LTD (IN LIQ) (ACN 156 618 825); MARY PITARD PTY LTD (IN LIQ) (ACN 608 289 792); PITARD KNOWLES NO 3 PTY LTD (IN LIQ) (ACN 606 901 295); PITARD KNOWLES NO 5 PTY LTD (IN LIQ) (ACN 609 767 615)
BETWEEN:
| STEWART ALEXANDER McCALLUM in his capacity as joint and several liquidator of LES DENNY PTY LTD (IN LIQ) (ACN 156 618 825), MARY PITARD PTY LTD (IN LIQ) (ACN 608 289 792), PITARD KNOWLES NO 3 PTY LTD (IN LIQ) (ACN 606 901 295) and PITARD KNOWLES NO 5 PTY LTD (IN LIQ) (ACN 609 767 615) & ORS (according to the schedule) | Plaintiffs |
| v | |
| PITARD CONSORTIUM PTY LTD (ACN 634 588 980) in its capacity as trustee for the PITARD TRUST) (ABN 23 359 983 098) & ORS (according to the schedule) | Defendants |
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JUDGE: | M Osborne J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 26 February 2021, 19 April 2021; further written submissions received 28 April 2021 (Plaintiffs); 4 May 2021 (Defendants); 25 May 2021 (Plaintiffs) |
DATE OF JUDGMENT: | 24 June 2021 |
CASE MAY BE CITED AS: | McCallum v Pitard Consortium |
MEDIUM NEUTRAL CITATION: | [2021] VSC 369 |
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TRUSTS - Application for power of sale by former trustee pursuant to right of indemnity – Former trustee seeking discovery and verification of trust assets – Former trustee company in liquidation – Liquidators seek authorisation to apply trust assets to liquidation expenses – Whether parties are accounting parties for purposes of order for account – Liquidators seeking general order for sale – Judicial sale - Order 54.02 of the Supreme Court (General Civil Procedure) 2015 – Sections 90-15 and 65-45 of the Insolvency Practice Schedule – Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 368 ALR 390; Hancock v Rhinehart (2015) 106 ACSR 207; Batrouney v Forster [2015] VSC 230; Rowe v National Australia Bank Ltd (2019) 56 WAR 1; QNI Resources Pty Ltd v Park (2016) 116 AVSR 321; North-Eastern Railway Co v Martin (1848) 41 ER 1136; Sood v Christianos [2008] NSWSC 1087; King Investment Solutions Pty Ltd v Hussain [2005] NSWSC 1076; Chateau Constructions (Aust) Ltd v Zepinic & Anor (No 5) [2010] NSWSC 265; Smithett v Hesketh (1890) 44 Ch D 161; Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361; Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677; Apostolou v VA Corporation of Aust Pty Ltd [2011] FCAFC 103; Cremin; Re Brimson Pty Ltd (in liq) [2019] FCA 1023; Re Mandeville Group Pty Ltd (in liq) [2020] VSC 293; Re Mackie Group Pty Ltd (in liq) (2017) 122 ACSR 537; Re Matthew Forbes Pty Ltd (in liq) [2018] VSC 331; Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) (2016) 305 FLR 222; Deputy Commissioner of Taxation v Starpicket Pty Ltd (No 2) [2013] FCA 699; Re AAA Financial Intelligence Pty Ltd (in liq) (No 2) [2014] NSWSC 1270; Clout v Stoddard (SE Queensland) Pty Ltd (2016) 115 ACSR 459; Re Aberdeen All Farm Pty Ltd (in liq) [2020] NSWSC 770; Onefone Australia v One Tel Ltd (2008) 69 ACSR 290.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr SI Maiden QC | MinterEllison |
| For the Defendants | Mr DG Collins QC with Mr DF McAloon | Strongman & Crouch |
HIS HONOUR:
Background
This is an application brought by the liquidators of a group of corporate trustees. The corporate trustees are the former trustees of a series of trusts related to the now insolvent Steller Property Group (‘Steller Group’). In their capacities as former trustees, the corporate trustees owe debts to trust creditors and have incurred expenses; including expenses arising out of the conduct of the liquidation. They now seek to exonerate themselves of those debts and recoup those expenses out of the trust assets. As the trust assets are presently held by new trustees, orders are sought to authorize and assist with the exoneration and recoupment process.
The proceeding was commenced on 21 December 2020 by, inter alia, the first plaintiff, Stewart Alexander McCallum (‘Mr McCallum’) seeking orders pursuant to, inter alia, the Court’s inherent jurisdiction; r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (‘the Rules’); or ss 90-15 and 65-45 of the Insolvency Practice Schedule (‘IPS’), being schedule 2 of the Corporations Act 2001 (Cth) (‘the Corporations Act’). Mr McCallum relies on three affidavits, sworn 21 December 2020, 15 March 2021 and 24 March 2021 respectively.
On 13 November 2019, Mr McCallum and the second plaintiff, Adams Pauls Nikitins, were appointed as joint and several liquidators (‘the Liquidators’) of the following companies pursuant to s 491 of the Corporations Act ( each ‘a Liquidation’, collectively ‘the Liquidations’):
(a) Les Denny Pty Ltd (‘Les Denny’);
(b) Mary Pitard Pty Ltd (‘Mary Pitard’);
(c) Pitard Knowles No 3 Pty Ltd (‘PK 3’); and
(d) Pitard Knowles No 5 Pty Ltd (‘PK 5’)
(‘the Former Trustees’).
The Former Trustees were previously trustees of the following trusts:
(a) Les Denny was the trustee of the Pitard Trust from 1 April 2012 to 3 July 2019;
(b) Mary Pitard was the trustee of the Mary Pitard Trust from 21 September 2015 to 8 July 2019;
(c) PK3 was the trustee of the Pitard Knowles No 3 Trust from 6 July 2015 to 8 July 2019; and
(d) PK5 was the trustee of the Pitard Knowles No 5 Trust from 11 December 2015 to 8 July 2019
(each a ‘Trust’ and together ‘the Trusts’).
The current trustees of the Trusts are:
(a) Pitard Consortium Pty Ltd (‘Pitard Consortium’), which has been the trustee of the Pitard Trust from 3 July 2019;
(b) Pitard No 3 Pty Ltd (‘Pitard 3’), which has been the trustee of the Mary Pitard Trust from 8 July 2019;
(c) PK No 8 Pty Ltd (‘PK 8’), which has been the trustee of the Pitard Knowles No 3 Trust from 8 July 2019; and
(d) PK No 10 Pty Ltd (‘PK 10’), which has been the trustee of the Pitard Knowles No 5 Trust from 8 July 2019
(each a ‘Current Trustee’ and together the ‘Current Trustees’).
The Current Trustees are the defendants in this proceeding.
The sole director of each of the Current Trustees is now James Michael O’Donahue (‘Mr O’Donahue’) who was appointed as a director of Pitard Consortium on 26 February 2020, and of Pitard 3, PK 8 and PK 10 on 19 May 2020. Mr O’Donahue was not involved in the management of the Current Trustees or the Trusts prior to his appointment as a director.
The Former Trustees are part of the Steller Group, which operates a Melbourne-based residential property development and construction business. The primary assets of the Trusts are real property (‘the Real Property Assets’), being:
(a) retention stock, meaning residential property developments which are retained and tenanted;
(b) residential development sites which are to be completed and sold; and
(c) single-title residential dwellings.
The Trusts also hold a number of non-real property assets, including bank accounts, shareholdings, unit holdings, unpaid present entitlements owing from related parties, and debtor accounts (‘the Non-Real Property Assets’).
The Former Trustees accrued liabilities in the discharge of their duties as trustees. The Former Trustees are entitled to be indemnified against such liabilities, whether by recoupment or exoneration, out of the trust assets; this entitlement is referred to as the ‘right of indemnity’.[1]
[1]Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 368 ALR 390 (‘Amerind’), 404 [34] (Kiefel CJ, Keane and Edelman JJ); 415 [80] (Bell, Gageler and Nettle JJ); 429 [130]-[132] (Gordon J).
On 26 July 2019 the Current Trustees and others commenced separate proceeding S ECI 2019 03402 in this Court seeking inter alia a declaration that certain deeds of appointment removing the Former Trustees and appointing the Current Trustees as trustees of the Trusts were effective.
On 12 September 2019, orders were made in that proceeding declaring, inter alia, that:
(a) the Current Trustees were each validly appointed as trustees of the Trusts; however
(b) the Current Trustees’ interests in the trust assets pursuant to their rights of indemnity are subordinate to the Former Trustees’ interests in the trust assets pursuant to their rights of indemnity.
Further, the Current Trustees provided undertakings to the Court[2] that until further order, each Current Trustee would not in any way dispose of, deal with, encumber or diminish the value of the property of its Trust, except:
[2]Recorded in orders made by the Court on 12 September 2019.
(a) by payment of debts incurred by the relevant Former Trustee of that Trust in their capacity as trustee, as they fall due; or
(b) with the consent of the relevant Former Trustee of that Trust.
In addition, the then-sole director of the Current Trustees, Skye Elizabeth Pitard (‘Ms Pitard’), undertook to the Court that she would not cause or permit any of the Current Trustees to breach those undertakings.
Upon Mr O’Donahue’s appointment as a director of the Current Trustees, he provided undertakings in relevantly identical terms to those provided by Ms Pitard.[3]
[3]See the orders made by the Court on 25 February 2020 and 18 May 2020.
Mr McCallum has deposed that based on his investigations and a review of available books and records:
(a) the Former Trustees never traded, incurred any liabilities nor held any assets in their own capacities, other than in respect of:
(i) 50 ordinary shares held by Les Denny beneficially in each of Steller Commercial Pty Ltd, Steller Group Services Pty Ltd, and Steller Highett Pty Ltd; and
(ii) 100 ordinary shares in The Steller Elitist Pty Ltd (which company was deregistered on 21 September 2020); and
(b) prior to their liquidation, the Former Trustees had taken steps to transfer all assets of the Trusts to the Current Trustees, other than the Real Property Assets.
Each Real Property Asset was the subject of registered mortgages, the existence of which prevented transfers of those assets without the consent of the relevant registered mortgagee. As a result, as at the date of appointment of the Liquidators, the Former Trustees remained the registered proprietors of the Real Property Assets, holding those properties as bare trustees subject to their rights of indemnity. The Non-Real Property Assets have passed to the Current Trustees.
Given that the Former Trustees remained as the registered proprietors of each of the Real Property Assets, the Former Trustees and the Current Trustees agreed that the Former Trustees should proceed to sell the Real Estate Assets to meet the claims of the trust creditors in each Liquidation. An agreement to this effect was executed on or around 12 February 2020 (‘the Asset Realisation Agreement’).
The Asset Realisation Agreement, among other things, provides that:
(a) all sale proceeds available after settlement, adjustments, and repayment of valid mortgages or charge securities will be received by the Liquidators into four bank accounts established and held by them (one account for each of the Former Trustees), which the parties agreed will not be disbursed except with the written consent of the Current Trustees or by order of the Court; and
(b) all rental receipts generated from the Trust Properties are to be transferred to those four bank accounts every 14 days, subject to an agreed amount to be retained by the property agents appointed by the Current Trustees to meet their agent’s fees and any urgent maintenance costs and expenses.
