Re Mamounia Pty Ltd (in liq) (No 3)
[2018] VSC 65
•20 February 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2017 00185
IN THE MATTER OF MAMOUNIA PTY LTD (IN LIQUIDATION) (ACN 007 091 349)
BETWEEN:
| MAMOUNIA PTY LTD (IN LIQUIDATION) (ACN 007 091 349) AND SHANE DEANE AND NICHOLAS GIASOUMI IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF MAMOUNIA PTY LTD (IN LIQUIDATION) (ACN 007 091 349) | Plaintiffs |
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JUDGE: | ROBSON J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 8 September 2017, 23 October 2017 and 29 November 2017 |
DATE OF JUDGMENT: | 20 February 2018 |
CASE MAY BE CITED AS: | Re Mamounia Pty Ltd (in liq) (No 3) |
MEDIUM NEUTRAL CITATION: | [2018] VSC 65 |
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CORPORATIONS – Winding up – Trust assets – Trustee company in liquidation – Application by liquidators for directions under s 511 of the Corporations Act 2001 (Cth) – Solicitors’ lien – Trust funds held by solicitors acting for the trustee – Solicitors owed substantial fees for work carried out on behalf of the trustee – Solicitors claimed a possessory common law lien over all the trust funds held by them – Trustee acted as a bare trustee – Application for directions as to whether the liquidators had the power to and were justified in releasing the trustee’s interest as trustee in the funds held by the solicitors to the extent of the solicitors’ fees.
CORPORATIONS – Winding up – Application of the principles in Re Universal Distributing Co Ltd (in liq) to trust assets – Orders made under s 63 of the Trustee Act 1958 authorising liquidators to release trust assets to solicitors to meet liabilities owed by the trustee and remove solicitors’ lien over trust moneys insofar as the principles in Re Universal Distributing Co Ltd (in liq) did not apply.
CORPORATIONS – Winding up – Liquidation – Advice and directions given under s 511 of the Corporations Act2001 (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M N C Harvey | Piper Alderman |
| For Meridian Lawyers and Altus Lawyers | Dr O Bigos Mr S Dyrenfurth | Meridian Lawyers and Altus Lawyers |
| Contradictor | Ms C G Rome-Sievers | Piper Alderman |
| Mr Fadi Kurban | Ms R V Howe | GPZ Legal |
TABLE OF CONTENTS
Introduction.......................................................................................................................... 1
The relevant facts................................................................................................................. 3
Statutory basis for application........................................................................................... 4
Granting a direction under s 511....................................................................................... 5
Mamounia:background facts........................................................................................... 6
Meridian’s legal services.................................................................................................... 7
Altus’ legal services............................................................................................................ 8
The parties at the hearing................................................................................................... 9
A solicitor’s lien................................................................................................................. 10
The liquidators’ powers................................................................................................... 13
Section 477 of the Corporations Act................................................................................ 14
Section 63 of the Trustee Act............................................................................................ 15
Submissions of the lawyers.............................................................................................. 16
Submissions of the contradictor...................................................................................... 19
Conclusion.......................................................................................................................... 21
HIS HONOUR:
Introduction
Mamounia Pty Ltd (in liquidation) (Mamounia) is the trustee of the Mamounia Family Trust. Mamounia conducted a pizza restaurant business in Box Hill called ‘Colombos’. The business was conducted by the members of the Kurban family. Members held an interest in the business through the Family Trust.
The liquidators of Mamounia are Shane Leslie Deane and Nicholas Giasoumi (the liquidators).
By an amended originating process dated 2 November 2017, the liquidators apply under s 511 of the Corporations Act 2001 (Cth) (Corporations Act) for directions regarding the distribution of the assets of Mamounia. In particular, the liquidators apply to the Court to answer the following questions:
(1)Do each of Meridian Lawyers (Meridian) and Altus Lawyers (Altus) (together the lawyers) have a common law lien over the sums[1] in the fund retained in the trust account of Meridian[2] (the fund)?
[1]Referred to in [8] of the Deane third affidavit (as referred to below).
[2]Referred to in [9.1] of the Deane third affidavit.
(2)What rights does the lien give each of the lawyers to claim or enforce payment of their unpaid fees from the fund on account of legal work undertaken for Mamounia to the date of liquidation?
(3)Are the liquidators justified in compromising:
(a)the amount of legal fees Meridian claims against Mamounia on account of the legal work undertaken in the sum of $220,148.49 (including interest);[3]
[3]The lawyers submit that the lien may also bear interest: see Coshott v Coshott [2015] FCA 1284. See Lawyers’ submissions dated 28 November 2017.
(b)the amount of legal fees Altus claims against Mamounia on account of legal work undertaken in the sum of $190,858.99 (including interest)?
(4)In circumstances where Mamounia is the bare trustee of the Kurban Family Trust, do the liquidators have power to direct and, if so, are they justified in directing Meridian to:
(a)withdraw the sum of $220,148.49 from the fund in full and final settlement of Meridian’s claim on account of work undertaken for Mamounia to the date of liquidation;
(b)transfer the sum of $190,858.99 from the fund to the nominated bank account of Altus in full and final payment of its claim of legal work undertaken for Mamounia to the date of liquidation; and
(c)deliver the balance of the funds to Mamounia?
