Re Mowbray College (in liq) (rec and mgr apptd)
[2013] VSC 565
•23 October 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
No. S CI 2012 06885
| RE MOWBRAY COLLEGE (in liquidation) (receivers and managers appointed) (ACN 006090 722) | |
| EX PARTE: JAMES PATRICK DOWNEY (in his capacity as liquidator of MOWBRAY COLLEGE (in liquidation) (receivers and managers appointed) (ACN 006 090 722)) | Plaintiff |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 16 June 2013 | |
DATE OF JUDGMENT: | 23 October 2013 | |
CASE MAY BE CITED AS: | Re Mowbray College (in liq) (rec & mgr apptd) | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 565 | |
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CORPORATIONS – Application for directions – Whether liquidator justified in treating fees paid in advance to the college as trust moneys – Whether intention to create trust established – Relevant principles to apply in assuming intention to create a trust – Insufficient evidence of intention to create a trust.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C.T. Möller | Mills Oakley |
| Amicus curiae | Mr P. Fary | Norton Rose Fulbright Australia |
HIS HONOUR:
Introduction and procedural history
Mowbray College (Mowbray) is a not-for-profit company, limited by guarantee, which carried on business as the operator of a multi-campus, independent, nondenominational, coeducational private college in the suburbs of Melton and Caroline Springs. Mowbray experienced financial difficulties, and a receiver was appointed at the request of Mowbray’s board of directors on 28 May 2012. On 4 July 2012, Mowbray’s creditors resolved that it be wound up and the administrator become its liquidator. Mowbray owes a total of approximately $14.4m dollars to creditors ($4.5m to secured creditors, and $9.9m to unsecured creditors).
Mowbray charged fees. In several instances, these were prepaid. However, the prepaid fees were not kept in a separate account or otherwise separated from Mowbray’s own funds.
Mowbray operated two main bank accounts: an overdraft account with the National Australia Bank (NAB account) and a cheque account with the Commonwealth Bank of Australia (CBA account). The NAB account was used for Mowbray’s day-to-day trading activities and all school fees (whether accrued or prepaid) were deposited into it. At all relevant times, this account was overdrawn.
At the time of the liquidator’s appointment, however, the CBA account had a credit balance of $279,061.50. That amount represents money which had been transferred from the NAB account in March 2012, apparently in respect of certain prepaid fees. The liquidator has obtained a list of the families to whose prepaid fees the transferred moneys appear to relate.
In this proceeding, the liquidator seeks a direction pursuant to s 511(1)(a) of the Corporations Act 2001 (the Act) as to whether any amount in the CBA account is trust money and, if so, how it should be treated and for whose benefit.
On 15 February 2013, I ordered, inter alia, that persons listed on the so-called prepaid debtors list having a prepaid balance of $1,000 or more be given notice of full details of the application, and that any person who intended to appear in this proceeding file and serve on the liquidator a notice of appearance by 11 March 2013. The application was set down for hearing on 25 March 2013.
When the matter was returned on 20 March 2013, the liquidator indicated he had not received any notices of appearance. The liquidator sought a direction whether (as it was highly unlikely that a contradictor would appear at the hearing on 25 March 2013) he would be justified in proceeding on the basis that he as plaintiff would canvass likely counterarguments that a contradictor would likely put forward, or whether he should arrange for independent counsel to act as amicus curiae. I ruled that the liquidator would be justified in retaining a separate firm of solicitors who would engage separate counsel to act as the contradictor on the return of application.
I so ruled because, without in any way criticising the skill of counsel appearing for the liquidator, I considered a contradictor desirable in assisting the court in forming a view of this fairly complex matter (involving tracing moneys through overdrawn accounts and the possible existence of a Quistclose or other trust). Another reason for my ruling was the presumably large number of parents who would be interested in the results of this case (which might give them some priority to claiming moneys), and the importance in the circumstances of comprehensive argument being seen to be put on their behalf.
The liquidator subsequently engaged Norton Rose Fulbright Australia, who instructed Mr Fary of counsel to appear as amicus curiae.
When the matter was returned on 25 March 2013, Mr Fary proposed that the matter be adjourned pending the conduct of the liquidator’s public examinations of Mowbray’s directors. The liquidator did not oppose such an adjournment. The matter was made returnable on 13 June 2013, and was heard on that day (the liquidator’s examinations having concluded late in the afternoon on 11 June 2013).