As at 21 December 2020, the Liquidators had sold 27 of the properties composing the Real Property Assets in accordance with the Asset Realisation Agreement, with three further properties having been sold by mortgagees exercising their power of sale.
The four bank accounts established and held by the Liquidators in the name of the Former Trustees are as follows:
(a) an account opened in the name of Les Denny bearing BSB 062-000 account number 1936-4724;
(b) an account opened in the name of Mary Pitard bearing BSB 062-900 account number 1112-7638;
(c) an account opened in the name of PK 3 bearing BSB 062-000 account number 1936-4564; and
(d) an account opened in the name of PK 5 bearing BSB 062-900 account number 1112-7611;
(each a ‘Restricted Account’ and together the ‘Restricted Accounts’).
The trust assets
As at 11 March 2021, the funds held in the Restricted Accounts total $2,797,629.32; comprising the following account balances:
Les Denny $854,641.03 Mary Pitard $835,782.76 PK3 $494,825.10 PK5 $612,380.43
On 20 December 2019, Mr John Georgakis (‘Mr Georgakis’), the director of the Former Trustees, completed a report on company activities and property (‘ROCAP’) in respect of each of the Former Trustees. Each ROCAP included a list of assets owned by the company, broken down into categories including bank accounts, real property, and ‘other assets’. The other assets consist of intangibles; largely shareholdings, unitholdings in unit trusts, and choses in action. In a column of the ROCAP headed ‘Estimated Asset Value’, Mr Georgakis marked a value of ‘-‘ (a dash) against each of the ‘other assets’, presumably indicating a value of nil in the case of those items, save for a shareholding in JA JV Pty Ltd (‘JA JV’) which Mr Georgakis values at zero to $1 million.
In addition to the funds held in the Restricted Accounts, there are funds held in separate accounts which are subject to claims by other parties who assert security interests in the funds derived from the sale of certain of the Real Property Assets. In particular:
(a) An amount of $4,224,167.97, comprising the net proceeds of the sale by Les Denny of a property at 3808 Point Nepean Road, Portsea (‘Retained Sale Proceeds’) which are the subject of a proceeding commenced by the Liquidators and Les Denny against Mr Russell Knowles (‘Mr Knowles’) (‘the PN 3808 Proceeding’). In the PN 3808 Proceeding, Mr Knowles contends that the funds generated from the sale of 3808 Point Nepean Road are subject to a claim by him secured by a mortgage over the property. These funds are presently held in a separate interest-bearing trust account.
(b) An amount of $1,912,429.74, comprising the net proceeds of the sale by Mary Pitard of properties located in Carnegie which are subject to a claim by Perpetual Corporate Trust Limited (‘Perpetual’) for amounts alleged to be owing and secured by an unregistered mortgage or charge. These funds are presently held in a solicitor’s trust account on behalf of Australian Securities Limited, the mortgagee in possession which sold the properties.
Mr McCallum has deposed that, aside from Mr Knowles and Perpetual, no party has given the Liquidators notice of any claims for priority payment from the net proceeds of the sale of the Real Property Assets.
The Liquidators have received proofs of debt in each of the Liquidations, but have not yet formally adjudicated them. In certain instances the Liquidators have received competing proofs of debt. Where this has occurred, the Liquidators have only counted the highest claimed amount from those competing proofs of debt. On that basis, Mr McCallum estimates the total received proofs of debt as:
(a) in the case of Les Denny, $40,944,565.53;
(b) in the case of Mary Pitard, $9,723,924.16;
(c) in the case of PK 3, $5,358,271.32; and
(d) in the case of PK 5, $8,704,135.61.
Although the Liquidators have not yet formally adjudicated those proofs of debt, they expect to admit at least the following further quanta of proofs of debt submitted by unsecured creditors:
(a) in the case of Les Denny, $35,152,912.44;
(b) in the case of Mary Pitard, $9,722,608.24;
(c) in the case of PK 3, $22,656.71, and
(d) in the case of PK 5, $25,535.19.
Mr McCallum estimates that, using the estimated realisable values provided in the ROCAPs, the ‘best outcome scenario of realisable values’ of the Real Property Assets and the Non-Real Property Assets is:
(a) in the case of Les Denny, $11,882,971;
(b) in the case Mary Pitard, $2,980,213;
(c) in the case of PK3, $1,295,823; and
(d) in the case of PK5, $4,883,350.
The overwhelming majority of the value of these estimates derives from the Real Property Assets.[4]
[4]In the case of Les Denny, the total estimated best outcome scenario of realisable values of the Trust properties and relevant assets of $11,882,971 is based on an estimated net return from realisation of the Trust properties in the amount of $7,863,971. In the case of Mary Pitard, the estimated outcome is $2,980,213; of which Trust properties account for $2,498,213); in the case of PK 3 the estimated outcome is $1,295,823, of which Trust properties account for $94,823; and in the case of PK 5 the estimated outcome is $4,883,350 of which Trust properties account for $2,786,350.
It is clear that:
(a) there will be a shortfall in the amount available to meet the claims of trust creditors in the Liquidations of Les Denny and Mary Pitard; and
(b) the rights of indemnity of Les Denny and Mary Pitard will exhaust the Real Property Assets and Non-Real Property Assets in the case of both the Pitard Trust and the Mary Pitard Trust, respectively.
The position with respect to PK 3 and PK 5 is less clear:
(a) In the case of PK 3, the best case outcome scenario of realisable values of the Real Property Assets and the Non-Real Property Assets is $4,883,350; whilst the Liquidators have received proofs of debt totalling $5,358,271.32. However, those proofs of debt include a claim of $3,827,793 in respect of unpaid present entitlements (‘UPEs’) alleged to be owing by PK 3 to the entity formerly known as Pitard Knowles Pty Ltd (‘Pitard Knowles’).
(b) In the case of PK5, the best case outcome scenario of realisable values of the Real Property Assets and the Non Real Property Assets is $4,883,350; whilst the proofs of debt received total $8,704,135.61. Those proofs of debt include a claim of $6,137,644.37 in respect of UPEs alleged to be owing by PK5 to Pitard Knowles.
The validity of the UPEs claimed by Pitard Knowles is disputed. If the proofs of debt lodged by Pitard Knowles are admitted, there will be a shortfall in the amount available to meet the claims of trust creditors in the Liquidations of PK 3 and PK 5, and accordingly the rights of indemnity of PK 3 and PK 5 will exhaust the assets of the Pitard Knowles No 3 and Pitard Knowles No 5 trusts, respectively.
In those circumstances, the Liquidators sought information from the Current Trustees as to the Non-Real Property Assets including:
(a) a description of each relevant asset;
(b) an estimate of the asset’s currently realisable value;
(c) the basis upon which the estimated current realisable value is calculated; and
(d) where the asset is an investment, the value of the company or the underlying project or asset to which the investment relates.
On 21 December 2020, after a lengthy period of correspondence between the solicitors for the Liquidators and the solicitors for the Current Trustees,[5] the Liquidators commenced this proceeding by originating motion, seeking:
[5]Part of the debate between the solicitors focussed on the Current Trustees’ contention that it was unreasonable for the Liquidators to require the Current Trustees to undertake detailed enquiries as to the Non-Real Property Assets where:
(a) first, by paragraphs 1 to 2 of the originating motion, orders in the nature of discovery and verification of the Non-Real Property Assets held by the Current Trustees;
(b) secondly, by paragraph 3 an order that the Liquidators be given the power to sell or otherwise realise the Non-Real Property Assets; and
(c) thirdly,
(iii) authorisation for the Liquidators to transfer all funds currently held in each of the Restricted Accounts to the relevant bank account established by the Liquidators for each Former Trustee (each a ‘Liquidation Bank Account’, collectively the ‘Liquidation Bank Accounts’); and
(iv) thereafter for the Liquidators to be authorised to apply those funds to meet the costs and expenses of the relevant liquidation (comprising remuneration payable to the Liquidators and payment of costs and expenses incurred by the Liquidators during the liquidation).
The information already provided by the Current Trustees
On 17 February 2021, prior to the first return of the originating motion,[6] Mr O’Donahue made an affidavit (‘the O’Donahue Affidavit’), seeking to provide the information sought by the Liquidators under the discovery and verification orders. The Current Trustees filed a short outline of submissions and appeared at the first return. Relevantly, they submitted that the O’Donahue affidavit was a sufficient answer to the discovery and verification relief sought by the Former Trustees and, relying on their outline of submissions, sought to be excused from the further hearing of the originating motion which was proposed to take place on 19 April 2021.[7]
[6]The originating motion was listed for directions on 26 February 2021.
[7]The Court acceded to this request.
In the O’Donahue Affidavit, Mr O’Donahue identifies the assets of each of the Trusts (apart from the Real Property Assets) as comprising:
(a) in the case of the Pitard Trust (formerly held by Les Denny):
(v) various bank accounts,
(vi) shares in various proprietary limited companies (most of which bear the Steller name in part),
(vii) interests in various unit trusts,
(viii) receivables in the form of loans made to proprietary limited companies, and
(ix)UPEs;
(b) in the case of the Mary Pitard Trust (formerly held by Mary Pitard):
(i) various bank accounts,
(ii) a receivable in the form of a loan made to a proprietary limited company, and
(iii) assets referred to as ‘other receivables’;
(c) in the case of the Pitard Knowles No 3 Trust (formerly held by PK 3):
(i) a Westpac Banking Corporation cheque account,
(ii) a Commonwealth Bank of Australia cheque account,
(iii) a loan to Pitard Knowles Pty Ltd, and
(iv) assets referred to as ‘other receivables’.
In each case, Mr O’Donahue values the Non-Real Property Assets at nil; excepting:
(a) the shareholding in JA JV held in the Pitard Trust, where the value is given as unknown; and
(b) those ‘other receivables’ held in the Mary Pitard Trust, where the value is given as unknown.
In addition, Mr O’Donahue has also provided information in connection with the assets of those companies in which the Current Trustees hold shares (defined in the originating motion as ‘Subsidiary Assets’). Mr O’Donahue says that he does not presently have details of the Subsidiary Assets, other than of the JA JV shareholding and the assets of four companies in which Pitard Consortium holds shares and of which Mr O’Donahue himself is a director, namely ACN 169 565 673 Pty Ltd (in liquidation), Pitard 250 Pty Ltd, Steller GA Pty Ltd (‘Steller GA’) and Steller Services Pty Ltd (‘the Four Companies’).[8] Mr O’Donahue estimates that based on the information presently available to him, the shares held by Pitard Consortium are of negligible value. Mr O’Donahue has not provided any information with respect to the assets and liabilities of the Four Companies or any other company in which the Current Trustees hold shares.
[8]The table annexed to Mr O’Donahue’s affidavit includes a fourth page which has no heading. It lists four assets in the following order: ‘Westpac cheque account, nil’; ‘CBA cheque account, nil’; ‘other receivables, nil’; and ‘loan – Pitard Knowles Pty Ltd, nil’. It is unclear whether this recapitulates the Non-Real Property Assets of the Pitard Knowles No 3 Trust or whether it is intended to outline the Non-Real Propery Assets of the Pitard Knowles No 5 Trust.
