Re All Class Insurance Brokers Pty Ltd (in liq)
[2014] NSWSC 475
•30 April 2014
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of All Class Insurance Brokers Pty Ltd (in liq); Vardy v Westpac Banking Corporation [2014] NSWSC 475 Hearing dates: 28 March 2014 Decision date: 30 April 2014 Jurisdiction: Equity Division - Corporations List Before: White J Decision: Refer to para [54] of judgment.
Catchwords: CORPORATIONS - liquidation - liquidator's applications - financial services licensee required to maintain trust account - trust account deficient - whether liquidator is entitled to be paid on an indemnity basis from the trust account for reasonable remuneration and expenses - whether money paid into the account by the company should be dealt with as an asset of the company and be paid to the liquidator - trust account allowed to go into debit - creditors entitled to participate in distribution of the account - whether money should be distributed pari passu to eligible creditors - Whether distribution to be in accordance with claimants' ability to trace - Corporations Act 2001 (Cth), ss 479, 511, 764A, 766A, 766C, 981A-981H - Corporations Regulations 2001 (Cth), regs 7.8.01-7.8.03 - Trustee Act 1925 (NSW), s 63 - Insurance (Agents and Brokers) Act 1984 (Cth), s 28 Legislation Cited: Corporations Act 2001 (Cth)
Trustee Act 1925 (NSW)
Banking Act 1959 (Cth)
Insurance (Agents and Brokers) Act 1984 (Cth)Cases Cited: Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674
In Re MF Global Australia Ltd (in liq) [2012] NSWSC 994
Re Universal Distributing Co Pty Ltd (in liq) (1933) 48 CLR 171
Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32
Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158
13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; 17 ACLC 500
Re Sutherland; French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361
In Re MF Global Australia Ltd (in liq) (No. 2) [2012] NSWSC 1426
Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301
James Roscoe (Boulten) Limited v Winder [1915] 1 Ch 62
Staniar v Evans (1886) 34 Ch D 470
Edgar v Plomley [1900] AC 431
In Re Dacre; Whittaker v Dacre [1916] 1 Ch 344
Re Hallett's Estate (1880) 13 Ch D 696
Re Global Finance Group Pty Ltd (in liq) [2002] WASC 63; (2002) 26 WAR 385
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Black v S Freedman & Co (1910) 12 CLR 105
Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589; 25 ACLC 809
Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371
Re National Buildplan Group Pty Ltd (subject to a deed of company arrangement) [2014] NSWSC 146
Georges v Seaborn International [2012] FCA 75; (2012) 87 ACSR 442
Georges v Seaborn International Pty Ltd [2012] FCAFC 140; 294 ALR 468
Re Perpetual Investment Management Ltd as responsible entity for Perpetual's Monthly Income Fund and Perpetual's Wholesale Monthly Income Fund [2011] NSWSC 615
Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653Category: Interlocutory applications Parties: Darren John Vardy (Plaintiff)
St George Bank - a division of Westpac Banking Corporation (Defendant)
The Hollard Insurance Company (Interested Party - 1)
Global Transport & Automotive Insurance Solutions Pty Ltd (Interested Party - 2)
WI Premium Funding Ltd (Interested Party - 3)
Wesfarmers General Insurance Ltd (Interested Party - 4)Representation: Counsel:
J T Johnson (Plaintiff)
M F Newton (1st and 2nd Interested Parties)
C Higginbotham (3rd and 4th Interested Parties)
Solicitors:
MCW Lawyers (Plaintiff)
Lander & Rogers (3rd & 4th Interested Parties)
File Number(s): 2013/357269
Judgment
HIS HONOUR: This is an application under s 511 of the Corporations Act 2001 (Cth) and s 63 of the Trustee Act 1925 (NSW) for directions and advice as to the disposition of moneys in a trust account.
The plaintiff is the liquidator of All Class Insurance Brokers Pty Ltd (in liq) ("the company"). The company is subject to a creditors' voluntary winding-up. The plaintiff was appointed as liquidator on 17 April 2013.
The company carried on business as an insurance broker. It held an Australian Financial Services Licence. That licence was cancelled on 6 May 2013. Pursuant to s 981B of the Corporations Act the company established an account into which money was paid by or on behalf of or for the benefit of clients. Pursuant to s 981B the company was required to ensure that such moneys were paid into the account. Pursuant to s 981H(1) money that was paid to the company by the client or by a person acting on behalf of the client, or to the company in its capacity as a person acting on behalf of the client, was taken to be held in trust by the company for the benefit of the client. Corporations reg 7.8.01(5) required the company to designate and operate the account as a trust account. Moneys in the account were held on trust for the benefit of the persons entitled to the moneys (reg 7.8.01(5)(c)).