The liquidator’s application
The principal issue in this proceeding is whether the funds in the CBA account are the subject of a trust in favour of persons who prepaid fees to Mowbray prior to 8 March 2012 or 13 March 2012 (being the dates of the relevant transfers from the NAB account to the CBA account).
Specific issues are:
(a) whether funds in the NAB account (ie prior to any transfer to the CBA account) had the character of trust moneys;
(b) alternatively, whether the first transfer had the effect of creating a trust fund for the prepaid debtors as at 8 March 2012 and, if so, the extent of the entitlements of each prepaid debt to the fund;
(c) whether the second transfer had the effect of creating a trust fund for the prepaid debtors as at 12 March 2012, and, if so, the extent of the entitlements of each prepaid debtor to the fund.
The factual background and evidence
People Involved
In this matter, evidence from a number of the members of Mowbray’s board of directors was presented:
· Tony Keirsten-Wakefield (known as Mr Wakefield), who had been a member of the College board since 2007 and a member of its finance and governance subcommittees. Mr Wakefield was also the acting principal of the College from 18 March 2012 to 23 May 2012;
· Kevin Yates, who had been a member of the College board since 2005 and was a chairman from November 2009 to October 2010. Mr Yates was a member of its finance and governance subcommittees; and
· John Wallace, who had been a member of the College board since 2004 and a member of its finance and governance subcommittees. Mr Wallace was also a former chairman of the board.
Evidence was also received from Nicole Bradshaw, Mowbray’s former manager of business and finance at the College. Bonnie Bester subsequently took over this role from Ms Bradshaw. As is apparent below, Mowbray also had important interactions with the director of the Victorian Registration and Qualifications Authority, Lynn Glover.
Fees charged by Mowbray and bank accounts kept by Mowbray
Mowbray imposed various fees and charges on students. These differed as between local and overseas students, and many also differed depending on the year level of the pupil. The fees and charges were set out in an annually-published “business notice”; none of these business notices specified any general refund policy for fees and charges. Of the various fees and charges, the “family deposit” (an amount between $900 and $2,000 per student, “payable before the first child of the family commences” but “to be refunded when the last child of the family leaves the College”) was the only fee or charge that the business notices expressed would be held in trust. The business notices state “the family deposit is a bond paid on accepting a place at the College and held in trust.” The Family Deposit could be used to settle the closing balance of an account or “convert it into a tax deductible donation to the Building Fund on completion of schooling” (emphasis in original).
As indicated above, Mowbray operated two main bank accounts – the NAB account and the CBA account.
From his investigations, the liquidator has concluded that Mowbray deposited all accrued and prepaid fees into the NAB account, and that the NAB account was used for all Mowbray’s day-to-day trading activities. Importantly, except for a short period from mid-January to February 2012, the NAB account had been in overdraft since at least 1 January 2012. At the time of the liquidator’s appointment as voluntary administrator (29 May 2012), it had a debit balance of $2,294,324.39.
The CBA account was opened in approximately September 2010. It is not entirely clear for what purpose or purposes it was established or used in the period prior to March 2012 when the relevant transfers (discussed below) were made. However, it appears to have been an account used for day-to-day operations. Prior to 2008, the College had banked with CBA, but in that year, following a tender, it had moved its business to the NAB. As at the date of the liquidator’s appointment, the balance of the CBA account was $279,061.59. Since then, the liquidator transferred the moneys to a separate account under his control, and closed the CBA account.
Those moneys largely represent funds that had been transferred from the NAB account (ie the overdrawn account) to the CBA account. The transfers were made by two payments, as follows:
(a) On 8 March 2012, the CBA account had a credit balance of $12,790.03 and the NAB account had a debit balance of $707,179.73.
(b) On 9 March 2012, $285,000 was deposited into the CBA account. The deposit was made by electronic transfer from the NAB account (first transfer). The narration on the NAB account statement for the first transfer reads “fees in adv transf.”
(c) Following the first transfer, the CBA account had a credit balance of $287,790.03 and (after various other credits and debits) the NAB account had a debit balance of $1,046,626.81.
(d) On 13 March 2012, a further sum of $30,000 was deposited into the CBA account. Again, the deposit made by electronic transfer from the NAB account (second transfer). The narration on the NAB account statement for the second transfer again reads “fees in adv transf.”
(e) Following the second transfer, the CBA account had a credit balance of $327,729.03 and (after various other credits and debits) the NAB account had a debit balance of $1,070,071.21.