In an affidavit sworn 15 March 2021, Mr McCallum set out a number of alleged inconsistencies or deficiencies in the O’Donahue Affidavit.
Specifically, Mr McCallum complains that Mr O’Donahue:
(a) has not provided any basis or supporting information for his estimates as to the current value of the assets;
(b) has not provided any detailed description or particulars regarding the Subsidiary Assets, or set out any estimate as to the current value of the Subsidiary Assets;
(c) has not set out the basis of, or provided any explanation for, his estimates that the current value of the shareholdings held by the Trustee in the Four Companies which hold those Subsidiary Assets is negligible;
(d) has not deposed to having taken, or being in the process of taking any steps to enquire or ascertain, the status, details and current value of the Subsidiary Assets;
(e) has failed to make clear whether his affidavit lists the assets of the Pitard Knowles No 5 Trust; or if it does, fails to make clear why Mr O’Donahue:
(x) does not refer to a UPE of $2,055,000 owing to the Pitard Knowles No 5 Trust by Carnegie Hall Developments Pty Ltd as trustee for the Carnegie Hall Trust; or
(xi)if that asset is referred to, why he has attributed a value of nil to the UPE with no explanation; and
(f) in particular, has not addressed the assets of Simply Built Pty Ltd, in which Pitard Consortium is a shareholder and which the Liquidators believe is developing a significant number of townhouses in Williamstown North.
The Liquidators also point to an apparent inconsistency where in paragraph 11 of his affidavit Mr O’Donahue has said that ‘based on the information presently available to me’ the shares and units are of ‘negligible value’, whereas in the exhibited table he values those assets at nil. Further, they observe that regardless of the correct valuation of the assets, Mr O’Donahue has not identified the information which has formed the basis of his belief.
Separately, the Liquidators also complain of an apparent reduction in the shareholding in Steller GA held by Pitard Consortium. It appears that on or around 30 June 2020, the proportion of the shareholding decreased from 51% to 46.3% by reason of the issue of 100 additional shares by Steller GA to Mr O’Donahue. As Mr O’Donahue is a director of Steller GA, the Liquidators contend that the issue of 100 shares to Mr O’Donahue could only have come about with Mr O’Donahue’s participation and thereby in breach of his undertaking that he would not ‘cause or permit relevantly Pitard Consortium to dispose of, deal with, encumber or diminish the value of its property’. The allegation of a breach of the undertaking is denied by Mr O’Donahue’s solicitors.
The former trustees’ interest in the trust assets
Before turning to the relief sought, it is necessary to say something briefly about the nature of the Former Trustees’ rights and interests in the trust assets. As former trustees, the companies now in liquidation each have a right of indemnity by way of exoneration or recoupment out of the assets of the respective Trusts for any liabilities incurred in the course of conducting the business of each Trust.[9]
[9]Amerind (n 1) 403 [29] (Kiefel CJ, Keane and Edelman JJ).
The right of indemnity generates a proprietary interest in the trust assets.[10] Accordingly, an indemnified trustee is described as having an equitable charge or lien over the trust assets.[11] A right of indemnity survives the trustee’s loss of office as trustee.[12] Where a trustee has gone into liquidation, control of the right of indemnity passes to his or her trustee in bankruptcy.[13] The same is true when control of those rights, rather than title, passes to a liquidator.[14]
[10]Ibid 432 [140] (Gordon J).
[11]Ibid 404 [32] (Kiefel CJ, Keane and Edelman JJ); 416 [83] (Bell, Gageler and Nettle JJ); 429 [132] (Gordon J).
[12]Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation (2009) 239 CLR 346, 358-9 [43] (French CJ, Gummow, Hayne, Heydon and Bell JJ).
[13]Amerind (n 1) 404-5 [34] (Kiefel CJ, Keane and Edelman JJ).
[14]Ibid 404-5 [34].
A trustee may exercise its right of indemnity without judicial intervention where property is not required to be sold, but the lien does not confer a power of sale and if sale is sought, a court order or the appointment of a receiver to sell is required.[15]
[15]Jones v Matrix Partners Pty Ltd (2018) 260 FCR 310, 323 [44] (Allsop CJ).
The right to be indemnified out of the trust assets in respect of liabilities properly incurred in the execution of the trust takes priority over the beneficiaries’ claims on the trust assets.[16]
[16]Amerind (n 1) [83] (Kiefel CJ, Keane and Edelman JJ).
This right and the generated proprietary interest in the trust assets may be enforced in the same way as an equitable charge. In Hewett v Court,[17] Deane J stated:
An equitable lien is a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness. Though called a lien, it is, in truth, a form of equitable charge over the subject property in that it does not depend upon possession and may, in general, be enforced in the same way as any other equitable charge, namely, by sale in pursuance of court order or, where the lien is over a fund, by an order for payment thereout.
(citations omitted)
[17](1983) 149 CLR 639, 663.
The nature of the plaintiff’s right determines the relief it can seek from this Court and is to be borne in mind when exercising discretion to grant those orders.
Paragraphs 1 and 2 of the originating motion – discovery and verification of Non-Real Estate Assets
By paragraphs 1 and 2 of the originating motion the plaintiffs seek the following orders:
1. Each of the Current Trustees make all reasonable inquiries necessary to make, and then make file and serve, an affidavit which:
(a)identifies each Relevant Asset[18] held by that trustee as trustee of one of the Trusts, including any interest in any business or property development or similar project;
[18]The originating motion defines ‘Relevant Assets’ to means all assets held on or by the Trusts, other than real estate assets. This definition is coextensive with the Non-Real Property Assets.
(b)sets out an estimate of the current value of that Relevant Asset;
(c)sets out the basis of that estimate;
(d)where that Relevant Asset is either shares or other equity or debt securities or rights (including but not limited to securities or rights convertible into shares) in a company or units or other interest in a joint venture, partnership or trust:
(i)identifies the proportion of shares or other equity or debt securities or rights (including if any securities or rights were converted into shares) held in the company or the proportion of units or percentage of interest held in the relevant joint venture, partnership or trust; and
(ii)identifies the assets of that company, joint venture, partnership or trust (the Subsidiary Assets), including any business or property development or similar project;
(iii)sets out an estimate of the current value of each such asset; and
(iv)sets out the basis of that estimate;
(e)where any Relevant Asset or Subsidiary Asset has been the subject of a claim to ownership, security, forfeiture, diminution, dilution or any other claim which if made out would reduce the value of that asset to the relevant Trust (save in so far as the claim is made by the relevant Former Trustee or the Liquidators) (an Adverse Claim), sets out:
(i)precise details of the claim (including particulars of the date and means of every communication of that claim);
(ii)the identity of all persons who made the claim; and
(iii)details of any steps that the Current Trustee has taken or proposes to take to mitigate the risk of the claim;
(f)identifies any asset which was realised, transferred or otherwise disposed of by the Current Trustee since its appointment as trustee of the relevant Trust (a Relevant Event) and in respect of any such asset:
(i)sets out an estimate of the value of the Relevant Asset at the time of the Relevant Event;
(ii)sets out the basis of that estimate;
(iii)describes the Relevant Event, including by identifying any agreement by which it was occasioned and any consideration received; and
(iv)identifies what became of any such consideration;
(g)where that Relevant Asset is either shares or other equity or debt securities or rights (including but not limited to securities or rights convertible into shares) in a company or units or any other interest in a joint venture, partnership or trust, provide details of any:
(i)issue, grant, conversion, redemption, reduction, split, consolidation, variation, buyback or cancellation; or
(ii)anything analogous to the mechanisms in paragraph (i) immediately above,
in or affecting any of the company’s shares (or other equity or debt securities or rights) or affecting any units or other interest in the joint venture, partnership or trust (for the avoidance of doubt, not limited to those shares, securities, rights or interests in which the Trust has or had a beneficial interest) between the date of the appointment of the Current Trustee and the date of the affidavit deposed in accordance with this order; and
(h)specifies the inquiries made for the purpose of making the affidavit.
2.The Current Trustees provide to the Liquidators copies of all documents in the Current Trustees’ possession, custody or control which:
(a)evidence the Current Trustees’ title to any Relevant Asset;
(b)relate to any Adverse Claim; or
(c)relate to any Relevant Event.
(citations added)
The Current Trustees make no submissions to the effect that the Court does not have the power to make such an order against them but maintain that the O’Donahue Affidavit has removed any need for the information sought. Accordingly, they argue such orders are no longer necessary.
In the alternative, they submit that if the Current Trustees are required to take any further step in connection with identifying or valuing the assets of the Trusts, the cost of doing so should be met from the assets of the Trusts with equivalent priority to expenses incurred by the Liquidators and the Former Trustee plaintiffs. The Liquidators now accept that any such costs should be prioritised in this way.[19]
[19]They also accept that the Current Trustees are entitled to the reasonable costs of and incidental to the preparation of the O’Donahue Affidavit.
The Liquidators submit that the power to order provision of the affidavit sought in paragraph 1 of the originating motion arises as an incident of the obligation of a trustee to report to the beneficiaries or to the Court concerning the administration of a trust, as a particular component of a trustee’s general duty to account.[20] That is undeniably so, but the duty to account cited by the Liquidators is owed to beneficiaries and is actionable at the suit of the beneficiary. Here, the application for such an order is made not by the beneficiaries, but rather by a former trustee in the exercise of its right of indemnity over the trust assets. It is not readily apparent that an equitable chargor and an equitable chargee stand in an accounting relationship to one another. Parties will be in accounting relationship where it has been established that one party is liable to pay to the other anything that is found, on the taking of the account, to be due to that other.[21] An order for taking of accounts may be made between accounting parties where the party seeking the remedy of an account can establish that he or she is entitled to some uncertain sum from the defendant.[22] Here, the sum sought is not uncertain; rather, uncertainty attends the adequate satisfaction of that sum out of the trust assets. The liquidators’ right to be indemnified out of the trust property is not disputed.
[20]Byrnes v Kendle (2011) 243 CLR 253, 270-271 [42]-[43] (Gummow and Hayne JJ).
[21]Sharpe v Goodhew (Drummond J, Unreported, Federal Court of Australia, 11 December 1992); cited in Batrouney v Forster [2015] VSC 230, [1403] (Robson J) and Rowe v National Australia Bank Ltd (2019) 56 WAR 1 (‘Rowe v NAB’), 24 [66] (Murphy JA and Sofronoff AJA).
[22]Hancock v Rhinehart (2015) 106 ACSR 207, 291 [338] (Brereton J). See also Batrouney v Forster (n 21) [1394] –[1410] (Robson J); Rowe v NAB (n 21), 19-31 [55]-[86] (Murphy JA and Sofronoff AJA); QNI Resources Pty Ltd v Park (2016) 116 ACSR 321, 336-7 [68]-74] (Bond J).
However, the circumstances in which an order for account may be made are not closed,[23] and arguably include cases where the defendant is not clearly an accounting party, and/or where the plaintiff does not have an entitlement to be paid an as yet uncertain sum.[24]
[23]Rowe v NAB (n 21), [61].