The account opened was called the All Class Insurance Brokers Pty Ltd Trust Insurance Broking Account. At the date of the liquidator's appointment there was a sum of $367,094.31 standing to the credit of the account. There should have been a lot more. The liquidator's investigation has disclosed that an employee of the company embezzled premium funds that were paid to the company.
The question is how the moneys remaining in the account should be dealt with. The account was held with St George Bank, which has been described as a division of Westpac Banking Corporation. It is a secured creditor. The liquidator joined Westpac Banking Corporation as a defendant to his originating process. Unsurprisingly it has made no claim to the moneys in the trust account. It did not enter an appearance.
An amended Originating Process and a lengthy affidavit of the liquidator made on 16 November 2013 was served on 27 creditors described as "interested parties", all of whom claim to be beneficially entitled to a share of the moneys in the trust account. No unsecured general creditor of the company was joined or served.
By his further amended originating process the liquidator sought declarations that the trust account was operated in accordance with s 981B of the Corporations Act, or, if not, that the provisions of Subdivision A of Div 2 of Pt 7.8 of the Corporations Act should apply to the account. The liquidator sought an order that the funds in the account be distributed pro rata among the 27 named creditors (described as "Eligible Creditors"), or alternatively, that there be an audit to determine the source of funds held in the account and whether any of the funds in the account form part of the property of the Company.
The so-called Eligible Creditors comprised 27 insurers or premium funding lenders. No insured has made a claim in respect of the moneys in the account. The effect of s 985B(2) of the Corporations Act is that moneys paid to the company in payment of premium by an intending insured, or on behalf of an intending insured, discharges the liability of the insured to the insurer. Hence the insurer is beneficially entitled to an amount in the trust account that represents the payment of premiums in respect of an insurance contract. The effect of s 985B(3) is that payment by an insurer to the company of policy benefits or settlement moneys does not discharge the insurer's liability to the insured.
The liquidator's investigations revealed that the following types of payments were made from time to time into the account:
"a. insurance premiums paid by clients in respect of genuine insurance policies;
b. insurance premiums paid on behalf of clients by premium funding lenders in respect of genuine insurance policies;
c. insurance premiums paid by clients in respect of fictitious insurance policies (i.e. insurance policies that the Company represented to clients had been effected or arranged but were in fact never effected or arranged);
d. insurance premiums paid on behalf of clients by premium funding lenders in respect of fictitious insurance policies (i.e. insurance policies that the Company represented to clients and premium funding insurers had been effected or arranged but were in fact never effected or arranged);
e. premium refunds paid by insurers to be refunded to premium funding lenders for clients who had premium funding arrangements in place;
g. policy benefits and settlement amounts paid by insurers to be paid to clients;
h. commissions paid by insurers to the Company (i.e. commissions that the insurer did not authorise the Company to deduct from premiums collected by the Company - those commissions that were paid separately by the insurers); and
i. pre-paid commissions paid by insurers to the Company pursuant to prepaid commission advance loan agreements."
The liquidator has received claims by insurers totalling $1,866,391.22 and claims by premium funding lenders totalling $168,593.30.
The company did not keep proper accounting records. It is not possible for the liquidator to determine accurately what part of the funds held in the account comprised premiums paid by clients, what part forms commissions payable to the company and what part forms premium funding payments.
In a report to the committee of creditors dated 11 November 2013 the liquidator advised that although it was not possible to reconcile the amounts with certainty in the absence of an audit, it was reasonable to expect that the maximum amount of money that might be held in the account representing commission to which the company was beneficially entitled was $18,250.
Although styled as a trust insurance broking account, the account was allowed to go into debit on 25 February 2013. It remained in debit until 28 February 2013.
The issues arising on the application are:
1. Whether any declarations can or should be made;
2. Whether the liquidator has a first claim to the moneys in the account for reasonable remuneration and costs, charges and expenses in administering the trust insurance broking account and distributing moneys following adjudication on claims for entitlement to moneys from the account, as well as costs of this application;
3. Whether the sum of $18,250 representing the maximum likely value of commissions paid to the company should be paid to the liquidator and dealt with as an asset of the company;
4. Whether premium funding lenders who paid money to the company for premiums for fictitious insurance policies are entitled to participate in a distribution from the account;
5. Whether the moneys in the account should be distributed pari passu to insurance companies and premium funding lenders;
a. according to whether moneys held on trust for them could be traced into the remaining moneys held in the account; or
b. according to the amounts they would be entitled to receive from the account if the company had dealt properly with the moneys received.