The liquidator seeks directions about these moneys.
Evidence as to concern over prepaid fees
In March 2012, it became apparent that Mowbray was in a dire financial position. At a meeting of the board on 6 March 2012, it was reported that the College would exceed its overdraft by 12 April and that the NAB “is not prepared to provide any more funds.” The board also discussed the possibility of putting the College into voluntary administration. Two board papers were prepared and circulated; neither addressed the issue of prepaid fees.
On about 2 March 2012, the Victorian Registration and Qualifications Authority (VRQA) commenced a review of Mowbray’s operations. The VRQA is a statutory authority administered under Chapter 4 of the Education and Training Reform Act 2006. It is responsible for, inter alia, the registration of education and training provided in vocational education and training, school education, senior secondary education and overseas secondary student exchange organisations. The director the VRQA was (and is) Ms Lynn Glover.
One of the issues raised by the VRQA was that Mowbray had had no mechanism in place to protect student fees paid in advance. Mr Wakefield (Mowbray’s Principal) gave evidence that he attended a meeting with Ms Glover of the VRQA at which Ms Glover “directed me [Mr Wakefield] to ensure that a trust fund was set up to quarantine family payments.” He also gave evidence that the “registration of the school hinged on a number of factors, that being one of them.” The issue was also raised in an email dated 26 March 2012 from the VRQA (dealt with below).
The issue of pre-paid fees appears to have been discussed at the board meeting held on 6-7 March 2012. However, the evidence concerning what transpired at that meeting is equivocal.
The minutes of the meeting (which are otherwise quite detailed) do not record the making of any resolution concerning the establishment of a trust. Mr Yates (who recalled that such resolution was passed) gave evidence that he would expect such a resolution to have been recorded in the minutes. The minutes do not follow the usual forms of recording resolutions put, nor note the substances of matters for and against and whether the resolutions were adopted.
The evidence given at the liquidator’s examinations by the former directors concerning the board’s consideration of this issue is inconsistent.
(a) Mr Wakefield’s evidence was that the only meeting at which the creation of a trust fund was discussed was his meeting with the VRQA. He could not recall the issue having been discussed at the meeting on 6-7 March 2012. Nor could he recall any resolution made by the board to create a trust in favour of parents who had prepaid school fees.
(b) Mr Yates’ evidence was that he attended a meeting of the board at which the question of the creation of a trust fund to protect prepaid school fees was discussed. He said that this was “after the VRQA had given us some advice that we had – we needed to do that.” Mr Yates’ recollection was that there was a board resolution to create a trust in favour of parents who had prepaid school fees, but he could not remember who proposed or seconded the resolution, and conceded that it was possible that there was no resolution but just a discussion (although his recollection was that there had been a resolution).
(c) Mr Wallace’s evidence was to similar effect. Mr Wallace’s attendance at meetings was limited owing to “professional commitments and some health issues,” but he said:
Apparently there had been some representations and/or meetings between college staff and one or two of the directors at the time with the Victorian Registration and Qualifications Authority. They, around about that time I think it also decided to have the accounts of the college examined by some auditors, which I think from memory was Ernst & Young, and apparently the director of that authority with what appeared to be an implicit threat as to the continuing registration of the college, particularly over a proposal to close the Melton campus and move students to Caroline Springs, that the prepaid fees should be put into separate accounts from the National Australia Bank and amortised each month, drawn from that account on a monthly basis as I understood the proposal, until those fees were spent.
Mr Wallace’s best recollection was that there was a resolution made to create a trust in favour of parents with prepaid school fees; he was unable to explain why such a resolution could not be found in the minutes, but recalled discussion of the creation of such a trust at the insistence of the VQRA. Mr Wallace said that he was “fairly sure” he was still a member of the board “when bank accounts were set up,” but he though he’d left the board by the time trust documentation had been produced.
(d) Ms Bradshaw’s evidence is that the issue of prepaid school fees was discussed at the meeting on 6 March 2012, and again at the meeting on 7 March 2012. She deposes as to the Board’s consideration as follows:
The effect of the board’s discussions at the meeting was that Mowbray College needed to quarantine any school fee debtor accounts in a separate credit banking account (being prepaid fees).
I do not recall any resolution be made at the meeting regarding the prepaid school fees, but I may not have attended the whole meeting.