[24]See the judgment of Quinlan CJ in Rowe v NAB (n 21) at 7, [5]-[7]. However, his Honour likely had in mind instances where, due to a lack of information as to the trustee’s dealings with the assets, it was not clear whether any credit sum was or was not owing prior to an order for account being made, such that the taking of account would bring the entitlement into existence.
However, regardless of whether the proper means to make such an order is as an incident of a duty to account, the order is sought so as to assist the Former Trustees in respect of the enforcement of the Former Trustee’s right of indemnity. The Courts stand ready to assist parties in the enforcement of their rights of indemnity.[25] Further, the Rules provide for orders to be made by way of discovery in aid of enforcement of an existing order.[26] Here, at least the order sought in paragraph 2 of the originating motion is capable of being made pursuant to Order 67 of the Rules, in circumstances where the order made on 12 September 2019 in proceeding S ECI 2019 03402 confirms that the Current Trustees’ interest in the trust assets is subordinate to the Former Trustees’ interest pursuant to the right of indemnity. As a component of this Court’s equitable jurisdiction, and noting that there is no opposition by the Current Trustees, I am prepared to make orders for provision of the affidavit sought so as to assist the Liquidators in the exercise of their right of indemnity.
[25]Amerind (n 1), 416 [83] (Bell, Gageler and Nettle JJ).
[26]Order 67.
In those circumstances, I am prepared to make orders that the Current Trustees file and serve a further affidavit relating to the assets of the relevant Trust. I am also prepared to make orders to the effect set out in paragraph 2 of the originating motion.
I do, however, see difficulty with making an order in the precise terms sought by the Liquidators. Whilst I accept that the matters identified by Mr McCallum need to be clarified by Mr O’Donahue, the proposed form of order ignores the fact that the O’Donahue Affidavit, at least in part, complies with the relief sought in paragraph 1 of the proposed order. Compliance with the order in the form sought would require Mr O’Donahue to repeat, at least in part, that which he has already done, and may otherwise lead to further disputes as to whether the O’Donahue Affidavit and the further affidavit to be provided comply with the order. The Liquidators ought also be mindful that whilst a trustee must give accurate information to a beneficiary, the trustee need not answer never-ending, lengthy and voluminous enquiries beyond those which are reasonable having regard to the trustee’s available time and resources.[27] I see no reason why the same considerations do not apply to a new trustee who holds assets subject to a right of indemnity, where the previous trustee is seeking information in order to assist in enforcement of the right of indemnity.
[27]Gray v Guardian Trust Australia [2003] NSWSC 704, [39] (Austin J). See also Tucker, Le Poidevin and Brightwell Lewin on Trusts (2020) [21-038].
Further, paragraphs 1(f) and (g) of the proposed orders require the Trustees to identify any asset which has been realised, transferred or otherwise disposed of by the Current Trustees since their appointment (that is, since 3 July 2019 and 8 July 2019), and then to state what has become of those proceeds.
The undertakings put in place since 12 September 2019, assuming they were observed, would have prevented the realisation, transfer or other disposition of the trust assets, and so render orders in the form of paragraphs 1(f) and (g) unnecessary. Aside from the issue raised by the Liquidators in relation to the Steller GA shareholding, there is no suggestion of any breach of those undertakings. Further, even if there were a breach of those undertakings (which is denied), I am not disposed to make an order which would require the Current Trustees to depose to matters which may constitute a breach of the undertakings.
In addition, the orders are sought to enable the Liquidators of the Former Trustees to obtain information about the current assets of the Trusts, with a view to potentially realising those assets to discharge outstanding liabilities of the Former Trustee. Such an exercise is aided by the Current Trustees providing relevant information about the identity and value of the current assets. It is not assisted by an affidavit explaining past disposal of those assets, regardless of any question of a breach of undertaking.
Accordingly, I will make orders to address the specific matters raised by the Liquidator in relation to the adequacy of the O’Donahue Affidavit[28] and otherwise in terms of paragraph 2 of the proposed orders.
Paragraph 3 of the originating motion – authorisation to the Liquidators to sell or otherwise realise the relevant assets of each trust
[28]There may well come a point where the provision of information by the current trustees by way of affidavits ordered by the Court becomes more costly and cumbersome than other options available to the Liquidators, such as examinations conducted pursuant to s 596B of the Corporations Act.
By paragraph 3 of the originating motion the Liquidators seek an order that:
3. The Liquidators are authorised to sell or otherwise realise the Relevant Assets of each Trust in the course of the liquidation of the Former Trustee of that Trust.
The Current Trustees acknowledge that the Liquidators can exercise the rights of indemnity of the Former Trustees against the Trust Assets. However, they submit that the Liquidators have no entitlement to a general order to sell trust assets as an incident of their appointment as liquidators of the Former Trustees. Further, they contend that until such time as a particular asset is identified as being capable of sale and is shown to have value, there is no basis to confer an unsupervised general right of sale on the Liquidators.
The Liquidators submit that it is clear that the receipts from the sale of the Real Property Assets will be insufficient to exonerate the Former Trustees to the full extent of the liabilities incurred by the Former Trustees in the execution of the Trusts. As such, they submit that it is convenient for the Court to confer a general authority to sell on the Liquidators, to be exercised as the need arises. They submit that an iterative process whereby the Former Trustees would need to return to the Court to realise the assets is burdensome and unnecessary.
The evidence to date discloses that the Non-Real Property Assets have either no or negligible value. The Non-Real Property Assets also include choses in action which might not be effectively realised under a power of sale. Given this, there may be no real occasion for the Liquidators to exercise the authority which they seek.
It is clear that a court may authorise the sale of assets held by a trustee so as to satisfy the power of indemnity, as a step in the process of the trustee exonerating itself from authorised liabilities in the same manner as any other equitable charge.[29]
[29]Amerind (n 1) 404 [32] (Kiefel CJ, Keane and Edelman JJ).
However, it is not correct to characterise the ability of a trustee (or any other person who has a benefit of an equitable charge over property) to seek an order for judicial sale of the property subject to the charge as a conferral of a power or authority to sell on the trustee.
Where the conduct of the sale is given by a Court to a trustee, the ultimate practical effect may not be much different, but the process of enforcing the equitable charge does not demand, and is not equivalent to, a conferral of a power of sale on the chargee. Rather, the sale occurs pursuant to Court order. Frequently, the terms of such an order identify the person who shall have conduct of the sale; specify the mode of sale; set a reserve price; or otherwise outline matters directed to realising the asset at the best possible price and facilitating completion of the sale and transfer of title to the purchaser.[30] Consistent with the sale occurring under the auspices of and pursuant to the authority of the Court, sale will not be ordered if owing to the value of the property, it will be a useless exercise;[31] and the Court will not usually order a sale where there is no evidence of value.[32]
[30]See, eg, Sood v Christianos [2008] NSWSC 1087, [20]-[23] (Brereton J); King Investment Solutions Pty Ltd v Hussain [2005] NSWSC 1076, [105] (Campbell J); Chateau Constructions (Aust) Ltd v Zepinic & Anor (No 5) [2010] NSWSC 265, [87] (Slattery J). See also Finnane, Newton and Wood, Equity Practice and Precedents (2008), 108-9 [P8.175]; Stuckey and Irwin, Parker’s Practice in Equity (1949), 283-287; Miller and Horsell, Equity Forms and Precedents (1934), 342-3; Aitken ‘Equitable charge or equitable mortgage?’ in March-May 2012 Commercial Law Quarterly 3.
[31]Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361, 380 (Young J).
[32]Smithett v Hesketh 44 ChD 161, 163 (North J); Manton v Parabolic Pty Ltd (n 31) (1985) 380 (Young J); King Investment Solution Pty Ltd v Hussain (n 30) [100]-[102] (Campbell J).
Against that background, the Liquidators’ proposed orders run into difficulty. First, it is by no means clear at this stage that the Liquidators will ultimately wish to sell any of the assets; even assuming that a realisable value emerges. As mentioned, the assets the subject of the proposed order include choses in action comprising bank accounts, loans made to proprietary limited entities, and receivables in the form of UPEs. If the bank accounts are found to hold value, it is overwhelmingly likely that the Liquidators will require the balance of the account to be simply paid to them rather than seek to sell the right to require payment of a credit balance to a third party; the same is likely in relation to the unpaid loans. Secondly, judicial sale orders require the identification of a specific asset so as to fix the mode of sale and prescribe the mechanics by which the sale will proceed.
My own research did not identify a previous instance of a court making an order by way of judicial sale over unspecified assets. Orders for judicial sale upon the application of a chargee condescend to identifying the manner in which the sale would occur, whether a reserve was to be set (or not), and the various mechanics by which the sale was to be effected.
At my request, the Liquidators filed a supplementary outline of submissions directing attention to cases where courts had made orders conferring a general power of sale over trust assets.
The Liquidators relied upon a series of cases[33] where a bare trustee sought orders under the various state Trustee Acts[34] to give a bare trustee a power which it otherwise lacked to sell trust assets to enforce the trustee’s right of indemnity.
[33]Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 (Gordon J); Re Asten Holdings Pty Ltd (in liq) [2020] FCA 1107 (Anderson J); Re Westside Group Pty Ltd (in liq) [2020] FCA 1586 (O’Bryan J); Re Montpac Pty Ltd (in liq) (2020) 149 ACSR 138 (Black J).
[34]Eg, in Victoria, the Trustee Act 1958 (Vic).
In those cases, the fact that the applicants were bare trustees of the asset in question was foundational to the grant of a power of sale. As bare trustee, the applicants held legal title to the trust assets; however, pursuant to the terms of the relevant trust deeds, their liquidation resulted in their automatic disqualification as the trustees of the trusts. Pursuant to those trust deeds, in each case no replacement trustee had been appointed and no transfer of title to the trust assets had yet taken place.
As a consequence, the applicants in those cases, although retaining the status of bare trustees as a result of their retention of legal title to the trust assets , did not have a power of sale under the relevant trust deed. As bare trustees the applicants had legal title but by the terms of the deed had no power or authorisation at equity to sell the trust assets.
Nevertheless, the applicants retained a right of indemnity out of the trust assets for liabilities incurred in the execution of the trust while they were acting as trustees under the trust deed. Like the present case, in each of those cases exercise of the right of indemnity was expected to exhaust the trust assets.
In each case the Court was prepared to make orders conferring a power to sell on the (bare) trustees under the relevant Trustee Act, because the conferral of such a power was in the Court’s opinion ‘expedient’.[35]
[35]To pick up the language of the relevant Trustee Act provisions; eg, s 63 in the Trustee Act..
In the present case, the Former Trustees are no longer trustees; because legal title in respect of the Non Real Estate Assets has passed to the Current Trustees, the Former Trustees are not bare trustees of those assets. As such, they do not seek to invite the Court to make orders under the Trustee Act 1958 (Vic) (‘the Trustee Act’) to confer this power of sale upon them.
As a result, the Former Trustees in the present case do not seek a grant of a power of sale as trustee (bare or otherwise) pursuant to the Trustee Act over trust assets to satisfy a right of indemnity. Rather, they seek to exercise a right of indemnity held by them as former trustees, secured by an equitable lien and enforceable by judicial sale or appointment of a receiver (as in the case of an equitable charge) and not by foreclosure or sale out of court.[36] Accordingly, it is the remedies available in enforcement of an equitable charge which the plaintiff must seek, not the grant of additional trustee powers under the Trustee Act. The Trustee Act cases do not assist the Liquidators.