Legislation
Subdivision 2A of Pt 7.8 of the Corporations Act regulates how a financial services licensee is to deal with clients' money. The subdivision applies to money paid in connection with a financial service that has been provided or will be provided to a client, or is paid in connection with a financial product held by a client where the money is paid by the client, or by a person acting on behalf of a client, or to the licensee in the licensee's capacity as a person acting on behalf of the client (s 981A(1)). It does not apply to money paid by way of remuneration payable to the licensee, or to money the licensee is entitled to deduct as remuneration, or to reimburse the licensee for payments made to acquire an interest in a financial product, or to discharge a liability incurred in respect of the acquisition of a financial product, or to acquire a financial product from a licensee (s 981A(2)). Such moneys to which the subdivision does not apply would be moneys to which the licensee would be beneficially entitled.
Section 981H provides that money to which the subdivision applies that is paid to the licensee by the client, or by a person acting on behalf of a client, or in the licensee's capacity as a person acting on behalf of a client, is taken to be held in trust by the licensee for the benefit of the client (s 981H(1)).
Section 981H(3)(b) provides that the regulations may provide for matters relating to the taking of money to be held in trust (including terms on which the money is taken to be held in trust and circumstances in which it is no longer taken to be held in trust).
Section 981B provides that a licensee must ensure that money to which the subdivision applies is paid into an account with an authorised deposit-taking institution within the meaning of the Banking Act 1959 (Cth) or of a kind prescribed by regulations, which is designated as an account for the purposes of the section. Section 981B(1)(b) requires that the licensee ensure that the only money paid into the account is money to which the subdivision applies, or interest, or interest or similar payments on an investment made in accordance with the regulations, or other money permitted to be paid into the account by the regulations. The licensee may hold multiple accounts for the purpose of s 981B (s 981B(2)).
Section 981C empowers the making of regulations to deal with various matters in relation to accounts maintained for the purposes of s 981B, including the circumstances in which payments may be made out of an account (s 981C(a)). Consistent with moneys being trust moneys, s 981E provides that money to which the subdivision applies that has been paid to a licensee, both while it is in an account maintained for the purposes of s 981B and before and after it is paid into such an account, and investments made with such moneys in accordance with the regulations, and other money in the account permitted by s 981B(1)(b), such as interest, cannot be attached or taken in execution, or be made subject to a set-off, security, interest or charging order, except at the suit of a person who is otherwise entitled to the money or investment.
Section 981F provides that regulations may include provisions dealing with how money in an account maintained for the purposes of s 981B, or an investment of such money, is to be dealt with if, amongst other things, the licensee ceases to be a financial services licensee.
Regulation 7.8.01(5) provides:
"Obligation to pay money into an account
...
(5) For paragraph 981B(1)(c) of the Act, a financial services licensee must:
(a) operate an account to which that paragraph applies as a trust account; and
(b) designate the account to be a trust account; and
(c) hold all moneys paid into the account (other than moneys paid to the financial services licensee under the financial services licensee's obligation to call margins from clients under the market integrity rules, the operating rules of a licensed market or the operating rules of a licensed CS facility) on trust for the benefit of the person who is entitled to the moneys."
Subregulations 7.8.01(11)-(13) provide in substance that money received by a licensee as a single payment that is not wholly s 981B money, but includes s 981B money, may be paid into the trust account to be established under reg 7.8.01, but the licensee must as soon as practicable, and in any event within one month after such money (called "mixed money") is paid into the account, remove from the account the part of the money that is not s 981B money.
Regulation 7.8.02 specifies the payments that may be made out of an account maintained for the purposes of s 981B. It provides:
"Accounts maintained for section 981B of the Act
Withdrawals from account
(1) For paragraph 981C(a) of the Act, payments may be made out of an account maintained for section 981B of the Act in any of the following circumstances:
(a) making a payment to, or in accordance with the written direction of, a person entitled to the money;
(b) defraying brokerage and other proper charges;
(c) paying to the financial services licensee money to which the financial services licensee is entitled;
(d) making a payment of moneys due to an insurer in connection with a contract of insurance;
(e) making a payment that is otherwise authorised by law;
(f) paying to the financial services licensee money to which the financial services licensee is entitled pursuant to the market integrity rules or the operating rules of a licensed market."
Subregulation 7.8.02(2) specifies what investments can be made in relation to an account maintained for the purposes of s 981B.
Subregulation 7.8.02(6) provides:
"(6) For paragraph 981C(b) of the Act, in relation to moneys received in relation to insurance products, the financial services licensee must ensure that:
(a) the balance of moneys in an account maintained by the financial services licensee under section 981B of the Act; and
(b) the total amount previously withdrawn from the account and currently invested under subregulation (2);
is at least the sum of:
(c) any amounts that an insurer is entitled to receive from the account; and
(d) any amounts that an insured or intending insured is entitled to receive from the account."