And the plaintiffs seek orders that:
(5)In the event the Court determines that the liquidators do not have power to make the payments referred to in paragraph 4 herein, then, pursuant to s 63 of the Trustee Act 1958 (Trustee Act), Mamounia and/or the liquidators have conferred upon them the power to direct the distribution of the fund in the manner specified in order 4, herein.
(6)Such further or other relief that the Court thinks fit.
The liquidators rely on the following affidavits:
(a) Brendan Peter Swift sworn 6 October 2017;
(b) Mark Fitzgerald sworn 6 October 2017;
(c) Elyn Anna-Margaret Lucas declared:
(i) 7 September 2017 (Lucas first affidavit);
(ii) 24 November 2017 (Lucas second affidavit);
(d) Shane Leslie Deane sworn:
(i) 10 June 2016 (Deane first affidavit);
(ii) 1 March 2017 (Deane second affidavit);
(iii) 4 August 2017 (Deane third affidavit);
(iv)17 November 2017 (Deane fourth affidavit).
The relevant facts
The lawyers provided legal services to Mamounia before it went into liquidation. Those services are detailed below. At all times Mamounia was acting as trustee of the Kurban Family Trust. At the date of the appointment of the liquidators, the lawyers held trust moneys of Mamounia.
At the date of liquidation, Meridian held the sum of $1,509,623.07 in its trust account for Mamounia.[4] Altus held the sum of $232,416,84 in its trust account for Mamounia. Both Meridian and Altus claim that they were owed fees by Mamounia for legal work provided to it and each claimed a general retaining lien over these funds.
[4]Deane third affidavit [8].
The lawyers and liquidators agreed that Meridian would retain in its trust account an amount for Altus’ legal costs. Altus has subsequently paid the $232,416,84 to the liquidators. Of the $1,509,623.07, Meridian has retained $454,454.89, which is the fund.[5] The remainder has been delivered to the liquidators.
[5]Deane third affidavit [9].
The lawyers have asserted and the liquidators accept a common law solicitors possessory lien over the fund until their costs are paid.
Altus claimed to be owed $194,789.87 (including interest as at 22 July 2016), and Meridian claimed $216,158.22. The liquidators propose to accept the claims of the lawyers for their costs as follows:[6]
(a) Meridian in an amount of $209,658.22 plus interest of $10,490.27 calculated to 30 June 2017, in accordance with the costs agreements; and
(b) Altus in an amount of $183,833.04 plus interest in the sum of $7,025.95 calculated to 13 June 2017, in accordance with the costs agreements.
[6]Deane third affidavit [16].
The liquidators and the lawyers have agreed that payment of the trust moneys to the liquidators does not affect or derogate from Meridian’s or Altus’ rights and ability to claim a general retaining lien over the whole of trust moneys they previously held for their respective claims and Meridian and Altus are to be regarded as having actual possession of the relevant property.[7]
[7] Deane third affidavit [9].
As to Altus parting with possession of the moneys in its hands, there is authority to the effect that a common law lien is not lost, if one lawyer relinquishes possession of the property to another lawyer, while expressly reasserting their rights.[8]
[8]See Re Ly (1995) 62 FCR 432, 435-6; Caldwell v Sumpters [1972] Ch 478, 495-6, 497; Bentleyv Gaisford [1997] QB 627, 641.
Statutory basis for application
This application is made under s 511(1) of the Corporations Act, which relevantly provides:
The Liquidator ... may apply to the Court … (a) to determine any question arising in the winding up of a company. …
The liquidators ask the Court under s 511(1) of the Corporations Act to determine whether they have the power to direct, and are justified in directing Meridian to withdraw the agreed sums from the fund subject to the lien, to pay itself and Altus, and then pay the balance of the fund to Mamounia. If they do not have the power, they ask the Court to confer power on Mamounia to do so under s 63 of the Trustee Act.
Item 170 in Schedule 2, Part 2, of the Insolvency Law Reform Act 2016 (Cth) (ILRA) repealed s 511 of the Corporations Act. By operation of s 2(1) of the ILRA, that repeal was to be effective on 1 March 2017, however Schedule 2 of the Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth) extended the time of commencement of Schedule 2 of the ILRA to 1 September 2017. Thus, s 511 was not repealed until 1 September 2017.
The new provision for making orders in relation to an external administration is now s 90-15(1) of Schedule 2, Part 3, of the Corporations Act. Transitional provisions were introduced into the Corporations Act by Schedule 2, Part 3, of the ILRA. Section 1617 provides that, where a proceeding is commenced before 1 September 2017, as is the case here, nothing in Schedule 2 of the ILRA affects the proceeding or the Court’s power to make orders in the proceeding and the old Act, accordingly, s 511, continues to apply on and after 1 September 2017 in relation to the present proceeding.
Granting a direction under s 511
Under s 511(1)(a) a liquidator may apply to the Court to determine any question arising in the winding up of a company. Section 511(2) relevantly provides:
The Court, if satisfied that the determination of the question … will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or make any such other order on the application as it thinks just.