[36]Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344, [18] (Brereton J); cited with approval in Caterpillar Finance Australia Ltd v Ovens Nominees Pty Ltd (n 33) [22] – [24] (Gordon J).
The Liquidators also relied upon Re Indopal Pty Ltd.[37] In that case, the Court appointed liquidators of a former trustee as receivers and managers to all of the assets of a trust, where the directors of the former trustee had failed to submit a verified report as to the affairs of the company and where such of the books and records of the former trustee that had been delivered to the liquidator by the former accountants for the former trustee were apparently incomplete.
[37](1987) 12 ACLR 54 (McLelland J).
The appointment of the liquidators as receivers and managers was on an interim basis and appears to have been made to protect the company’s assets.[38] Nor was there any power of sale conferred on the receivers. Further, in that case no appointment of a new trustee had yet been effected and as such the former trustee retained legal title to the trust assets, presumably as a bare trustee.
[38]Ibid, 57.
Although the jurisdiction for the Court to appoint a receiver is wide and may in an appropriate instance extend to appointing a receiver to hold property affected by a lien pending a judicial sale,[39] or extend to the conferral of powers of sale on the receivers,[40] such relief is not presently sought by the Liquidators.[41]
[39]Commonwealth v ABC2 Group Pty Ltd (2008) 69 ACSR 228, 232 [25] (Barrett J).
[40]Apostolou v VA Corporation of Aust Pty Ltd [2011] FCAFC 103, [45] (Perram, Nicholas and Yates JJ), citing Heydon and Leeming Jacobs’ Law of Trusts in Australia (2006) at [2104], Sykes and Walker The Law of Securities (1993) at 198. See also Re Brimson Pty Ltd (in liq) [2019] FCA 1023, [283] (Moshinsky J), cited with approval in this Court in Re Mandeville Group Pty Ltd (in liq) [2020] VSC 293 (‘Re Mandeville’) (Sloss J) and Re Total Truss System Pty Ltd (in liq) [2021] VSC 205 [66] (Gardiner AsJ).
[41]Understandably, in light of their lack of visibility over the value of the assets, the Liquidators sought to avoid the additional complexity and costs that would be associated with their dual appointment as receivers. If appropriate and if so minded, the Liquidators could seek such appointment at a later stage.
In the above circumstances, it is not appropriate at the present stage to make orders in the form sought by the Liquidators.
If difficulty emerges in realising the choses in action, the Court can assist with necessary orders.[42] In the event that the Liquidators are able to identify a saleable asset of value and difficulty emerges in bringing about its sale,[43] then the Court will not hesitate to assist with the making of orders and directions to facilitate such sale. It remains open to the Liquidators to seek such orders where appropriate.
[42]By way of an order for payment; see Hewett v Court (n 17) 663 (Deane J).
[43]The Current Trustees are bound to deal with the Trust assets in a manner consistent with the rights of indemnity. In the case of the Former Trustees’ rights of indemnity, the Current Trustee must recognise that that right has priority over the rights of other beneficiaries.
Application of the proceeds
The amended originating process filed by the Liquidators outlines a regimes under which their right of indemnity is to be exercised and the claims of creditors are to be met:
(a) by paragraph 4 , the Liquidators seek orders that they be authorised to transfer all funds currently held in each of the Restricted Accounts to the Liquidation Bank Account established by the Liquidators for the relevant Former Trustee in whose name the account is held (the ‘Initial Sweep’);
(b) by paragraph 5, the Liquidators seek orders that following the Initial Sweep, they be authorised to effect a monthly transfer of funds from each of the Restricted Accounts to the relevant Liquidation Bank Account (‘Monthly Sweeps’) subject to, inter alia, the Liquidators being satisfied that the further funds are required to meet the costs and expenses of the relevant Liquidation (including remuneration payable to the Liquidators), or to meet claims of creditors within that Liquidation;
(c) by paragraph 6, the Liquidators seek to notify the Current Trustees in writing at least two business days before each Monthly Sweep of the amount of that upcoming sweep; and
(d) By paragraph 7, the Liquidators seek an order that they be authorised to apply the proceeds of the Initial Sweep, any Monthly Sweeps, and the proceeds of sale of any relevant assets towards the costs and expenses (including remuneration payable to the Liquidators) of the relevant Liquidation, and thereafter in satisfaction of the relevant Former Trustee’s liabilities incurred in its capacity as trustee of the trust in accordance with the priorities specified in s 556 of the Corporations Act.
As noted above, the Asset Realisation Agreement entered into between the Former Trustee and the Current Trustees provides that sales proceeds, after settlement adjustments and payment of valid mortgages or charge securities, would be paid by the Liquidators into the Restricted Accounts established and held by them, which the parties agreed would not be disbursed except with the written consent of the Current Trustees or by order of the Court.
Correspondence regarding fees and expenses
In the context of that agreement, on 5 February 2020 the Liquidators, by their solicitors MinterEllison,[44] first wrote to the Current Trustees proposing that the Liquidators be authorised to apply moneys held in the Restricted Accounts in payment of their remuneration and expenses, on a monthly basis and subject to:
[44]All the correspondence below was between the solicitors for the Liquidators, MinterEllison, and the solicitors for the Current Trustees, Strongman & Crouch, on behalf of their respective clients
(a) the remuneration having first been approved by creditors;
(b) the relevant expenses having been first approved by the Liquidators; and
(c) there being sufficient moneys on hand for the purpose.
In response, on 13 February 2020 the Current Trustees sought details as to:
(a) the approximate amount of the Liquidators’ fees to date;
(b) the approximate amount of the legal fees owing to MinterEllison (which formed part of the Liquidators’ expenses); and
(c) the means by and intervals at which the Liquidators intended to seek and obtain approval from creditors for their remuneration and the payment of expenses.
MinterEllison subsequently provided the Current Trustees with copies of the costs agreement entered into by the Liquidators and asserted that the firm had at all times complied with its obligations under the Uniform Law.
On 5 March 2020, MinterEllison advised that the Liquidators would apply to the Court for approval to enter into a funding agreement, wherein finance would be sought from an appropriate lender to facilitate payment of the Liquidators’ fees and expenses and to help fund the costs of the Liquidation. MinterEllison also stated that, in addition to the proposed funding agreement, the Liquidators intended to apply to the Court for orders allowing them to draw on trust moneys to meet amounts that would be paid under the proposed funding agreement.
On 30 July 2020, MinterEllison again wrote to the Current Trustee, this time seeking consent from the Current Trustees to the making of specific payments out of the Restricted Accounts to the Liquidators to meet the Liquidator’s fees and expenses. By the date of the letter, significant funds had built up in the Restricted Accounts. By way of example, the funds in the Restricted Account held in the name of Les Denny as at the date of the letter were $829,466.84 and MinterEllison proposed that payments be made from the funds held in that account in the amounts of $152,317 in respect of liquidator’s fees and $360,841.22 in respect of liquidator’s expenses. The letter sought confirmation from the Current Trustees that they would agree to the Liquidators making part payment of their fees and expenses incurred to date in the manner set out in the letter, and that similarly the Liquidators would be authorised to apply future trust balances to pay their remuneration and expenses on a monthly basis.
In their response of 6 August 2020, Strongman & Crouch noted that the Liquidators had previously agreed in a letter of MinterEllison dated 21 February 2020 to provide 48 hours’ written notice to the Current Trustees before each proposed application of trust moneys in payment of their fees and expenses. They also noted that MinterEllison had indicated that the Liquidators would provide a breakdown of the hours worked by each relevant fee-earner (from MinterEllison in respect of legal fees, and from Ernst & Young in respect of liquidation fees) and of each relevant disbursement. Such breakdown had not been provided as of 30 July 2020.
Further, Strongman & Crouch drew attention to an apparent disconformity between the total legal costs estimated in the costs agreement, as provided on 21 February 2020, and the legal costs incurred to date; emphasising that the Liquidations did not appear close to finalisation. Accordingly, Strongman & Crouch advised that the Current Trustees had concerns as to whether the expenses claimed by the Liquidators were ‘necessary and proper’. In the result, Strongman & Crouch requested that the Liquidators provide the Current Trustee with:
(a) a description of the nature of the legal services provided by MinterEllison and how they related to the Liquidations and work streams identified in the reports to creditors;
(b) reasons as to why those legal services were reasonable or necessary; and
(c) reasons as to why the firm fees charged by MinterEllison for those services were reasonable in amount.
In their response dated 9 October 2020, MinterEllison asserted a present entitlement on the part of the Liquidators to draw remuneration and to pay for expenses including legal costs if, after exercising proper judgment, the Liquidators were satisfied that the relevant legal work was properly performed and the quantum of the fees charged was reasonable. MinterEllison advised that the Liquidators had reviewed the invoices provided by MinterEllison and were satisfied that the work performed had been undertaken at the Liquidators’ instructions, was necessary, was directly connected with issues in the Liquidations, had been properly performed, and that the quantum of fees charged by MinterEllison was reasonable.
The letter also noted that the following amounts were presently owed to the Liquidators by way of remuneration, as approved by creditors at creditors’ meetings held on 3 August 2020:
(a) in respect of Les Denny, $576,412.65;
(b) in respect of Mary Pitard, $174,107.45;
(c) in respect of PK 3, $119,615.65; and
(d) in respect of PK 5, $115,094.10.
The letter provided an updated estimate of MinterEllison’s total fees and expenses, outlining the following amounts as due to MinterEllison from the Liquidators and describing those legal fees and expenses as having been approved by the Liquidators in each of the Liquidations:
(a) in respect of Les Denny, $535,303.18;
(b) in respect of Mary Pitard, $85,458.03;
(c) in respect of PK3, $67,137.11;
(d) in respect of PK5, $71,894.47.
Relevantly, the letter enclosed a summary of the billed hours worked by each relevant fee earner at MinterEllison together with their charge-out rates, but otherwise did not provide copies of MinterEllison’s invoices, for reasons including that many of the narrations in the bills were said to relate directly to issues between the Liquidator and the Current Trustees.
The letter concluded by requesting payment of the following amounts:
(a) Liquidators’ approved remuneration of $985,229.85;
(b) Liquidators’ internal expenses of $4,505.60;
(c) fees and disbursement due to MinterEllison of $759,792.79;
(d) an outstanding amount due to King & Wood Mallesons, who act for the Liquidators in the PN 3808 Proceeding.
The letter further proposed that the Liquidators be authorised to apply future Restricted Account balances to pay their ongoing remuneration and expenses on a monthly basis, subject to there being sufficient funds held in the Restricted Accounts. The letter otherwise refused to provide any further information to the Current Trustees, and asserted that the Current Trustees ‘do not have the supervisory power of a court’ to oversee the Liquidations. The Current Trustees were not in fact purporting to exercise the supervisory power of a court; rather, their consent was required, as contemplated by the Asset Realisation Agreement, and they had asked for further information for the purposes of deciding whether to provide such consent.