…
[The Board’s intention was] to authorise the withdrawal of money representing a total of prepaid school fees recorded as being in credit into Mowbray College’s account with the National Australia Bank so that it could be transferred to another account with the Commonwealth Bank and quarantined until a trust account could be formally set up.
Evidence as to the bank transfers
The transfers took place on 9 and 13 March 2012. Mr Wakefield gave evidence that the transfers were made by Ms Bradshaw at his direction and under his authority as college principal, after he returned from meeting with the VRQA. Mr Wakefield could not explain how the amount of the transfer was calculated; he “assumed the business manager knew what amount to transfer.” Mr Wakefield could not recall his exact words in directing the transfer.
Mr Wallace also recalled having had a “passing conversation” with Ms Bradshaw about whether the transfer should be made. However, he could not recall whether Mr Wakefield was with him at the time. Ms Bradshaw’s evidence contains no mention of any direction from Mr Wakefield or Mr Wallace. It is also doubtful that Mr Wakefield could have given the direction with his authority as Mowbray’s principal because he did not become the principal until after the transfers were made. The previous principal resigned sometime shortly before 6 March 2013, and Mr Wakefield became acting principal. The employment contract by which Mr Wakefield was employed as Mowbray’s principal is dated 15 March 2012, and specifies the commencement date as 19 March 2012.
Ms Bradshaw deposed that she determined the amounts of the first and second transfers by “print[ing] out a debtor trial balance and highlight[ing] the prepaid school fee accounts that the College had recorded as being in credit and calculat[ing] the total of all those accounts.”
On 4 June 2012, Bonnie Bester (who succeeded Ms Bradshaw as the College’s manager of business and finance) sent an email to one of the liquidator’s staff, stating:
Please find attached the list of prepaid debtors as at 08.03.2012 which made up the $285,000 transferred into the CBA bank account.
These families would have paid the school fees in advance for the term, or several years, so the balance relates to their fees as at 08.03 2012.
The list attached to the email (prepaid debtors list) details a variety of students with different payment arrangements in place, and shows a total of $281,919.39 as owing. Although it appears to break down the families by the type of payment arrangement that they had in place, it does not reveal how the amounts were constituted (ie to which specific fees they related). It is clear that the amount transferred pertained only to prepaid school fees. No amount was set aside in respect of “family deposits.”
On 26 March 2012, Ms Glover sent an email to Mark Handley, who was a director of Mowbray and the chair of its board. The email referred to a meeting held earlier that day between Ms Glover and Mr Handley at which he had provided “an update on the current situation at Mowbray College,” and sought to summarise the meeting. The email records, among other things:
6. CBA bank account: you were unable to explain the purpose of the current CBA bank account which has approximately $300K.
…
8. I expressed concern about the risk to parents if any prepaid schools fees were not protected by a trust…
Action:
…
• Mowbray to explain the purpose of the current CBA account.
…
• Mowbray to discuss with their solicitor approaches to protecting prepaid school fees.
Evidence as to draft trust deed
Subsequent email correspondence between Mowbray’s solicitors (Norton Gledhill), the solicitors for the VRQA (Maddocks) and later Ms Glover of the VRQA concerns the establishment of a trust to protect prepaid fees.
On 4 April 2012 at 2:53pm, David Newman of Maddocks sent an email to Sue-Anne Hine of Deloitte (copied to Sal Algeri of Deloitte) referring to the need for pre-paid fees to be protected in the event the school was unable to continue to provide educational services. The email attached a draft trust deed. (Deloitte had been engaged by NAB to conduct a financial assessment of Mowbray.)
A draft report by the VRQA of its findings concerning Mowbray College (provided to the chairperson of the College board and the Acting Principal on 29 May 2012) states that, on 5 April 2012, Mr Handley informed the VRQA that, at its meeting on 4 April 2012, the board had “resolved to establish a trust to protect fees paid in advance.” However, the liquidator deposes that his investigations have revealed that this did not take place.
On 10 April 2012 at 3:21pm, Mr Handley sent an email to Ms Glover. In the email, Mr Handley referred (amongst other things) to having spoken with the College’s solicitor “and directed him to engage with VRQA’s legal representative re the setting up of a Trust fund re prepayment of school fees.”
On 23 April 2012 at 8:20am, Michael Coker of Norton Gledhill emailed Mr Newman of Maddocks, stating that he expected “to be able to provide comments on the draft trust deed in the next few days.”
On 7 May 2012 at 4:22pm, Mr Coker emailed Mr Newman attaching a marked-up version of the draft trust deed and indicating that it was still “subject to instructions.”