Subregulations 7.8.02(6A) and (6B) provide:
"(6A) For paragraph (6)(c), if, at a particular time, money received by a financial services licensee for or on account of an insurer as mentioned in paragraph 7.8.01(4)(a) is paid into the account, the insurer is taken to be entitled to receive payment of:
(a) the amount; or
(b) if any deductions from the amount are authorised by a written agreement between the insurer and the broker--the amount less the deductions;
throughout the period:
(c) beginning at that time; and
(d) ending when the payment is actually made to the insurer;
whether or not the amount has been invested under subregulation (2).
(6B) For paragraph (6)(d), if, at a particular time, money received by a financial services licensee for or on account of an insured or intending insured as mentioned in paragraph 7.8.01(4)(b) is paid into an account, the insured or intending insured is taken to be entitled to receive payment of the amount throughout the period:
(a) beginning at that time; and
(b) ending when the payment is actually made to the insured or intending insured;
whether or not the amount has been invested under subregulation (2)."
Regulation 7.8.03 relevantly provides:
"How money to be dealt with if licensee ceases to be licensed etc
(1) For paragraph 981F(a) of the Act, this regulation applies if a financial services licensee ceases to be licensed (including a cessation because the financial services licensee's licence has been suspended or cancelled).
(2) For paragraph 981F(b) of the Act, this regulation applies if a financial services licensee:
(a) becomes insolvent under an administration; or
(b) is the subject of any of the following arrangements:
(i) the appointment of an administrator under section 436A, 436B or 436C of the Act;
(ii) the commencement of winding up;
...
(3) For paragraph 981F(d) of the Act, this regulation applies if:
(a) a financial services licensee ceases to carry on a particular activity authorised by the financial services licence; and
(b) money is paid in connection with that activity.
(4) For each person who is entitled to be paid money from an account of the financial services licensee maintained for section 981B of the Act, the account is taken to be subject to a trust in favour of the person.
(5) If money in an account of the financial services licensee maintained for section 981B of the Act has been invested, for each person who is entitled to be paid money from the account, the investment is taken to be subject to a trust in favour of the person.
(6) Money in the account of the financial services licensee maintained for section 981B of the Act is to be paid as follows:
(a) the first payment is of money that has been paid into the account in error;
(b) if money has been received on behalf of insureds in accordance with a contract of insurance, the second payment is payment to each insured person who is entitled to be paid money from the account, in the following order:
(i) the amounts that the insured persons are entitled to receive from the moneys in the account in respect of claims that have been made;
(ii) the amounts that the insured persons are entitled to receive from the moneys in the account in respect of other matters;
(c) if:
(i) paragraph (b) has been complied with; or
(ii) paragraph (b) does not apply;
the next payment is payment to each person who is entitled to be paid money from the account;
(d) if the money in the account is not sufficient to be paid in accordance with paragraph (a), (b) or (c), the money in the account must be paid in proportion to the amount of each person's entitlement;
(e) if there is money remaining in the account after payments made in accordance with paragraphs (a), (b) and (c), the remaining money is taken to be money payable to the financial services licensee.
(7) This regulation applies despite anything to the contrary in the Bankruptcy Act 1966 or a law relating to companies."
Nature of relief
Counsel for the liquidator did not press a claim for the making of declarations. Insofar as the liquidator seeks judicial advice under s 63 of the Trustee Act, or directions pursuant to s 479(3) of the Corporations Act made applicable by s 511(1)(b), the relief to which he may be entitled is the giving of directions. If there is full and fair disclosure of the material facts, the directions will protect the liquidator from personal liability in his administration of the company or the trust if he acts in accordance with them (Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674). It may be possible in the exercise of the power under s 511(1)(a) for the Court to make binding determinations of right if the proceedings are properly constituted for that purpose (In Re MF Global Australia Ltd (in liq) [2012] NSWSC 994 at [10]-[12]). In this case no declarations can be made that would bind non-parties. No representative orders were sought or made. The only party joined was Westpac which has not participated in the proceedings and whose rights are not affected by the directions sought.
Liquidator's remuneration and expenses in administering the trust
The liquidator is entitled to be paid from the trust account in priority to other claimants his reasonable remuneration and reimbursement or exoneration for reasonable expenses incurred in administering the trust property, including handling and determining claims of creditors necessary to determine who is entitled to the moneys in the account (Re Universal Distributing Co Pty Ltd (in liq) (1933) 48 CLR 171 at 174-175; Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32 at 50-51; Re GB Nathan & Co Pty Ltd (in liq) at 689; Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158; 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 at 385; 17 ACLC 500 at 509; Re Sutherland; French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361 at [213], [217]; In Re MF Global Australia Ltd (in liq) (No. 2) [2012] NSWSC 1426 at [50], [54], [61]). In this case the only asset available to the liquidator is the trust account. There is no property beneficially owned by the company available to meet the liquidator's remuneration and expenses (compare Re GB Nathan & Co Pty Ltd (in liq) at 689).