On 21 October 2020, the Current Trustees rejected the Liquidators’ contention that the the Liquidators were entitled to draw remuneration, as asserted in a letter of MinterEllison dated 9 October 2020. They stated that such a contention sat at odds with the terms of the Asset Realisation Agreement; noting that under the terms of the Asset Realisation Agreement the moneys held in the Restricted Accounts could not be dispersed ‘except with the written consent of the New Trustees or by order of the Court’. The letter continued by noting that the Liquidators had not presently availed themselves of either of these exceptions, and informed the Liquidators that if they sought a relevant Court order they would necessarily need to demonstrate to the Court that the fees and expenses sought to be paid from the Restricted Accounts were properly incurred and reasonable in amount.
In the result, on 26 October 2020 MinterEllison advised the Current Trustees that the Liquidators would not be providing any further information relating to the outstanding amounts for which payment was sought, and that absent consent from the Current Trustees the Liquidators would have no option but to apply to the Court for orders allowing the withdrawal of moneys held in the Restricted Account to meet their ongoing remuneration and expenses. The Liquidators expressly reserved their right to seek the costs of any application to the Court from the Current Trustees in their personal capacity (that is, without recourse to the moneys held in the Restricted Accounts).
The present application and authorities relied upon
In the result, the Liquidators brought the current application seeking the relief in paragraphs 4 to 7 of the originating motion outlined above.
In his supporting affidavit sworn 21 December 2020, Mr McCallum deposed that on 25 November 2020, in the context of the impasse that had developed in seeking access to the funds held in the Restricted Accounts, the Liquidators caused the Former Trustees to enter into a funding agreement with Steller Equity Pty Ltd (‘Steller Equity’), wherein Steller Equity provided a facility of up to $1 million to help fund the cost of the Liquidations (‘the Funding Agreement’). Pursuant to that agreement, on 7 December 2020 the Liquidators had drawn funds to meet part of the costs and expenses that the Liquidations have incurred to date. Mr McCallum further deposed that, as at 21 December 2020, the Liquidators:
(a) were owed by way of approved liquidator’s remuneration more than $985,229.85;
(b) were entitled to further remuneration, subject to creditor approval, of approximately $744,074.10;
(c) had incurred internal expenses of more than $4,632.12;
(d) owed MinterEllison, by way of legal fees and expenses, $659,672.75; and
(e) owed King & Wood Mallesons, by way of legal fees and expenses, more than $505,726.23.
The Liquidators submitted that the relief sought in the amended originating motion was purely mechanical in nature, and that the Court was not thereby asked to approve the liquidator’s remuneration or the expenses of the Liquidations. They submitted that the orders sought were in a ‘standard form’ customarily made in similar proceedings by liquidators and former corporate trustee companies in relation to the application of funds received from the sale of trust assets, relying upon, inter alia, Re Mandeville Group Pty Ltd (in liq) (‘Re Mandeville’),[45] Re Mackie Group Pty Ltd (in liq) (‘Re Mackie’),[46] and Re Matthew Forbes Pty Ltd (in liq) (‘Re Matthew Forbes’).[47]
[45]Re Mandeville (n 40) (Sloss J).
[46](2017) 122 ACSR 537 (Kennedy J).
[47][2018] VSC 331 [29]-[31] (Riordan J).
In Re Mandeville, a liquidator of a trustee company sought orders pursuant to the Trustee Act that the trustee company be authorised to sell a property held by it as bare trustee, in circumstances where the trustee company had vacated its office as trustee under the trust deed by operation of an ipso facto clause, and no replacement trustee had yet been appointed.[48] The Court made orders conferring such a power of sale on the trustee company, and made a further order pursuant to the IPS that the liquidators were justified in conducting the winding up of the trustee company on the basis, inter alia, that the liquidator was entitled to be paid his remuneration, costs and expenses properly incurred in preserving, realising or getting in assets of the trust; and that that entitlement included any remuneration, costs and expenses of and incidental to the application before the Court, which costs were to be paid in accordance with the priority specified in s 556(1) of the Corporations Act.[49]
[48]Re Mandeville (n 40) [9]-[10] (Sloss J).
[49]Ibid [213]-[214].
In Re Mackie, the Court gave a direction that liquidators of a trustee company were entitled to have access to the assets of the trust for remuneration and general expenses reasonably incurred in administering and winding up the trust, and that such remuneration and costs were to be paid in priority to the claims of unsecured creditors, unitholders in the trust and members of the company.[50] The Court was satisfied that the liquidators had engaged in work to identify assets; had taken steps to recover amounts owed to the trust; and had adjudicated claims and taken advice to ensure the trust funds were properly distributed.[51] The Court was also satisfied that this work was in the interests of the beneficiaries and that as such it should be remunerated.[52] Though the applicants did not seek the quantification of the proper amount of costs at that stage, the Court noted that liquidators are generally entitled to ‘reasonable remuneration’ out of the trust assets and expressed the view that the Court could have regard to the relevant provisions in the Corporations Act in determining the reasonableness of costs and expenses; although the Court was exercising its inherent jurisdiction to allow remuneration out of trust assets, rather than any statutory jurisdiction conferred by the Corporations Act. [53]
[50]Re Mackie (n 46) 551 [94] (Kennedy J).
[51]Ibid 546-7 [61].
[52]Ibid 547 [62].
[53]Ibid 547 [65].
In Re Matthew Forbes, the liquidators sought, inter alia, orders under the Trustee Act facilitating the realisation of assets of a trustee company, which assets it held as bare trustee of a trust.[54] The office of trustee under the trust deed had been vacated by operation of an ipso facto clause.[55] In addition, the liquidators sought relief pursuant to the IPS that they were justified and were acting reasonably in proceeding on the basis that they are entitled to be paid approved remuneration, costs, and expenses from the trust property, and that they were entitled to be indemnified out of the trust property for such sums.[56] The Court noted that a bare trustee is not generally entitled to remuneration for its time and trouble in the execution of the trust,[57] but that a liquidator may be entitled to recover expenses and remuneration on the ‘salvage principle’ established by Re Universal Distributing Co Ltd (in liq).[58] The Court noted that the application of the salvage principle has been held[59] to entitle a liquidator acting reasonably to be indemnified out of trust assets for its costs and expenses in, inter alia:
[54]Re Matthew Forbes (n 47) [15] – [17] (Riordan J).
[55]Ibid [6].
[56]Ibid [26].
[57]Ibid [27].
[58](1933) 48 CLR 171 (Dixon J).
[59]13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377, 385 (Finkelstein J); Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144, 158 [49] (Davies J).
(a) identifying or attempting to identify trust assets;
(b) recovering or attempting to recover trust assets;
(c) realising or attempting to realise trust assets;
(d) protecting or attempting to protect trust assets; and
(e) distributing trust assets to persons beneficially entitled to them.[60]
[60]Re Matthew Forbes (n 50) [28] (Riordan J).
The Court noted that it was unclear whether the salvage principle gives rise to an entitlement different to that recognised under s 556(1)(a) of the Corporations Act, ultimately concluding that although the liquidator is entitled to a lien under the salvage principle, s 556(1)(a) regulates a liquidator’s entitlement in such circumstances.[61] On that basis, and noting that s 556(1)(a) confers priority in respect of expenses properly incurred in preserving, realising or getting in property of the company, or in carrying on the company’s business, the Court made orders pursuant to the IPS that the liquidators were justified and were otherwise acting reasonably in proceeding on the basis that:
(a) the liquidators are entitled to be paid their remuneration, costs and expenses properly incurred in preserving, realising or getting in trust property, or in carrying on the business of the trust from the trust property; and
(b) the remuneration, costs and expenses include those of and incidental to the application and are to be paid in accordance with the priority specified in s 556(1) of the Corporations Act.
[61]Ibid [29]-[30].
The Liquidators otherwise submitted that they are entitled to be indemnified for all proper expenses incurred in the Liquidations.[62]
[62]Onefone Australia Pty Ltd v One Tel Ltd (2008) 69 ACSR 290, 300 [46]-[47].
At my request at the conclusion of the hearing on 19 April 2021, the Liquidators filed further submissions on 28 April 2021, addressing the question as to whether any independent approval of expenses specifically in the form of legal fees, as incurred by the Liquidators, was required. In their further submissions, the Liquidators observed that liquidators’ remuneration is regulated by Division 60 of the IPS. Further, they noted that the ‘simplified outline’ of the remuneration approval regime provided in the IPS notes that the amount of remuneration that a liquidator is entitled to receive will almost always depend on a ‘remuneration determination’ being made, either by a resolution of the creditors or the Court, and that such remuneration determinations can be challenged by ASIC, persons with a financial interest in the external administration, and officers of the company.[63]
[63]Corporations Act, Schedule 2, s 60-11(1).
The Liquidators also relied upon Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) (‘Re ICS’).[64] In Re ICS, the Court considered an application by a liquidator of a trustee company for directions that the liquidator would be justified in treating certain moneys as assets of the company, in circumstances where it was unclear whether those moneys held by the company beneficially in its personal capacity, or on trust in its capacity as trustee.[65] The correct characterisation of the ownership of the moneys was determinative of how the moneys were to be distributed in the course of the liquidation. Subsequent to that original application, the liquidator applied for interlocutory orders declaring or determining that the liquidator was entitled to particular sums representing remuneration, legal costs, and expenses; to be paid out of the moneys the subject of the proceeding.[66]
[64](2016) 305 FLR 222 (Brereton J).
[65]Ibid 224-5 [2]-[3].
[66]Ibid 226 [6].
The Court noted that in the context of considering such applications the Court was not exercising statutory jurisdiction under the Corporations Act, but rather its inherent equitable jurisdiction to allow remuneration out of trust assets in connection with the administration of a trust fund.[67] However, the Court held that in considering the remuneration of a liquidator, the Court was treating work done administering the trust as an incident of the liquidation and should accordingly approach such application for remuneration as analogous to an application by an official liquidator for approval of remuneration under the Corporations Act.[68] On the question of expenses, the Liquidators drew this Court’s specific attention to paragraphs 27 and 28 of the reasons:[69]
27The liquidators of a company which is the trustee of a trading trust and has no other activities, are entitled to be paid their costs and expenses, whether for administering the trust assets or for “general liquidation work”, out of the trust assets.
28As to expenses, ordinarily, the Court’s approval of a liquidator’s remuneration does not include disbursements, the liquidator’s right to indemnity for which depends on the general law relating to a trustee’s right of indemnity. Whether and to what extent a liquidator is entitled to recoup a disbursement from the estate ordinarily arises upon the taking of a trustee’s accounts, or upon a misfeasance summons arising from the liquidator’s accounts.
(citations omitted; underline added)
[67]Ibid 233 [31].
[68]Ibid 233 [31].
[69]Ibid 232 [27]-[28].
In response to the Liquidator’s submissions, the Current Trustees sought and obtained leave to file a supplementary outline of submissions. In those submissions, the Current Trustees took issue with the proposition that the order sought by the Liquidators was merely mechanical, and submitted that it was appropriate in the circumstances for the Court to scrutinise the disbursements incurred by the Liquidators before making any order allowing the Liquidators to pay the expenses from the Restricted Accounts or other assets of the trust. Additionally, the Current Trustees asserted that the Court should not make any order confirming that the Liquidators are entitled to pay future disbursements from the trust assets. The Current Trustees noted paragraph [29] of Re ICS,[70] which immediately followed the paragraphs extracted by the Liquidators:
[70]Ibid 232 [29].