Between 16 and 21 May 2012, there were emails between Mr Coker and various members of staff and directors of Mowbray concerning the trust deed.
(a) On 16 May 2012, he sent an email to Ms Bradshaw (copied to Mr Wakefield and Ms MacKenzie) which stated:
Nicole, all we need is a quick chat to run through some issues on the draft trust deed. I understand the VRQA is getting anxious about the document, so the sooner the better!
(b) On 17 May 2012, Mr Coker sent an email to Bonnie Bester (who had become Mowbray’s manager of business and finance after the resignation of Ms Bradshaw) which stated:
Bonnie,
Further to our discussion this morning I set out below my comments and questions on the draft trust deed (a copy of which is attached for your convenience).
Comments
(a) 1 (Compliance Audit Date) 6 monthly auditing is a little onerous but Mowbray may be okay with this[.]
(b) 2 A contractual promise to comply with regulatory issues seems unnecessary but Mowbray may be okay with this[.]
(c) 4.1.1 With Mowbray College as the trustee you will need to set up a special purpose bank account for the prepaid fees[.]
(d) 7.2 Note that despite the requirements of the trust deed you have an unfettered entitlement to change the Refund Protocols (ie. you could constrain/reduce parents entitlements to refunds)[.]
(e) 11.1 Mowbray is responsible for all costs, charges and expenses of administering the Trust that cannot be paid from the income of the Trust. This is only likely to be relevant to you if Mowbray is not the trustee[.]
(f) 11.2.1 I have assumed that Mowbray College will want to be the trustee itself and not appoint a 3rd party to that role[.]
Questions
1 (Written Agreements) Are there any written agreements outside the general school refund policy which relates to the refund of school fees?
(h) 3.5.1 Do you want the arrangements to terminate at your discretion if certain financial stability targets are achieved? Otherwise the Trust deed runs for 80 years
(i) 10. 2 Do you want to have any influence over the appointment of a new trustee in the event VRQA exercises its right to appoint a new trustee?
(j) Items 2 & 3 in Schedule 1 Please provide the missing contact details
(c) On 21 May 2012 at 9.27 am, Ms MacKenzie replied to Mr Coker’s email of 17 May 2012, stating:
Hi Michael,
Questions
1. Are there any written agreements outside the general School refund policy which relate to the refund of School fees?
No but Bonnie can you please confirm this? The Principal can and has entered into agreements in relation to refunds of school fees. Finance will be notified by Principal and Finance will then place notes on the debtors [sic] records and action the refunds.
2. Do you want the arrangements to terminate at your discretion if certain financial stability targets achieved? Otherwise the Trust deed runs for 80 years
No
Please have it terminate at our discretion
…
(d) On 21 May 2012 (9.45am), Mr Coker replied to Ms MacKenzie:
Many thanks for following through with this
If the arrangements are to be terminable at Mowbray’s discretion in specific circumstances it will be necessary to define what exactly what those circumstances are.
The VRQA is certain not to agree to have the arrangements terminable without financial stability being re-obtained. Maybe Deloitte can formulate some financial stability targets that if met, would entitle my break to end the trust arrangement?
(e) On 21 May 2012 (9.51am), Mr Wallace replied to Mr Coker:
Thanks Michael I agree. In the event the VRQA a takes the step to appoint a new trustee I think there is little MCL [Mowbray College Ltd] should do to try an [sic] influence that appointment. The attempts at saving Mowbray would I feel at that point has been lost. Better for the VRQA to take full responsibility as trustee.
(f) On 21 May 2012 (10.57am), Mr Coker responded to Ms MacKenzie:
Tracey,
I still need:
(a) the contact details noted in my original question 4;
(b) financial stability target(s), assuming Mowbray wants to pursue reaching these as a termination event. I suspect that the are you a will be sensitive about introducing such an event, although ultimately, I suspect that financial stability target(s) would able to be agreed;
However despite the fact I think having such an event is sensible, negotiating the definition of such an event may take a little while, and is likely to hold up finalisation of the trust deed.
In this light Mowbray should consider how much it wants to press the point[.]
As is apparent from the quoted correspondence, there were various questions and lacunae regarding the final contents of the draft trust deed. It is also significant that Mr Coker’s email of 17 May 2012 to Ms Bester noted that Mowbray would “need to set up a special purpose bank account for the prepaid fees.”