As to whether the Court should accede to the application under s 511, the following principles apply:
•the jurisdiction is analogous to the judicial advice jurisdiction under s 54.02 of the Supreme Court Rules;[9]
•the ability of a liquidator to approach the Court for directions is intended to facilitate the liquidator’s functions and should be interpreted widely to give effect to that intention;[10]
•there must be something more than making a business or commercial decision before a Court gives directions as to or approves the decision;[11]
•the liquidator should be seeking guidance on a legal issue of substance or procedure or on an issue of power, propriety or reasonableness;[12] and
•a Court may give a direction in the context of a proposed compromise and/or where the decision is likely to be contentious.[13]
Mamounia: background facts
[9]Re One.Tel Ltd (2014) 99 ACSR 247, 255 (‘Re One.Tel’).
[10]Re One.Tel, 244.
[11]Re Ansett Australia Ltd and Korda (2002) 115 FCR 409 (‘Re Ansett’), [65].
[12]Re Ansett [65]; Re One.Tel, 225–6; and Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, 117.
[13]Re One.Tel, 256.
The following facts relating to Mamounia were found by the Court in Re Mamounia Pty Ltd (in liq):[14]
[14][2017] VSC 230 (‘Mamounia (No 1)’).
(a)Mamounia had no other function or business other than as trustee of the [Trust] and did not trade in its own right;[15]
(b)‘Mamounia has no assets of its own save for the right of indemnity it has in respect of debts incurred on behalf of the [Trust]’;[16]
(c)‘Mamounia is no longer trustee of the business assets under the terms of the [Trust]; under clause 17, it ceased to be trustee on it going into liquidation. Mamounia now holds the assets as bare trustee’;[17]
(d)Mamounia acquired and operated a business known as Colombo’s Family Restaurant, which comprised a restaurant and the take away department (Business);[18]
(e)On 23 December 2015, Mamounia agreed to sell the Business to a purchaser. The sale of the Business ultimately settled on 30 March 2016;[19]
(f)A number of disputes between members of the Kurban family and Mamounia have arisen, leading to various proceedings and applications in the Court;[20]
(g)The lawyers provided legal services to Mamounia up to the date of liquidation;[21]
(h)The lawyers claim liens over particular funds in relation to legal services they provided Mamounia;[22] and
(i)The liquidators have come to an agreement with the lawyers whereby Meridian is currently holding the total combined sum over which the lawyers claim liens in its trust account, pending determination of the validity of the liens and a review of the lawyers’ files.[23]
[15]Mamounia (No 1) [12].
[16]Mamounia (No 1) [12].
[17]Mamounia (No 1) [12].
[18]Mamounia (No 1) [13].
[19]Mamounia (No 1) [22].
[20]Mamounia (No 1) [23], [24], [25].
[21]Mamounia (No 1) [43].
[22]Mamounia (No 1) [43], [44].
[23]Mamounia (No 1) [43].
Meridian’s legal services
Meridian provided the relevant legal services to Mamounia from October 2015 to 6 June 2016. These services were divided between five matters, each with its own number.
·Matter No. 2011126
A costs disclosure and costs agreement signed only on behalf of Meridian and dated 29 October 2015 shows Meridian acted for Mamounia in the sale of the Businesses. Meridian sent eight invoices, totaling $109,936.81. On 5 April 2016, Mamounia made part payment of $10,000. The sum outstanding is $99,936.81.
·Matter No. 2013049
A signed costs disclosure and costs agreement dated 17 or 18 December 2015 shows Meridian acted for Mamounia in responding to a letter from GPZ Legal and regaining access to and control of domain names allegedly stolen by Fadi Kurban. Meridian also provided assistance from Altus in Supreme Court proceeding number 0806 of 2013, Fadi Kurban v Mamounia & Nabil Kurban. It sent four invoices totaling $74,757.55. On 12 April 2016, Mamounia made a part payment of $7,722.50. The sum outstanding is $67,035.05.
·Matter No. 2013114
A signed costs disclosure and costs agreement dated 18 December 2015 shows Meridian acted for Mamounia in Supreme Court proceeding number 06164 of 2015, Smarjs Pty Ltd & Ors v Mamounia & Ors. Meridian sent five invoices totaling $18,834.21. No payment was made.
·Matter No. 2008884
Meridian acted for Mamounia in relation to a realisation deed with a bank, a directors’ penalty notice, and negotiations with Simon Kurban’s lawyer. It sent two invoices, totaling $28,897.23. No payment was made.
·Matter No. 2009336
Meridian acted for Mamounia in relation to claiming an interest in a property at 42 Elliott Avenue, Balwyn. It sent two invoices, totaling $5,453.18. Mamounia made three part payments, totaling $3,998.26. The sum outstanding is now $1,454.92.
Altus’ legal services
Altus provided legal services to Mamounia from March to 6 June 2016. These services were divided between two matters, each with its own number.