29 In this case, the Liquidator is in effect seeking the Court’s approval in advance,
and thus protection for the payments he has made or proposes to make from
the trust funds. While the Court is generally supportive of liquidators who
have incurred disbursements in the exercise of their commercial judgment, the
liquidators bear the onus of justifying their disbursements. An insolvency
practitioner stands in a fiduciary relationship with the creditors, and must act
with the same care as a prudent businessperson would act in their own affairs
at their own cost and risk.
The Court then went on to consider the specific disbursements in respect of which payment was sought, determining whether or not those amounts had been reasonably incurred.
Similarly, in Deputy Commissioner of Taxation v Starpicket Pty Ltd (No 2) (‘DCT v Starpicket’),[71] the Court held that although s 473 of the Corporations Act did not empower the Court to review and approve a liquidator’s disbursements,[72] if a liquidator intends to assert their lien over assets of the company to secure the costs of his disbursements ‘there are grounds upon which the Court has power to direct the extent to which the liquidator is entitled to assert such a lien’ including because the Court has the ‘necessary supervisory power’ under the Corporations Act and its inherent jurisdiction.[73] Further, and specifically in relation to assessing a liquidator’s claim for disbursements, the Court held that ‘an assessment of reasonableness must also be applied’ and that ‘the Court must consider whether the disbursements have been reasonably incurred and are of a reasonable amount’.[74] The Court rejected the proposition that it could approve a liquidator’s claim without evidence of the disbursements in fact incurred, and she could not be satisfied that the liquidator was entitled to assert a lien in respect of amounts described as ‘estimated expenses’.[75]
[71][2013] FCA 699 (Gordon J).
[72]Ibid [16].
[73]Ibid [18], [21].
[74]Ibid [27].
[75]Ibid [63].
The Current Trustees also relied upon Re AAA Financial Intelligence Pty Ltd (in liq) (No 2) (‘Re AAA Financial’).[76] In that case, the Court considered an application by the liquidators of a financial services company who had received money on trust from advisers and stockbrokers that it engaged.[77] The Court accepted that liquidators were entitled to their reasonable and proper costs and expenses from the trust assets, but only in respect of work that was referable to the administration of the trust.[78] The Court noted that the application as originally brought only sought advice to the effect that the liquidators would be justified in distributing trust moneys in a certain order of priorities, but effectively left to a later and separate application the question of approval of their remuneration.[79] Further, the Court noted that on the material originally filed questions seemed to arise as to the reasonableness of the remuneration and expenses foreshadowed, particularly with regard to the value and nature of the property dealt with in circumstances where the liquidators endeavours appeared to have resulted in a net diminution, rather than enhancement, of the trust fund.[80] Importantly in the context of the present application, the Court stated as follows:[81]
In the ordinary case, the court’s approval of a liquidator’s remuneration does not include disbursements, the liquidator’s right to indemnity for which depends on the general law relating to a trustee’s right of indemnity … there are two questions. First, the liquidators (or trustees) must first decide to what extend they are bound to pay the liabilities they have incurred, and if they accept that they are bound to pay must do so, as they are personally liable. The second question is whether and to what extent they are entitled to recoup what they have paid from the estate. That question ordinarily arises upon the taking of a trustee’s accounts or upon a misfeasance summons arising from a liquidator’s accounts. Although the court will generally be supportive of liquidators who have incurred disbursements and paid them out of the estate in the exercise of their commercial judgment, albeit without the prior approval of the court – as liquidators are to be encouraged to use their commercial judgment and not to make applications for directions in respect of comparatively trivial matters – the liquidators bear the onus of justifying their disbursements, and since they can only recoup from the estate if they have acted properly in instructing and paying third parties (such as solicitors), they should subject the bills received from them to critical scrutiny.
(citations omitted; underline added)
[76][2014] NSWSC 1270 (Brereton J).
[77]Ibid [1].
[78]Ibid [4].
[79]Ibid [10].
[80]Ibid [11].
[81]Ibid [14].
The Court then assessed each of the disbursements, noting that the liquidators’ application for directions arose in circumstances where the liquidators were in effect seeking the Court’s approval and thus protection for the payments they had made or proposed to make from the trust fund.[82] Specifically, in the context of a disbursement of $19,989.13 paid by the liquidators to solicitors for legal advice, his Honour approved only $11,000 of that sum,[83] noting the deficiency of appropriate evidence, and stating that ‘notwithstanding the Court’s disposition to be supportive of liquidators who have incurred disbursements in the exercise of their commercial judgment, something more than the mere incurring and payment of a disbursement is required to justify it’.[84]
[82]Ibid [16].
[83]Ibid [57].
[84]Ibid [21].
In a further outline of submissions made in reply to the Current Trustees’ supplementary outline of submissions, the Liquidators remained adamant that the authorities do not require a review or approval of disbursements by the Court; save for Re ICS, which the Liquidators submitted did not identify any authority. Instead, the Liquidators relied upon Clout v Stoddard (SE Queensland) Pty Ltd where the Court observed that:[85]
A liquidator has a right to reimbursement by the company of all of his or her expenses, in a similar manner to a trustee. There is no requirement for the expenses incurred by a liquidator to be “determined” by the court. Reimbursements for expenses taken by a liquidator out of the property of the company may, however, be challenged as part of the process of the liquidator’s accounts being audited (s 539 of the Act), or as part of an investigation into the liquidator’s books, or an inquiry into the liquidator’s conduct (s 536 of the Act).
[85](2016) 115 ACSR 459, 477-8 [122] (Robb J).
The Liquidators otherwise relied upon Re Aberdeen All Farm Pty Ltd (in liq) (‘Re Aberdeen All Farm’),[86] in which the Court considered an application by liquidators of a trustee company for a declaration that trust properties were charged with the payment of liquidator’s costs and expenses, including specific sums for remuneration and disbursements.[87] The application before the Court was supported by an affidavit which set out the experience of the liquidator and his staff, and referred to work undertaken by him and his solicitors to secure the several properties held by the company, including the steps taken to identify and attend to claims made against the properties and steps taken to investigate the identity of claimants upon them.[88] There was also evidence that the liquidator had undertaken work identifying the manner in which time was recorded by the liquidation firm, and the liquidator deposed to his belief that the amount claimed was fair and reasonable.[89] In allowing the recoupment of disbursements (including future disbursements) against trust property, the Court was satisfied that the liquidator should recoup proper disbursements but did not propose to undertake a costs assessment in respect to the amount of legal costs or other disbursements, stating it was a matter for the liquidator to satisfy himself as to the amounts that are properly paid.[90]
Conclusion as to expenses
[86][2020] NSWSC 770 (Black J).
[87]Ibid [1].
[88]Ibid [4].
[89]Ibid [6]-[7].
[90]Ibid [43].
I prefer the submissions of the Current Trustees. In the circumstances of this case the Liquidators bear an evidentiary onus of establishing that the disbursements have been reasonably incurred.
First, the application by the Liquidators arises in the context of the Asset Realisation Agreement, the terms of which provide that payments are not to be made out of the Restricted Accounts unless agreed to by the Current Trustees or by order of the Court. In circumstances where the Current Trustees have not provided their consent, and where the parties have agreed that payments would not be made absent an order of the Court, it would be an odd result indeed if the Court were to have no role in assessing the reasonableness of the payments sought to be made out of the Restricted Accounts. That is the burden of the Liquidators’ submission.
Secondly, the principal cases relied upon by the Liquidators in support of the proposition that the orders they seek are standard or mechanical are readily distinguishable. As mentioned above, in Re Mandeville the liquidators sought orders that they were to be justified in conducting the winding up of the trustee company on the basis that the liquidators were entitled to be paid remuneration, costs and expenses properly incurred in preserving, realising or getting in assets of the trust. The order in Re Matthew Forbes was in substantially identical terms. In each case, the orders obtained were in the nature of directions made pursuant to the IPS that the liquidator was acting reasonably in proceeding in a particular way. Whilst there is some debate as to whether such directions are binding on third parties,[91] it is clear that in Re Mandeville and Re Mackie, the Court did not purport to bind third parties. So much is implicit in the relief granted, viz. that the liquidators were justified in proceeding in a particular way.
[91]See, eg, Re GB Nathan & Co Pty Ltd (in liq) (1992) 24 NSWLR 674 (McLelland J); Re Association for Visual Impairment The Homeless and The Destitute Inc (in liq) [2013] VSC 673, [6], [16] (Ferguson J); cf. Re Mento Developments (Aust) Pty Ltd (2009) 73 ACSR 622 (Robson J).
Here, the orders sought are different in both form and substance. The orders are sought against the background of an existing Asset Realisation Agreement that provides a contractual regime governing the winding up of the trustee company and the approval and payment of associated costs and expenses.
Moreover, the relief presently sought is cast in quite different terms: it is not cast in terms of the liquidators being justified in recovering from the trust property remuneration, costs and expenses properly incurred in preserving, realising or getting in trust property. Rather, in the present case the Liquidators seek orders in the nature of a standing authorisation to transfer funds held in the Restricted Accounts to the relevant Liquidation Bank Account, and subsequently to apply those funds to the costs and expenses (including liquidator’s remuneration) of the relevant Liquidation. The orders seek to bind the Current Trustees and are determinative of the payment regime set out in the Asset Realisation Agreement. The orders do not in terms contemplate that the remuneration and expenses be first approved by the creditors, as contemplated in their original request for the consent of the Current Trustees; nor are the orders conditional on the remuneration being reasonable in quantity or the expenses having been reasonably incurred. The orders sought also extend to future remuneration and expenses not yet incurred.
Further, and notwithstanding the generality of the orders sought, it is plain that the purpose of the orders is in part to provide for the payment of identified sums out of the Restricted Accounts by way of remuneration, or of reimbursement of expenses paid or payable by the Liquidators to legal firms. In cases where binding approval has been sought with respect to the making of particular identified payments, the Courts have required that the expenses be reasonably and properly incurred. Contrary to the submissions of the Liquidators, the decision in Re ICS did not fail to identify supporting authority and is consistent with the approach followed in other cases.
The same course was in fact followed in a number of the cases cited by the Liquidators in their outline of submissions, including Re Mackie Group, where the order was made against the background of a consideration of the work undertaken by the liquidators which had led the Court to the conclusion that ‘the work generally needed to be done in the interests of the beneficiaries such that remuneration should be awarded’. Likewise, such course was followed in DCT v Starpicket and in Re AAA Financial.
Such a course was also followed in Re Aberdeen All Farm; that case having been cited by the Liquidators as authority for the proposition that the payment of disbursements was ‘a matter for the liquidator to satisfy himself as to the amounts that are properly paid’. The reliance on that case for that proposition ignored the context in which that observation was made, which was in light of earlier, detailed consideration as to the reasonableness of the remuneration charges of the liquidator, taking into account evidence before the Court as to the nature of the work undertaken. Having satisfied itself that the work undertaken was, on the evidence, reasonable, the Court concluded that in the context of such an evidentiary finding disbursements including legal costs associated or related to the liquidator’s activity did not require a detailed costs assessment. Re Aberdeen All Farm does not stand for the broad proposition that in all such circumstances the reasonableness of the payment of disbursements is purely a matter for the liquidator.