On or about 22 May 2012 at 3:43pm, Mr Coker sent an email direct to Ms Glover (copied to Mr Newman and others) attaching a further marked-up version of the draft trust deed.
According to the liquidator’s investigations, the draft trust deed was not finalised or executed prior to his appointment as administrator on 29 May 2012.
The directors gave evidence about the trust deed at the liquidator’s public examinations. Mr Wakefield said that it was his understanding that a trust deed was executed, although he didn’t recall. Mr Yates said that he was aware that a draft proposed trust deed concerning prepaid fees had been prepared, but that he had never see the finalised document. For this reason, Mr Yates did not think the trust deed was executed. Mr Wallace could not recall making comments on draft versions of a trust deed, but on reviewing documents put to him he acknowledged he did so. Mr Wallace did not know whether or not the trust deed was executed, nor could he say why it was not executed. Messrs Wakefield, Yates and Wallace all indicated that they were aware a deed establishing a trust for prepaid fees was being prepared in response to the VQRA’s request, and that it was of great importance for Mowbray to comply with the VQRA’s request (lest Mowbray lose its licence).
On 11 July 2012, the liquidator received an email from Ms MacKenzie, the then chairperson of the board. It stated:
Just FYI – this Trust Deed conversation (for fees paid in advance) started at the beginning of April between Mowbray’s solicitors (Michael Corker [sic] from Norton Gledhill), the VRQA and Maddocks (on behalf of the VRQA). This is why we had that sum of Money transferred into the CBA Account. I realise now that it would not cover the amount of fees paid in advance but we had started down this path. We just ran out of time to have the trust deed executed.
On 17 May 2012, Ms Bester sent an email to the NAB which stated:
Mowbray needs to set up a trust bank account ASAP, we are just finalising the Trust Deed.
What do we need to do to get the new account open?
A bank officer replied by email on 17 May 2012, requesting a copy of the trust deed.
Subsequent transactions from CBA account
Between 13 March 2012 and Mowbray going into voluntary administration on 29 May 2012, there were various other transactions on the CBA account. These included credit and debit transactions. Several transactions are insignificant, representing bank fees or interest paid on the credit balance. However, some are more significant. For instance:
(a) On 19 March 2012, $47,000.00 was deposited into the CBA account in a transaction described as “Surfside and Carr”. A handwritten annotation to the relevant statement records “Sale of BMW inc GST.”
(b) On 19 March 2012, $47,000.00 was withdrawn from the CBA account in a transaction described as “Mowbray College contract 905115.”
(c) On 5 April 2012, $321.75 was deposited into the CBA account, with the narration “University of BA.”
(d) On 16 April 2012, $4,343.72 was withdrawn from the CBA account I a transaction described as “CBFC ASSETMGR payment.” The payment relates to equipment leased by Mowbray.
(e) On 27 April 2012, $43,700.00 was withdrawn from the CBA account in a transaction described as “BS&PJ Vella refund.” This amount represents a refund paid of school fees following the withdrawal of a student from the College.
(f) On 30 April 2012, $2,638.48 was withdrawn from the CBA account in a transaction described as “CBFC ASSETMGR payment.” Again, the payment relates to equipment leased by Mowbray.
The applicable legal principles
Section 511 Application
The liquidator seeks directions under s 511(1) of the Act, which provides that:
the liquidator or any contributory or creditor, may apply to the Court:
(a) to determine any questions in the winding up of a company; or
(b)to exercise all or any powers that the Court might exercise if the company were being wound up by the Court.
The Court’s powers are circumscribed by subsection (3), which provides that:
… the Court, if satisfied that the determination of the question or the exercise of the 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.
If the company were being wound up by the Court, the liquidator could apply to the Court for directions under s 479(3). The liquidator seeks that the Court exercise this power pursuant to s 511(1)(b).
It is uncontroversial that a liquidator’s application for directions from the court includes where the liquidator needs guidance on matters of law.[1] I accept the liquidator’s submission that this is such an application. In order to be able to conduct the liquidation, the liquidator needs to know whether or not the significant funds in the CBA account are trust moneys. Not only is that a “question in the winding up” of Mowbray but it involves a matter of law on which the liquidator requires guidance. Moreover, the interest of the potential beneficiaries of any trust have been protected by the vigorous submissions of the amicus curiae. In these circumstances, I consider that it is “just and beneficial” that I give directions on the questions asked of me by the liquidator.[2]
Equitable tracing through an overdrawn account
[1]Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, 117 (citing Re Australian Home Finance Pty Ltd (1956) VR 1 and Re Standard Insurance Co Ltd (1963) 80 WN (NSW) 1355).