Regulation 7.8.03(6) stipulates how money in an account maintained for the purposes of s 981B is to be paid. Regulation 7.8.03(6) does not provide for payment out of the trust account of any expenses of a liquidator or administrator incurred in recovering moneys that should have been held in the trust account, nor in administering the trust account, nor in determining the entitlement of persons to moneys in the trust account, nor in distributing such moneys. The predecessor provision to that regulation was s 28(4) of the Insurance (Agents and Brokers) Act 1984 (Cth) which was in materially the same terms. In Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301 Young CJ in Eq (as his Honour then was) held that the terms of that provision were not "strong enough to make me hold that the Act intended some different result" (at [22]). His Honour held that the liquidator's costs were recoverable from the trust money notwithstanding that s 28(4) made no provision for payment out of the trust account of moneys for the liquidator's remuneration and expenses.
It may be taken that the regulation was passed with the knowledge of the interpretation given to s 28(4) of the Insurance (Agents and Brokers) Act and that no different result was intended by the regulation. It would be highly inconvenient if a different result were intended. If there were no right to remuneration and recovery of expenses no liquidator or administrator could be expected to carry out the work that would be needed to recover moneys that should have been in the trust account, or handle claims to moneys in the trust account, or to distribute money from the trust account. Such an inconvenient construction should not be adopted if an alternative construction is reasonably open. Such a right of remuneration and reimbursement as exoneration is implied by law. I therefore conclude that I should follow Re Greater West Insurance Brokers Pty Ltd.
Moneys to which the company may be beneficially entitled
In his written submissions counsel for the liquidator said that the liquidator and the Eligible Creditors (that is, the insurance companies and premium funding lenders) were agreed that it was appropriate that the sum of $18,250, representing the maximum likely value of commissions paid to the company, be determined to be company funds and be paid to the liquidator to be dealt with in accordance with his obligations as liquidator (i.e. as liquidator dealing with the company's property in its liquidation). While it was said that the Eligible Creditors had agreed to this proposal, it emerged in the course of submissions that what was meant to be conveyed was that no Eligible Creditor had objected to the proposal.
In the course of oral submissions this proposal was not pressed. Counsel for the liquidator also did not press an associated question as to whether there should be an audit of the account in order to determine how much of the moneys in the account represented commission to which the company was beneficially entitled.
It may be that the reason that the issue was not pressed is that there is authority that a trustee in default who pays or allows to be paid moneys to which the trustee is beneficially entitled into a trust account whose balance is deficient because of the trustee's default must be taken to have intended to apply the moneys towards remedying the breach of trust, rather than intending to retain beneficial ownership (James Roscoe (Boulten) Limited v Winder [1915] 1 Ch 62 at 69; and see Staniar v Evans (1886) 34 Ch D 470 at 473; Edgar v Plomley [1900] AC 431 at 439; In Re Dacre; Whittaker v Dacre [1916] 1 Ch 344 at 348; Re Hallett's Estate (1880) 13 Ch D 696 at 727; cp Re Global Finance Group Pty Ltd (in liq) [2002] WASC 63; (2002) 26 WAR 385 at [103]-[104]). It is unnecessary to pursue this question as the claim was not pressed. For the same reason it is unnecessary to decide whether it could be said that payment of such commission into the account was made in error within the meaning of reg 7.8.03(6)(a). The fact that reg 7.8.01(11) and (12) provides for the payment into the account of "mixed money" would be relevant to whether the commission paid into the account was paid in error within the meaning of reg 7.8.03(6)(a). Again, as the question was not argued it is unnecessary to do more than flag the potential issue.
Claims of premium funding lenders
As a matter of construction of reg 7.8.01(4) money paid into the account by a premium funding lender would be paid on behalf of an intending insured in connection with a proposed contract of insurance, even if the company had no genuine intention of causing such a contract of insurance to be entered into. What was described as a fictitious contract of insurance would nonetheless be a proposed contract of insurance within the meaning of reg 7.8.01(4)(a)(ii). Such money would be paid in connection with a financial service that would or may be provided to a person (the client), would be money paid by a person acting on behalf of the client, or would be paid to the licensee in its capacity as a person acting on behalf of the client, and thus be money to which subdivision A of Div 1 of Pt 7.8 applied (s 981A(1)). The money would be paid in connection with a financial service that will or might be provided to the client because the company provided a financial service by dealing in a financial product, namely contracts of insurance (ss 766A, 766C and 764A(d)). Section 981B(1) and reg 7.8.01(4)(a) required that moneys paid to the company by lenders who provided funding for premiums be paid into the trust account. Such moneys would be paid on behalf of an insured or an intending insured for, or on account of, an insurer and in connection with a contract of insurance or proposed contract of insurance, even if the proposed contract of insurance was fictitious. The moneys were required to be held in the trust account and dealt with in accordance with the Act and Regulations irrespective of whether there would be a trust at general law.