·Matter No. 168015
A signed costs disclosure and costs agreement dated 7 March 2016 shows Altus acted for Mamounia and Nabil Kurban in a proceeding brought against them in the Supreme Court by Fadi Kurban (in proceeding number 00806 of 2016). Altus sent four invoices, totaling $232,963.14. Part payment of $50,000 was made, making the total $182,963.14.
·Matter No. 168016
A signed costs disclosure and costs agreement dated 7 March 2016 shows Altus acted for Mamounia and Nabil Kurban in a proceeding brought against them in the Supreme Court by Simon and Marlene Kurban (in proceeding number 0841 of 2016). Altus sent two invoices, totaling $9,943.65.
The parties at the hearing
When the application came on for hearing on 23 October 2017, Fadi Kurban, who had previously indicated he wished to be heard, withdrew from the application. Nabil Kurban appeared on the first return date on 8 September 2017, but took no further part in the application.
As the lawyers and the liquidators were each making submissions in support of the directions sought, as no one was appearing to challenge the orders, at the Court’s suggestion the liquidators briefed counsel to appear as a contradictor on the application and to furnish the Court and the parties with submissions. Ms C G Rome-Sievers of counsel appeared as contradictor. The Court acknowledges the contradictor’s assistance.
The Court was also assisted by the submissions of counsel for the liquidators and counsel for the lawyers.
A solicitor’s lien
A solicitor has a common law possessory lien over all property of the client, in his possession, that entitles the solicitor to retain possession of the property until his taxable costs have been paid.[24] The lien is merely passive and possessory in nature and does not give the solicitor any proprietary interest in the client’s property. The lien does not entitle the solicitor to apply the property in satisfaction of the lien. The lien is a right in rem exercisable upon the property in the solicitor’s possession. The remedy requires no intervention from the Court.[25]The lien is only available in respect of taxable costs, charges and expense which have been incurred on the client’s instructions and for which the client is liable.[26]
[24]Barratt v Gough-Thomas [1951] 1 Ch 242, 250 (Evershed MR); Bolster v McCallum [1966] NSWR 660, 664; Johns v Law Society of New South Wales [1982] 2 NSWLR 1, 18–19; Ex Parte Patience: Makinson v the Minister (1940) SR (NSW) 96, 100. Applied in Worrell v Power & Power (1993) 46 FCR 214, 223–4; AKKI Pty Ltd v Martin Hall Pty Ltd (1994) 35 NSWLR 470, 474; Karam v Palmone Shoes Pty Ltd (No 2) [2010] VSC 82, [13].
[25]See Barratt v Gough-Thomas [1951] 1 Ch 242, 250 (Evershed MR); Tappenden v Artus [1964] 2QB 185, 198 (Diplock LJ); and DLA Piper v Official Receiver Singapore [2017] VSC 216 [18].
[26]Re Taylor, Stileman & Underwood [1891] 1 Ch 590; Bolster v McCallum [1966] NWSR 660, 664; Bentley v Gaisford [1997] QB 627, 640–1.
Evershed MR said of the nature of the lien in Barratt v Gough-Thomas:[27]
The nature of a solicitor’s general retaining lien has more than once been authoritatively stated. It is a right at common law depending, it has been said, upon implied agreement. It has not the character of an incumbrance or equitable charge. It is merely passive and possessory, that is to say, the solicitor has no right of actively enforcing his demand. It confers on him merely the right to withhold possession of the documents or other personal property of his client or former client - in the words of Sir E Sugden in Blunden v Desart (2 Dr & War 405, 418):
“…to lock them up in his box, and to put the key in his pocket, until his client satisfies the amount of the demand.”
It is wholly derived from, and, therefore, co-extensive with, the right of the client to the documents or other property: see the statement of Lord Cranworth, LJ in Pelly v Wathen [1851] Eng R 940,cited by Chitty J in In re Llewellin [1891] 3 Ch 148.
[27]Barratt v Gough-Thomas [1951] 1 Ch 242, 250.
In Tappenden v Artus, Lord Justice Diplock said:[28]
The common law remedy of a possessory lien, like other primitive remedies such as abatement of nuisance, self-defence or ejection of trespassers to land, is one of self-help. It is a remedy in rem exercisable on the goods, and its exercise requires no intervention by the courts, for it is exercisable only by an artificer who has actual possession of the goods subject to the lien. Since, however, the remedy is the exercise of a right to continue an existing actual possession of the goods, it necessarily involves a right of possession adverse to the right of the person who, but for the lien, would be entitled to immediate possession of the goods. A common law lien, although not enforceable by action, thus affords a defence to an action for recovery of the goods by a person who, but for the lien, would be entitled to immediate possession.
[28][1964] 2 QB 185, 198.
Because it is ‘general’ in nature, it extends to all costs owed by the client to the solicitor; it is not restricted to the costs relating to the specific property which has come into the solicitor’s possession, and can thus be asserted regardless of whether the property came into existence before or after the relevant legal services were provided.[29]
[29]Re Dee Estates Ltd [1911] 2 Ch 85.
A solicitor’s right to possession over documents or other property provided by his client are no greater than the client’s.[30] In Francis v Francis, Knight and Turner LJJ held that a solicitor who acted for a trustee and held funds realised by the trustee from the trust fund could have no higher claim for his fees against funds held on trust by the trustee than that of their client the trustee.