Moreover, in Onefone Australia Pty Ltd v One Tel Ltd,[92] the Court considered that in the unusual circumstances of that case it was appropriate for the Court to assess whether the relevant expenses were ‘properly incurred’,[93] noting that such a question would ordinarily arise on an enquiry after the event into the propriety of a liquidator’s conduct.[94]
[92]Onefone Australia Pty Ltd v One Tel Ltd (n 62) (Barrett J).
[93]Ibid 303 [59]-[62].
[94]Ibid 302 [52].
In the circumstances, I do not consider that it is appropriate for the Court to grant the Liquidators relief in the terms sought. Absent any reference to reasonableness or creditor approval of the expenses incurred, the authorisation sought by the Liquidators consigns the Court to the role of mere rubber stamp for the Liquidators, and renders illusory the practical benefit of the consent regime given to the Current Trustees under the terms of the Asset Realisation Agreement.[95]
[95]It also renders close to illusory the proposed order that the Liquidators be required to give the Current Trustees 48 hours’ notice of any of any proposed sweep from the accounts. On the Liquidators’ approach, in the event of an absence of consent, the Liquidators would be entitled to apply to the Court to obtain a mechanical order effecting the sweep, without any real supervision by the Court.
The adamantine approach taken by the Liquidators means that there is little evidence before the Court as to nature of the work undertaken by the Liquidators and the lawyers whose fees the Liquidators seek to recover by way of expenses.
Nonetheless, I do note that:
(a) the funds in the Restricted Accounts have been derived from the sale of the trust properties which have been sold on behalf of the Trusts by the Liquidators pursuant to the Asset Realisation Agreement;
(b) in addition to the work which has been carried out by the Liquidators in effecting the sale of the trust properties, the Liquidators have received various proofs of debt and have undertaken investigations into the proofs of those debts;
(c) the Liquidators have undertaken investigations as to the Non-Real Estate Assets now held by the Current Trustees, being assets against which the Former Trustees have a right to be indemnified for liabilities they have incurred in the execution of the trusts (including all proper costs of the Liquidations);the Liquidators have engaged by their solicitors in a lengthy correspondence with the solicitors for the Current Trustees concerning matters of some complexity, including the extent of any obligation on behalf of the Current Trustees to provide the information now sought by the Liquidators in paragraphs 1 and 2 of the amended originating motion, and the question of consent to payment out of moneys held in the Restricted Accounts; and
(d) importantly, there is evidence that the creditors have approved part of the Liquidators’ remuneration. In Mr McCallum’s most recent affidavit relied upon by the Liquidators in this proceeding, he deposes to the fact that the Liquidators are owed substantial sums; including more than $985,229.85 by way of approved remuneration, as well as further remuneration of $901,249.8 subject to creditor approval.
In circumstances where the Liquidators’ remuneration has been approved and where the Current Trustees raise no specific objection in relation to the payment out of the Restricted Accounts of approved remuneration, I am prepared to make orders to the effect that the Liquidators are authorised to transfer all funds currently held in each of the Restricted Accounts for the purpose of facilitating the payment of remuneration that has been approved at meetings of creditors. That would appear to extend to at least an amount totalling $985,229.85; being the amount approved as at 15 March 2021. To the extent that any further amounts are or have been subsequently approved by the creditors, I would leave it open to the Liquidators to seek consent from the Current Trustees, or failing the provision of such consent, to make application to the Court.
In respect of expenses, a different position pertains. The expenses have not been approved by creditors (no such approval is required under the IPS) and the Current Trustees have made specific objections, noting inter alia that the legal expenses in fact incurred to date substantially exceed the initial estimates of legal expenses anticipated for the Liquidation. The legal expenses sought to be recovered are also of similar magnitude to the Liquidators’ remuneration. Further, the Current Trustees note that the legal expenses incurred with respect to the sale and conveyance of the property at 3808 Point Nepean Road, Portsea alone total in excess of $200,000, a sum which on its face warrants some elucidation.
Nothing that I have said should be taken to suggest that the Liquidators have not acted otherwise than in accordance with the proper discharge of their duties, as a fiduciary with respect to the assets of the Trusts and the incurring of the expenses. However, in the circumstances of the case and consistently with authority, that is not enough of itself to justify the making of the orders sought on the present material. The further material that the Liquidators may wish to rely upon in support of any application for approval of expenses which have been incurred may be able to be put together in reasonably short order.
Costs
While the Liquidators have not been wholly successful in obtaining the relief they have sought, I have been assisted by both the submissions of the Liquidators and the submissions of the Current Trustees. Each criticise aspects of the submissions of the other. I was not moved by the criticisms. Whilst I have to a substantial extent accepted the submissions of the Current Trustees in relation to the payment of the Liquidators’ expenses, I do not consider that there was anything untoward in the Liquidators’ submissions. Nor do I accept that the Current Trustees, by not appearing at the hearing on 19 April 2021, in some way bear responsibility for the delayed resolution of the matter. In the circumstances, both the Liquidators and the Current Trustees shall each be entitled to orders that their reasonable costs of the proceeding to date be paid from the assets of the Trusts.
Disposition
I shall make orders as follows:
1. Within 42 days or such further period as agreed between the plaintiffs and the defendants or as ordered by the Court, the defendants make, file and serve an affidavit which:
(a) sets out or otherwise explains the basis upon which the defendants have formulated the estimates of the current value of each asset referred to in the O’Donahue affidavit;
(b) clarifies whether there is any, and if so what, distinction between an estimate of value of ‘nil’ or an estimate of ‘negligible value’ and in either case sets out the basis upon which such estimate is formulated;
(c) in relation to assets of companies in which the defendants (or any of the Trusts) holds shares (‘Subsidiary Assets’), provides a description of each Subsidiary Asset, an estimate of current realisable value, the basis upon which the current realisable value is calculated and where that value is an investment, the value of the company or the underlying project or asset to which the investment relates;
(d) sets out the information referred to in paragraph (c) in relation to the assets of the Pitard Knowles No 5 Trust;
(e) states:
(i) whether the defendants believe that the assets of the Pitard Knowles No 5 Trust include a receivable in the form of an unpaid present entitlement of $2,055,000 (or any other amount) owing to the Pitard Knowles No 5 Trust by Carnegie Hall Developments Pty Ltd in its capacity as trustee of the Carnegie Hall Trust;
(ii) if yes to (i), provides an estimate of current realisable value with respect to the amount owing to the Pitard Knowles No 5 Trust by Carnegie Hall Developments Pty Ltd in its capacity as trustee of the Carnegie Hall Trust; and
(f) set out the enquiries and investigations which have been carried out by the Current Trustees in completing the O’Donahue affidavit and the further affidavit provided pursuant to this order.
2. Within 42 days or such further period as agreed between the plaintiffs and the defendants or as ordered by the Court, the defendants provide to the first and second plaintiffs copies of all documents in their possession, custody or control which:
(a) evidence the defendants’ title to all assets held on or by the Trusts other than real estate assets (‘Relevant Assets’);
(b) relate to any claim to ownership, security, forfeiture, diminution, dilution or any other claim which if made out would reduce the value of that asset to the relevant trust (save insofar as the claim is made by the relevant former Trustee or the Liquidators) (‘an Adverse Claim’) and in so doing set out:
(i) precise details of the claim (including particulars of the date and means of every communication of that claim);
(ii) the identity of all persons who made the claim;
(iii) details of any steps that the defendants have taken or propose to take to mitigate the risk of the claim; or
(c) relate to or identify any asset which has been realised, transferred or otherwise disposed of by the defendant since its appointment as Trustee of the relevant Trust (‘Relevant Event’).
3. The Liquidators are authorised to transfer such portion of the funds held in each of the Restricted Accounts to the Liquidation Bank Account established by the Liquidators for the Company in whose name the account is held to meet the Liquidators’ remuneration in the amount approved by creditors as at 24 March 2021.
4. The defendants’ reasonable costs and expenses of complying with paragraphs 1 and 2, along with their reasonable expenses and costs of and incidental to the provision of the O’Donahue Affidavit, shall be payable from the assets of the Trusts and rank pari passu with the costs of the Liquidators.
5. The Liquidators’ reasonable costs of the proceeding to date be treated as costs in the liquidation of the Former Trustees, and be payable from the assets of the Trust.
6. The defendants’ reasonable costs of the proceeding to date be payable from the assets of the Trusts and rank pari passu with the costs of the Liquidators.
7. The further hearing of the originating motion is adjourned sine die.
8. Liberty to apply is reserved.
SCHEDULE OF PARTIES
| STEWART ALEXANDER MCCALLUM in his capacity as joint and several liquidator of Les Denny Pty Ltd (in liquidation) (ACN 156 618 825); Mary Pitard Pty Ltd (in liquidation) (ACN 608 289 792); Pitard Knowles No. 3 Pty Ltd (in liquidation) (ACN 606 901 295) and Pitard Knowles No.5 Pty Ltd (in liquidation) (ACN 609 767 615) | First Plaintiff |
| ADAMS PAULS NIKITINS in his capacity as joint and several liquidator of Les Denny Pty Ltd (in liquidation) (ACN 156 618 825); Mary Pitard Pty Ltd (in liquidation) (ACN 608 289 792); Pitard Knowles No. 3 Pty Ltd (in liquidation) (ACN 606 901 295) and Pitard Knowles No.5 Pty Ltd (in liquidation) (ACN 609 767 615) | Second Plaintiff |
| LES DENNY PTY LTD (IN LIQUIDATION) (ACN 156 618 825) | Third Plaintiff |
| MARY PITARD PTY LTD (IN LIQUIDATION) (ACN 608 289 792) | Fourth Plaintiff |
| PITARD KNOWLES NO. 3 PTY LTD (IN LIQUIDATION) (ACN 606 901 295) | Fifth Plaintiff |
| PITARD KNOWLES NO.5 PTY LTD (IN LIQUIDATION) (ACN 609 767 615) | Sixth Plaintiff |
| -and- | |
| PITARD CONSORTIUM PTY LTD (ACN 634 588 980) in its capacity as trustee for the Pitard Trust (ABN 23 359 983 098) | First Defendant |
| PITARD 3 PTY LTD (ACN 618 907 234) in its capacity as trustee for the Mary Pitard Trust (ABN 62 715 798 356) | Second Defendant |
| PK NO 8 PTY LTD (ACN 617 439 175) in its capacity as trustee for the Pitard Knowles No 3 Trust (ABN 32 275 661 156) | Third Defendant |
| PK NO 10 PTY LTD (ACN 618 877 508) in its capacity as trustee for Pitard Knowles No 5 Trust (ABN 38 997 780 919) | Fourth Defendant |
(a) the assets were said to be of negligible value;
(b) it was contended that the Liquidators were in substantially the same position as the
Current Trustees in obtaining the relevant information; and
(c) the Current Trustees were not to be reimbursed out of the trust
assets in respect of their costs and expenses of compiling the information.
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