On 22 November 2013 the liquidator advised one of the creditors that he proposed to treat premium funding lenders as general unsecured creditors, that is, as parties who had made loans to the company. That position was not pressed.
Where there was an actual contract of insurance such moneys would be held by the company on trust for the insurer. Even at general law, where there was a proposed contract of insurance, but none was entered into, such moneys would be held on trust for the provider of the funds on the failure of the purpose for which they were paid (Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567). The fact that the moneys were to be paid and were paid into the trust account shows a mutual intention that the moneys not fall within the general fund of the company's assets.
Premium funding lenders or insureds may have been deceived into thinking that receipts would be applied in payment of premiums when in fact the company did not intend to cause any insurance contract to be brought into existence. The liquidator believes that the company's employee responsible for fraud procured money for insurance contracts that were fictitious. The obtaining of money by fraud and for no consideration would provide a separate ground for imposing a constructive trust on the moneys received by the company, at least on rescission of any contract with the company (Black v S Freedman & Co (1910) 12 CLR 105 at 110; Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589; 25 ACLC 809 at [43] and cases cited; Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371). It is unnecessary to pursue this question because the Act and the Regulations apply to such a case and specifically required that the moneys paid into the trust account be held on trust for the persons entitled thereto.
Distributions to persons entitled
No creditor submitted that it is entitled to first payment out of the account because it was in error in paying money to the company, having been induced to do so by fraud. In my view, the relevant error for the purpose of reg 7.8.03(6)(a) would be the error of the person making or directing payment to the account. Even if a creditor made the payment directly to the trust account, as distinct from merely paying the company, and was induced to do so by fraud, I do not consider that it would have acted merely in error. The moneys would have been paid into the intended account albeit that the payment was induced by fraud.
Counsel for the liquidator submitted that directions for the distribution of moneys in the account should be given by reference to the principles considered in Re Sutherland and applied in Re National Buildplan Group Pty Ltd(subject to a deed of company arrangement) [2014] NSWSC 146 at [15] and [26]-[28], that is by reference to tracing principles where there has been a mixture of beneficiaries' funds in a trust account. As I understood counsel's submission, it was to the effect that as in Re Sutherland and in Re National Buildplan Group Pty Ltd, a pro rata distribution was justified because there was insufficient information to allow a tracing of moneys to specific claimants, at least in a cost effective way.
That submission ignored the fact that the account had gone into overdraft less than a month before the company's liquidation.
Because the trust account went into debit at the end of February 2013 only those claimants whose moneys were paid into the account after 28 February 2013 would be entitled to trace moneys held on trust for them into the funds that were held in the account at the time of the company's liquidation (Re Global Finance Group Pty Ltd (in liq) at [129]-[135]; Re Sutherland at [187]).
After the issue was raised, the liquidator gave oral evidence that indicated to me that it would not be too complex a task to identify the persons for whom moneys were paid into the trust account after 28 February 2013 and the amounts so paid, nor to identify to whom and for what purpose amounts were paid out of the trust account after 28 February 2013.
However, the question (not broached in the liquidator's submissions) is whether a distribution to those claimants who can trace funds held for them into the moneys standing to the credit of the account at the date of liquidation is the appropriate method of distribution or whether reg 7.8.03(6) requires a different outcome. In particular, the question is who are the persons "entitled to be paid money from the account" within the meaning of regulation 7.08.03(06)(c). Does that expression refer to those who, in accordance with tracing principles applicable at general law, can claim a beneficial interest in the remaining moneys in the account or a charge over the account, or does it refer to those who would be entitled to be paid moneys from the account if the company had deposited moneys into the account and paid moneys out of the account only in accordance with its statutory obligations and without any breach of trust? In Georges v Seaborn International [2012] FCA 75; (2012) 87 ACSR 442 Gordon J said (at [81]) that:
"Because of s 981H of the Corporations Act, all moneys paid to Sonray by, or on behalf of, a person in connection with a financial service or a financial product are deemed to be held on trust for the client (thus giving rise to an entitlement to be paid), whether or not those moneys are paid into a separate account in accordance with s 981B of the Act. In other words, entitlement in respect of moneys paid to a licensee such as Sonray is not dependent upon those moneys being paid into a segregated account. The client's trust entitlement arises at the time of payment to Sonray."