[30]Marsh v Bathoe (1774) 27 ER 22; Francis v Francis (1854) 43 ER 811.
Counsel for the liquidators referred to a trustee’s right to be indemnified out of trust assets for liabilities incurred on behalf of a trust. Submitting that:[31]
But, where the solicitor has trust property in his/her hands, he/she has a lien over that property. The trustee has a right of indemnity out of the trust property. The beneficiaries cannot take any benefit except on the terms of indemnifying their trustee against all liability incurred by the trustee. The beneficiaries have no higher title than the trustee. Thus, beneficiaries cannot demand the return of trust property in the hands of an unpaid solicitor.[32]
[31]Liquidator’s submissions dated 14 November 2017 [19].
[32]See Re Dee Estates Ltd [1911] 2 Ch 85, 93, 95–6; Staniar v Evans (1886) 34 Ch D 470, 477.
In this case, the issue is whether the client as trustee, had a right to possess the trust assets until the trustee’s right to be reimbursed from the trust assets for liabilities incurred on behalf of the trust, had been satisfied. The solicitors would have no higher right to possess the trust assets than would the trustee.
Mamounia has an equitable lien which secures its trustee’s right of indemnity and/or exoneration, in respect of any expense of liability incurred by it as trustee in the course of administering the trust.[33] The lien is available in equity, under statute (s 36(2) of the Trustee Act and under the deed of the trust (clause 24)). The right of indemnity and/or exoneration is secured by an equitable lien, and takes priority over any rights or objects of the beneficiaries.[34]
[33]H A J Ford and W A Lee, Principles of the Law of Trusts (LBC Information Services, 3rd ed, 1996) [14.110].
[34]H A J Ford and W A Lee, Principles of the Law of Trusts (LBC Information Services, 3rd ed, 1996) [14.240].
The fact that Mamounia is being wound up does not defeat a valid lien that was existing over its assets at the time the winding up petition was presented.[35]
[35]In re Capital Fire Insurance Association [1883] 24 Ch D 408; In re Rapid Road Transport Company [1909] 1 Ch 96.
The liquidators referred to the following cases for the proposition that a solicitor’s common law lien over funds is not extinguished simply by reason of the liquidation of his/her corporate client.[36]
[36]Liquidator’s submissions dated 14 November 2017 [20].
(a) In re Capital Fire Insurance Association,[37] followed in In re Rapid Road Transit Company,[38] stands for the proposition that a winding up order cannot defeat any valid lien existing at the time the winding up petition was presented.
(b) In Australia there are cases in which a solicitor’s common law lien has been protected despite the solicitor delivering up a company’s certificates of title to liquidators.[39]
(c) Similarly, there are cases in Australia to the effect that a common law lien is available against a trustee in bankruptcy.[40]
[37](1883) 24 Ch D 408.
[38][1909] 1 Ch 96.
[39]See Bennett & Co v CLC Corporation 2001) 159 FLR 422, 426–7; and Coshott v Coshott [2015] FCA 1284.
[40]See Re Wedgwood (1993) 116 ALR 153, 159; and Re Wright; ex parte Clout (1984) 1 FCR 51, 53.
In summary, the lawyers provided legal services to Mamounia in its capacity as trustee of the trust. Mamounia became personally indebted to the lawyers for the payment of the legal fees as trustee. The lawyers have a lien against the trust property that came into their hands. The beneficiaries of the trust cannot demand the return of that security. The liquidation of Mamounia did not extinguish the liens. As the trustee had a right to possess the trust fund, the solicitors’ lien gives them the same right to the liquidators.
Thus the liquidators of Mamounia are faced with a dilemma, or impediment to the liquidation. The lawyers are legally entitled to retain possession of the trust property in the fund, and the liquidators doubt that they have the power to release the trust moneys to meet the lawyers’ fees, and thus recover the balance of trust moneys being held by the lawyers.
The liquidators’ powers
The liquidators wish to direct Meridian to pay part of the trust moneys held in Meridian’s trust account to itself and Altus and then the residue to Mamounia. It is submitted that the power to do so can be found in s 477 of the Corporations Act or s 63 of the Trustee Act.
The liquidators submit that if Mamounia’s right of indemnity as trustee of the trust is a personal asset of Mamounia, the liquidators have power to so direct under s 477 of the Corporations Act (set out below), which gives the liquidators power to compromise or make any arrangement.
Alternatively, if Mamounia’s right of indemnity as trustee of the trust is trust property, as bare trustee, Mamounia needs the power to pay the debts of the lawyers conferred on it under s 63 of the Trustee Act.
Section 477 of the Corporations Act
Section 477(1) is in the following terms:
Powers of liquidator
(1) Subject to this section, a liquidator of a company may:
(a)carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business; and
(b)subject to the provisions of section 556, pay any class of creditors in full; and
(c)make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging that they have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or whereby the company may be rendered liable; and
(d)compromise any calls, liabilities to calls, debts, liabilities capable of resulting in debts and any claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and a contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the property or the winding up of the company, on such terms as are agreed, and take any security for the discharge of, and give a complete discharge in respect of, any such call, debt, liability or claim.