[2]See Re Sports Alive Pty Ltd (in liq) [2013] V SC 69, [18].
The Liquidator submits that the funds in the NAB account were not trust moneys, primarily because NAB account was overdrawn at the time the funds were deposited. In the Liquidator’s submission, regardless of the character the moneys deposited into that account might have had beforehand, once deposited, any consequent proprietary claim was lost.[3] This is because equitable tracing presupposes “the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund.”[4] As McClure J said in Re Global Finance Group Pty Ltd, “[t]he overwhelming balance of authority is to the effect that a proprietary claim to the traceable product will fail if trust money is paid into an overdrawn account”.[5]
[3]Williams v Peters [2010] 1 Qd R 475, [5] (McMurdo P), [31]-[44] (Muir JA), citing In re Goldcorp Exchange Ltd [1995] 1 AC 74, 104–105, Bishopsgate Investment Management Ltd (In Liquidation) v Homan [1995] Ch 211 (Bishopsgate), 218-221.
[4]Re Diplock [1948] Ch 465, 521.
[5][2002] WASC 63 (Re Global Finance), [129].
While the amicus curiae’s submissions explored the possible exceptions to the rule against tracing through an overdrawn account,[6] the Amicus conceded that on the facts of the present case no such exception could be invoked.
[6]Re Global Finance, [133]–[134] (citing Bishopsgate); Georges v Seaborn International Pty Ltd (Trustee), Re Sonray Capital Markets Pty Ltd (in liq) (2012) 206 FCR 408; Conlan as liquidator of Rowena Nominees Pty Ltd v Connolly [2011] WASC 160; and see generally M Conaglen, ‘Difficulties with Tracing Backwards’ (2011) 127 LQR, 432-455.
The next question is therefore whether a fresh express trust arose when the moneys where deposited in the CBA account.
A new trust
It is accepted that a declaration of trust may be oral “or even inferred from conduct.”[7]
[7]JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia (2006, 7th ed), [623].
Both the liquidator and the amicus curiae pointed to the established rule that in order to constitute a trust, the “three certainties” must be satisfied – of intention, subject matter, and object.[8] The principles concerning ascertainment of the relevant “intention” were recently considered by the High Court of Australia in Byrnes v Kendle,[9] where Heydon and Crennan JJ said:
[8]Kauter v Hilton (1953) 90 CLR 86, 97 (Dixon CJ, Williams and Fullagar JJ).
[9](2011) 243 CLR 253 (Byrnes v Kendle).
… The question is what the settlor or settlors did, not what they intended to do.
That truth tends to be obscured by constant repetition of the need to search for an “intention to create a trust”. That search can be seen as concerning the first of the three “certainties” – what Dixon CJ, Williams and Fullagar JJ called in Kauter v Hilton:
“[T]he established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries.”
But the “intention” referred to is an intention to be extracted from the words used, not a subjective intention which may have existed but which cannot be extracted from those words. This is as true of unilateral declarations of alleged trust as it is of bilateral covenants to create an alleged trust. It is as true of alleged trusts which are not wholly in writing as it is of alleged trusts which are wholly in writing.[10]
[10]Byrnes v Kendle (2011) 243 CLR 253, [113]-[114] (citation omitted); see also paragraphs [105]-[112], where their Honours traced authorities concerning the “search for ‘intention’”.
In ascertaining the relevant intention, it is the outwardly manifested intention that is relevant.[11] Subsequent statements concerning the subjective intention of the putative trustee are inadmissible.[12] Even if “the language employed by the parties … is inexplicit,” the court can infer an intention to create a trust “from other language used by them, from the nature of the transaction and from the circumstances attending the relationship between the parties.”[13]
[11]Byrnes v Kendle (2011) 243 CLR 253, [54]-[57] (Gummow and Hayne JJ).
[12]Byrnes v Kendle (2011) 243 CLR 253, 273 [52] (Gummow and Hayne JJ); [93]-[94] (Heydon and Crennan JJ); Commissioner of State Revenue v Snowy Hydro Ltd [2012] VSCA 145, [83].
[13]Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588, [34] (Gaudron, McHugh, Gummow and Hayne JJ) (citation omitted).