However, her Honour also said (at [82]-[86]):
"[82] In the present case, applying these provisions of the Corporations Act and the regulations is not straight forward. First, the words 'entitled' and 'entitlement' are not defined in the Corporations Act or the regulations. Given the statutory trust imposed by s 981H(1) of the Corporations Act, the liquidators submitted (and I accept) that these words import the principles applicable to trusts and, in particular, to deficient mixed trust accounts: compare Re Lehman Brothers at [67]-[72] and [181].
[83] Those principles provide that all contributors to a deficient mixed fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions, subject to any dealings and costs (Sutherland Re; French Caledonia Travel Services Pty Ltd (in liq) (2003) 59 NSWLR 361; 204 ALR 353; 48 ACSR 97; [2003] NSWSC 1008 (French Caledonia) and Australian Securities and Investments Commission v Letten (No 7) (2010) 190 FCR 59; 80 ACSR 401; [2010] FCA 1231 (Letten (No 7))) or are equitable tenants in common of the mixed fund as a whole, including its traceable proceeds, and subject to such deductions: R M Goode, Goode on Legal Problems of Credit and Security, 4th ed, Sweet & Maxwell/Thomson Reuters, London, 2008, at [6-11-6-14].
[84] Next, the Corporations Act and the regulations do not deal with the situation where it is not possible to work out precisely who is entitled to what moneys in particular segregated accounts. It was common ground that all the court can do in such circumstances is to permit the moneys in the segregated accounts to be pooled with a view to their proportionate distribution. The basis for the rateable distribution is the mixing of the funds: French Caledonia at [127] and [187].
[85] Such a course of action is consistent with the purpose of the statutory regime, namely the achievement of a fair outcome between clients by a pragmatic and even-handed distribution among them: see, by way of example, s 983E of the Corporations Act which provides that where the money received is insufficient to pay all proved claims, the court may 'despite any rule of law or equity to the contrary, apportion the money among the claimants in proportion to their proved claims and show in the scheme how the money is so apportioned' and the second reading speeches in relation to the Financial Services Reform Bill 2001 (Cth) which indicate that the legislation was designed to produce a harmonised regulatory regime for market integrity and consumer protection across the financial services industry.
[86] Of course, rateable distribution is subject to an important qualification - it does not apply if the claimants do not have equal claims: French Caledonia at [176] and [185]. Put another way, it is necessary to determine whether there should be differential treatment of claimants. That question is determined on available evidence. Thus, if a claimant can establish a remedy founded on tracing, the court will grant relief founded on that evidence because it permits it to reach a different conclusion in respect of that claimant: French Caledonia at [178], [187] and [189]."
This part of her Honour's judgment is not affected by the decision on appeal (Georges v Seaborn International Pty Ltd [2012] FCAFC 140; 294 ALR 468). However, with respect, I do not accept that if a claimant can establish a remedy founded on tracing, the Court will grant relief founded on principles of tracing. That would only be so if the outcome were permitted by reg 7.8.03(6). The regulations govern how money in the account maintained for the purposes of s 981B of the Act is to be disbursed. Regulation 7.8.03(6) contains its own code. Principles of trust law may inform the proper construction of the regulation if the language so permits, but it is the regulation and not the principles of trust law that is paramount.
In Re MF Global Australia Ltd (in liq) Black J said (at [102]):
"[102] The case law indicates, and I accept, that, where client funds have been mixed in an account maintained under s 981B of the Corporations Act and that account is deficient, principles of trust law relevant to determining that question will be applicable, subject to the statutory regime. The relevance of trust law principles to the corresponding provisions in the United Kingdom was recognised by the Court of Appeal in Re Lehman Brothers International (Europe) (in admin) [2010] EWCA Civ 917, where Arden LJ noted at [65] that, where statutory rules established a trust with little elaboration, the court would turn to general principles of trust law to determine the applicable rules and principles. In Sonray, Gordon J observed at [82]-[86] that, given the statutory trust imposed by s 981H(1), the words 'entitled' and 'entitlement' import 'the principles applicable to trusts and, in particular, to deficient mixed trust accounts' such that 'all contributors to a deficient mixed fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions.' Her Honour referred to the principles applicable to deficient mixed trust accounts in cases such as Re French Caledonia Travel Service Pty Ltd (in liq) above and Australian Securities and investments Commission v Letten (No 7) above which involve a rateable distribution (at [84]) subject to equality of claims (at [86]) and also noted that one way in which differential treatment may be justified is the establishment of a remedy founded on tracing (at [86]). I note, however, that there may be limited occasion for such differential treatment once a relevant entitlement has been established, since reg 7.8.03(6)(d) expressly requires a deficient account to be paid in proportion to the amount of each person's entitlement and to that extent mandates a pari passu distribution."