In support of the proposition that the right of indemnity is a personal asset of Mamounia, the liquidators rely on the decision of Derrington J in Lane v DCT,[41] where his Honour accepted that a trustee’s right of exoneration from trust property was an asset of the trustee.
[41][2017] FCA 953 (‘Lane v DCT’) [5], [48]–[50], [107]–[111].
In reaching this conclusion, Derrington J declined to follow this Court’s decision in Re Amerind Pty Ltd (in liq),[42] that the right of indemnity is trust property and is not a personal asset of the trustee. Currently, Re Amerind is under appeal to the Court of Appeal.
[42](2017) 320 FLR 118 (Re Amerind), 142 [96].
The liquidators submit that applying Derrington J’s conclusions to this matter, the fund is legally owned by Mamounia and beneficially owned by it, to the extent of its right of exoneration. The liquidators submit that the fund, to the extent of the lawyers’ claims, are the personal property of Mamounia and, therefore is an asset available to the liquidators to reach compromises under s 477 of the Corporations Act.
The liquidators submit that I should follow the decision in Lane v DCT and not follow Re Amerind. In circumstances where Re Amerind is subject to appeal and I am not satisfied that Re Amerind is clearly wrong, I feel I should apply Re Amerind.
Section 63 of the Trustee Act
Section 63(1) of the Trustee Act provides:
Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorized to be expended, and the costs of any transaction are to be paid or borne as between capital and income.
The liquidators contend that upon Mamounia entering into liquidation, its office as trustee became ‘ipso facto determined and vacated’[43] and thus holds the trust property as bare trustee.
[43]Clause 17 of the Trust Deed.
The liquidators submit that as a bare trustee, Mamounia’s powers are essentially confined to conveying the trust property in accordance with the demands of the beneficiaries.[44] Thus, in order to give the direction to Meridian to pay out the trust moneys, Mamounia needs to have the power to pay conferred on it. The liquidators submit that s 63(1) of the Trustee Act enables the Court to provide such power.
[44]Herdegen v FCT (1988) 20 ATR 24, 32–33 (Gummow J) and CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174, 182 [36].
The liquidators submit that currently there is a ‘stalemate’ over the trust moneys. The lawyers cannot pay themselves, since their lien is passive. Mamounia, the liquidators and the beneficiaries cannot validly avail themselves of the trust money as it is subject to the solicitor’s lien. Accordingly, the liquidators submit that it is expedient that the Court grant the power to enable Mamounia to direct Meridian to pay out the Fund.[45]
[45]See Riddle v Riddle (1952) 85 CLR 202, 221 (Williams J) and Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd 2011 FCA 677, [36] (Gordon J).
Submissions of the lawyers
The lawyers submit that they came into possession of the trust moneys prior to the liquidation of Mamounia on 6 June 2016. They submit that the property over which the lien is claimed is part of the proceeds of sale, which was equivalent to the legal fees in respect of which Mamounia had a right of exoneration.
The lawyers submit that their lien survives the liquidation, as the insolvency of the debtor does not affect a lien which pre-dates the insolvency.[46] As Meridian and Altus came into possession of the property on 30 March 2016, prior to the liquidation of Mamounia on 6 June 2016,[47] the lawyers submit that the lien survives the liquidation.
[46]Robson v Kemp (1802) 170 ER 703; Lambert v Buckmaster (1824) 107 ER 513; Re Capital Fire Insurance Association (1883) 24 Ch D 408, 419–20; Re Mosley (1953) 16 ABC 195, 199.
[47]Deane first Affidavit [6].
The lawyers submit that this proceeding relates to enforcement of a security interest and that there are three equitable interests in the trust property:
(a) The liquidators have a first-ranking equitable lien, pursuant to their claim for indemnity under the Universal Distributing principle,[48] for their costs and expenses reasonably incurred.[49]
(b) Mamounia has an equitable lien which secures its trustee’s right of indemnity and/or exoneration, in respect of any expense or liability incurred by it as trustee in the course of administering the Trust.[50] It is available in equity, under statute (relevantly s 36(2) of the Trustee Act) and under the trust deed of the trust (clause 24).[51] The right of indemnity and/or exoneration is secured by an equitable lien, and takes priority over any rights of objects or beneficiaries.[52]
(c) The objects of the Trust are entitled to the residual trust property. Under a discretionary trust, the objects have no legal or beneficial interest but only the right to due consideration and due administration of the Trust.[53]
[48]Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171.
[49]Re Mamounia (No 1).
[50]H A J Ford and W A Lee, Principles of the Law of Trusts (LBC Information Services, 3rd ed, 1996) [14.110].
[51]Exhibit SD-7 to the Deane first Affidavit.
[52]H A J Ford and W A Lee, Principles of the Law of Trusts (LBC Information Services, 3rd ed, 1996) [14.250].
[53]Kennon v Spry; Spry v Kennon (2008) 238 CLR 366; In re Gulbenkian’s Settlements [1970] AC 508; McPhail v Doulton [1971] AC 424.