Discussion of potential new trust
Both counsel for the Liquidators and counsel appearing as amicus curiae accepted that the moneys that were withdrawn from the ANZ account to constitute the “quarantined” fund were not trust moneys, because they had been withdrawn from an overdrawn account.
Both counsel accepted that for the moneys in the “quarantined” fund to be trust moneys, the moneys would need to be converted from non-trust moneys into trust moneys by a declaration of trust.
Although there was some evidence to suggest that a trust was established, the evidence was not sufficient to convince me on the balance of probabilities that there was a trust. Specifically, on the balance of probabilities, the evidence does not persuade me there was certainty of intention.
There was some evidence before me that Mowbray’s board had passed a resolution establishing a trust (in the form of testimony from the liquidator’s examinations, particularly the testimony of Mr Yates and Mr Wallace). However, this evidence was equivocal – Mr Yates’ and Mr Wallaces’ testimony was unclear, and no minutes or other evidence of a formal resolution were found by the liquidator (nor was any such evidence presented to this Court). I think it unlikely that the evidence supports a finding of an informal resolution, but even if I were to accept the helpful submissions of the amicus curiae and find that an informal resolution had been passed,[14] in my opinion this would not be sufficient to evince an intention to create a trust when considered in the context of the other factors arguing against a trust (discussed below).
[14]See, eg, Circle Petroleum (Qld) Pty Ltd v Greenslade [1998] QSC 172 (Muir J).
There was some disagreement between the liquidator and the amicus curiae as to whether the amounts transferred into the CBA account (totalling $305,000) could be considered sufficiently certain in terms of their subject matter (viz, the prepaid fees) so as to be trust moneys. I accept, on balance, that the transferred moneys were intended to represent prepaid fees. Both transactions bore the narration “fees in adv transf”. Although the liquidator’s submissions dealt with each of the two deposits separately when analysing whether intention to create a new trust was discernable, the two evidence pertaining to the two deposits was sufficiently similar to warrant analysis of both transactions together – in any case, nothing turns on this in my opinion.
The mere existence of a “quarantined” fund is not sufficient to evince an intention to create a trust. The CBA account was not a trust account in form or in substance. The CBA account was an existing account, opened several years before the transfers, and had in the past been used for day-to-day company business. The account name did not identify it as a trust account, nor was there documentation typical of trust accounting pertaining to transactions in and out of the account. Furthermore, there is evidence that the fund of money in the account was a mixed fund, including credits and debits not relating to the prepaid fees (such as for the lease of equipment). I accept the liquidator’s submission that the mixing of funds, and the use of mixed funds for Mowbray’s ordinary purposes, is inconsistent with the intention to establish a trust. Moreover, there were no later references at board level (nor, indeed, at any level) to the account in which the moneys where held being a trust account.
Significantly, while there was ample evidence of an intention to execute a trust deed, there was no evidence a trust deed was ever executed, and this deed may not have been complete and in final form. A trust deed was first mentioned in the email correspondence of 4 April 2013, some time after the transfer of the moneys into the CBA account. However, the 4 April 2013 email (attaching a draft deed) was apparently not sent to Mowbray or its directors, only to Deloitte (who were assessing Mowbray’s finances on behalf of NAB). It was in Mr Handley’s of 10 April 2013 to Ms Glover where Mowbray made reference to having instructed Mowbray’s solicitors to set up a trust for prepaid fees. The subsequent email correspondence between Mowbray and its solicitors suggests that there were lacunae in the contents of the proposed deed, which do not appear to have been rectified.
Conclusions
In my opinion, while there may have been an intention to create a trust at a later stage (and sum of money was “quarantined” for that purpose), the evidence before me was insufficient to find that the intention had crystallised and a trust had been created that attaches to the “quarantined” moneys. As Finn J noted in Pascoe v Boensch:
The intention … must be to create an immediately operative trust: Harpur v Levy (2007) 16 VR 587; [2007] VSCA 128 at [62]–[63]. An intention that the trust be constituted at a later date will be ineffective to create a trust either at the time of the declaration or at that later date.[15]
[15](2008) 250 ALR 24, [21].
Therefore, I find, order and direct that the liquidator would be justified in treating the entire balance of the CBA account as an asset of Mowbray and available to be applied in the liquidation in the ordinary way.
The liquidator should have his costs out of the fund, on an indemnity basis. The contradictor’s costs should also come out of the fund, also on an indemnity basis.
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