I agree with Black J's observation that reg 7.8.03(6)(d) does not permit differential treatment between claimants once a relevant entitlement has been established (or as he put it, that there may be "limited occasion" for such differential treatment) because the regulation mandates a pari passu distribution.
The question is what do the words "entitled to be paid money from the account" mean? The same expression is used in reg 7.8.03(4). In that provision the reference to a person being entitled to be paid money from the account clearly refers to an entitlement under s 981B and the regulations made pursuant to s 981C and 981F whereby the money must be paid into the trust account and maintained in the trust account or invested in accordance with reg 7.8.02(2) or reg 7.8.03(5). The investment is taken to be the subject to the same trust as the money in the account. The reference to a person's entitlement to be paid money from the trust account is to the entitlement the person has as against the company. Regulation 7.8.02(6) requires the licensee to ensure that the moneys in the account and the moneys invested are at least the sum of the amounts that an insurer and the insured, or intending insured, are entitled to receive from the account. The moneys that they are entitled to receive within the meaning of reg 7.8.02(6) are the moneys they are entitled to be paid from the account within the meaning of reg 7.8.03(4) and 7.8.03(6). That entitlement does not depend upon the ability to trace payments made into a deficient account.
Regulation 7.8.03(6) is intended to displace what would otherwise be the rules relating to the distribution of moneys from the account. Hence, preference is given to insureds who are entitled to receive money held on their behalf before payment is made to others who are entitled to be paid from the account. Preference is also given to the person entitled to money that was paid into the account in error.
In Re MF Global Australia Ltd (in liq) Black J said (at [107]) that he saw considerable attraction in an approach that would result in the client's "entitlement" being determined by reference to the position if the licensee had properly performed its obligations by, for example, depositing moneys received on behalf of the client into the relevant account, rather than disregarding any moneys which should have been, but were not, so deposited. I agree. By the same reasoning, a person's entitlement cannot depend upon their right to trace at general law. I agree with the submission of Mr M F Newton of counsel who appeared for two insurers that the Act and Regulations make comprehensive provision for the regulation of s 981B accounts and that the protections afforded by the statutory scheme should not be undermined by the general law associated with principles of tracing into mixed trust funds. I agree with his submission that those general law principles do not apply to deny or diminish a person's "entitlement" within the meaning of reg 7.8.03(4).
The liquidator's evidence and the submissions of counsel for the liquidator focused on the position of those who provided money to the company, that was paid into the account. It was not suggested that moneys were provided to the company which ought to have been paid into the trust account, but were not so paid.
Costs of the application
The liquidator is entitled to be indemnified out of the trust account for the expenses reasonably incurred by him in connection with this application. Four creditors who are beneficiaries of the trust appeared on the application. They also sought their costs. Their costs were sought on the ordinary basis and not the indemnity basis (compare Re Perpetual Investment Management Ltd as responsible entity for Perpetual's Monthly Income Fund and Perpetual's Wholesale Monthly Income Fund [2011] NSWSC 615 and Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653 at 671). They were properly joined to the application and it is appropriate that they have their costs out of the fund. I was assisted by the submissions made on behalf of the creditors who appeared on the application, particularly by the submissions of Mr Newton of counsel.
For these reasons I make the following orders:
1. Order that the plaintiff be advised and directed that he would be justified in dealing with the moneys standing to the credit of the account styled "All Class Insurance Brokers Pty Ltd Trust Insurance Broking Account No. 332-027 0000552694012" by:
a. retaining a sum sufficient to pay his reasonable remuneration and expenses properly incurred in administering the trusts upon which All Class Insurance Brokers Pty Ltd (in liquidation) ACN 095 825 513 ("the Company") holds the moneys in the said account, including identifying the claims of beneficiaries to the said moneys and distributing moneys in the account to persons entitled to be paid money out of the account within the meaning of Corporations reg 7.8.03(6)(c);
b. paying from the said account the costs as agreed or assessed on the ordinary basis of Global Transport and Automotive Insurance Solutions Pty Ltd, The Hollard Insurance Co Pty Ltd, Wesfarmers General Insurance Ltd trading as Lumley Insurance, and WI Premium Funding Ltd; and
c. distributing the balance of the moneys in the said account between the creditors referred to in para 3 of the further amended originating process pro rata according to their claims to be entitled to be paid money out of the said account as the plaintiff might properly determine.
2. Order that the plaintiff be entitled to be paid out of the said account his costs of the proceedings on the indemnity basis and direct that the amount of such costs may be retained in accordance with order 1(a).
3. Order that the costs of the creditors referred to in order 1(b) be agreed or assessed on the ordinary basis and be paid out of the said account in accordance with order 1(b).
Decision last updated: 30 April 2014
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