The lawyers submit that the question whether the trustee’s right of indemnity and/or exoneration, by reference to which the lien is claimed, is property ‘of’ the company, for the purposes of the Corporations Act does not arise. The lawyers say there are no competing creditors under s 556 of the Corporations Act, such as employees, that may impinge on the rights of Meridian and Altus as secured creditors. The lawyers submit that there is no occasion to invoke the priority provisions of the Corporations Act, nor to engage in complex legal debate which was analysed comprehensively in Re Amerind.
The lawyers submit that the jurisdictional basis for the liquidators’ application is s 511 of the Corporations Act and/or s 63 of the Trustee Act (and, if need be, r 54.02 of the Supreme Court Rules).
Section 511 of the Corporations Act provides:
Application to Court to have questions determined or powers exercised
(1) The liquidator, or any contributory or creditor, may apply to the Court:
(a)to determine any question arising in the winding up of a company; or
(b)to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.
…
(2)The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.
Reg 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Rules) provides:
Relief without general administration
(1)A proceeding may be brought for any relief which could be granted in an administration proceeding and a claim need not be made for the administration or execution under the direction of the Court of the estate or trust in respect of which the relief is sought.
(2) Without limiting paragraph (1), a proceeding may be brought for—
(a)the determination of any question which could be determined in an administration proceeding, including any question—
(i)arising in the administration of an estate or in the execution of a trust;
(ii)as to the composition of any class of persons having a claim against an estate or a beneficial interest in an estate or in property subject to a trust; or
(iii)as to the rights or interests of a person claiming to be a creditor of an estate or to be entitled under the will or on the intestacy of a deceased person or to be beneficially entitled under a trust;
(b)an order directing an executor, administrator or trustee to—
(i) furnish and, if necessary, verify accounts;
(ii) pay funds of the estate or trust into court; or
(iii) do or abstain from doing any act;
(c) an order—
(i)approving any sale, purchase, compromise or other transaction by an executor, administrator or trustee; or
(ii)directing any act to be done in the administration of an estate or in the execution of a trust which the Court could order to be done if the estate or trust were being administered or executed under the direction of the Court.
The lawyers submit that there is little if any practical difference between the regimes under the Corporations Act, the Trustee Act or the Rules, as the Court has wide jurisdiction under both to give judicial advice and to answer questions posed by the liquidators.
Submissions of the contradictor
The contradictor in a thorough analysis of the facts and issues accepted that any suggestion that Mamounia acted improperly as trustee, or that it incurred the debts to the lawyers otherwise than properly in its capacity as trustee is unsubstantiated.
The contradictor agrees that the parties are at an impasse; the trust moneys are locked up, held under the lawyers’ lien, and there they remain until their fees are paid. The contradictor submits, and I accept, that payment of trust moneys to the solicitors requires a power to do so. As the contradictor submits, the lawyers do not have that power. The lien only gives the lawyers a passive right to retain the funds. The beneficiaries of the trust, being a discretionary trust, have no such power either. The contradictor submits that the insolvency of the client Mamounia, who owns the trust funds as bare trustee, does not affect a lien existing prior to the relevant date for insolvency purposes.
The contradictor addressed the question that arises as to the nature of the rights of the lawyers as holders of a retaining lien over a trust asset. The contradictor submits that a solicitor’s retaining lien is a security within the definition of the Corporations Act and that secured trust creditors with an in rem right in trust property, and in this case of pre-liquidation trust debts, have a direct proprietary claim in the trust property securing their debt.
The contradictor submits that the rights under a solicitor’s retainer lien are valid against all other persons claiming an interest, although, as noted above, the solicitor’s rights cannot exceed those of the client.[54]
[54]G E Dal Pont, Law of Costs (LexisNexis Butterworths, 3rd ed, 2013) [26.26].
The contradictor submits that the fund, consisting of money in a bank account, is capable of being subject to the solicitor’s possessory lien, which generally refers to a right to retain physical possession of a specific thing.[55] Property rights may be held in the chose in action constituted by the debt owed by the bank to the account holder, Meridian.
[55]See G E Dal Pont, Law of Costs (LexisNexis Butterworths, 3rd ed, 2013) [26.10]–[26.11].
The contradictor concludes that the fact that the fund is a trust asset does not affect the lawyers right to retain possession of the fund until after their fees are paid. In the contradictor’s opinion the lawyers’ liens have remained intact.
Further, following insolvency, the solicitors’ lien over a trust asset is not subrogated to the trustee’s right of exoneration, contrary to the position of an ordinary trust creditor. Thus the impasse will remain until the owner of the fund exercises a power to pay the legal fees.
The contradictor addresses whether power is given to the liquidators to direct payment to the lawyers under s 477 or whether they would require power to be conferred upon them (or Mamounia) under s 63 of the Trustee Act.
The contradictor says that whether the liquidators have power to direct payment under s 477 depends on whether Mamounia’s rights as a trustee to an indemnity by way or exoneration over trust assets is an asset of Mamounia the company, or is a trust asset.
In Re Amerind, the distinction was drawn between circumstances where the trustee had a right to be indemnified for the use of its own moneys in meeting a trustee liability and where a debt was incurred by the trustee on behalf of the trust.
Mamounia is now a bare trustee. The assets that it holds are trust assets and may only be used to pay trust liabilities. As bare trustee, Mamounia has a ‘duty to maintain and protect the trust property and to refrain from active management that does not fall within this duty.’[56] As discussed in Re Mamounia (No 1), the claims of creditors and potential creditors exceed its assets. In circumstances where Mamounia may be insolvent, even if Mamounia had power to use the assets to meet liabilities incurred on behalf of the trust to the lawyers, the liquidators would not be justified in preferring one creditor over another.
[56]Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation (2011) 193 FCR 442 [21].
The contradictor considers that the liquidators are justified in compromising the lawyers debts against Mamounia and incurred by it in its capacity as trustee in the manner they have proposed.
The contradictor agrees with the submissions for the liquidators that the lawyers’ liens are not voidable preferences.
If the right of exoneration is not an asset of the company, the liquidators lack the requisite power as liquidators of a company which holds trust assets as bare trustee.
It is submitted that s 63 of the Trustee Act gives the Court power to authorise Mamounia as bare trustee to deal with trust assets by directing Meridian to pay out the Fund as proposed, and in all the circumstances it is appropriate for the Court to confer power upon Mamounia to do so.[57]
[57]Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677, [30], [36] (Gordon J); Riddle v Riddle (1952) 85 CLR 202, 221 (Williams J).
Conclusion
I am not satisfied that s 477 is of any assistance to the liquidators. The compromise envisaged is one where the liquidators would agree that the debt to the solicitors be limited to an agreed sum and that the liquidators would transfer Mamounia’s proprietary interest as trustee in the funds held by the solicitors in full satisfaction of their claim against Mamounia. The difficulty with that compromise is that the funds are trust assets and not the property of Mamounia.
The Universal Distributing principles are of assistance to the liquidators. In Re Mamounia (No 1), I said:
In Re Universal Distributing Co Ltd (in liq),[58] the company went into liquidation. The assets realised were not sufficient to meet the liability owing under debentures which were secured by the undertaking and its uncalled capital. Dixon J held that the liquidator was entitled to charge against the assets he had realised ‘so much of the remuneration fixed for work done in the winding up referable to the calling in and conversion of the assets producing the fund.’[59] Dixon J held that expenses ‘reasonably incurred in the care, preservation and realisation of the property’ charged to the debenture holders could be deducted from the fund realised by the liquidator.[60]
[58](1933) 48 CLR 171 (‘Re Universal Distributing’).
[59]Re Universal Distributing, 173.
[60]Re Universal Distributing, 174.
Thus in this case, some, if not all, of the reasonable expenses incurred by Mamounia to the lawyers may fall within the Universal Distributing principles and the liquidators would be entitled to, and in my opinion justified, in using the trust moneys to meet those expenses in those circumstances.
Insofar as the Universal Distributing principles do not apply to meet the liabilities incurred by Mamounia to the lawyers, s 63 of the Trustee Act offers a solution to the problem facing the liquidators.
Insofar as the Universal Distributing principles do not justify the payment by the liquidators of Mamounia of trust moneys to the lawyers in satisfaction of their claims, I am satisfied that the liquidators of Mamounia, as bare trustee, have an absence of power to so use the trust funds.
In my opinion, it is expedient, to resolve the impasse between the liquidators and the lawyers, that the liquidators of Mamounia as the trustee be given power to apply and release Mamounia’s interest as trustee, in the funds held by the lawyers, in order to satisfy the lien of the lawyers.
Unless that be done, the impasse will remain and the surplus funds held by the lawyers will not be released to the benefit of the liquidation.
Accordingly, the power of the Court to make an order under s 63 of the Trustee Act is enlivened. I find that it is in the best interests of the trust that the lawyers’ liens over the trust funds be removed by the means proposed by the liquidators.
I will order, under s 63 of the Trustee Act, that, insofar as the liquidators of Mamounia as trustee of the Mamounia Family Trust do not have the power under the principles identified in Re Universal Distributing to pay out of the trust funds the sum agreed as the lawyers’ fees, I confer upon the liquidators the power to apply and release trust funds subject to the solicitors’ possessory lien of the lawyers in full and final satisfaction of the sum agreed as the lawyers’ fees. I direct that the liquidators are justified in exercising both powers to make the appropriate payments to the lawyers.
I therefore will answer the questions asked by the liquidators as follows:
(a) Question 1: yes.
(b) Question 2: the lawyers may retain possession of the trust moneys of Mamounia until paid their due fees for work done for Mamounia.
(c) Questions 3 and 4: I will make orders under s 63 of the Trustee Act that grants the liquidators the necessary powers to pay trust moneys to the lawyers to meet their reasonable costs incurred in acting for Mamounia, in the event that they do not have the necessary powers to so pay under the principles in Re UniversalDistributing, and direct that the liquidators would be justified in so doing.
I direct that the liquidators bring in minutes of order reflecting my decision and proposed orders.
I will hear the parties on costs.
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