Re Stay In Bed Milk & Bread Pty Ltd (In Liq)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S ECI 2018 00205

IN THE MATTER OF STAY IN BED MILK & BREAD PTY LTD (IN LIQUIDATION) (ACN 115 166 982)

BETWEEN

CRAIG SHEPARD AND LEANNE CHESSER (IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF STAY IN BED MILK & BREAD PTY LTD (IN LIQUIDATION) (ACN 115 166 982) AND ANOTHER LISTED IN THE SCHEDULE	Plaintiffs
v
COMMONWEALTH OF AUSTRALIA, REPRESENTED BY THE AUSTRALIAN GOVERNMENT DEPARTMENT OF JOBS AND SMALL BUSINESS (ABN 54 201 218 474)	Defendant

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JUDGE:	Randall AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	18 September 2018
DATE OF JUDGMENT:	22 March 2019
CASE MAY BE CITED AS:	Re Stay In Bed Milk & Bread Pty Ltd (In Liq)
MEDIUM NEUTRAL CITATION:	[2019] VSC 181

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CORPORATIONS – Winding up – Liquidators seek directions as to distribution of funds – s 90–15 of Schedule 2 (Insolvency Practice Schedule) to the Corporations Act 2001 (Cth).

MARKETING FUND – Marketing fund established by Franchisor – Franchisees contributing towards the marketing fund by a levy – Franchising agreements – Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) – Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) which came into operation on 1 January 2015.
EQUITY – Trusts – Whether the proceeds of the marketing fund held on trust for the franchisees – Consideration of circumstances – Explanatory material – Sole discretion – Obligation to apply monies – Marketing program – Termination of franchise relationship – Identification of contributions – Ability to distribute purported beneficial interest.

EXPLANATORY MEMORANDUM – s 15AB of the Acts Interpretation Act 1901 (Cth) – Use of extrinsic material in the interpretation of an Act – s 15AB(1)(a) of the Acts Interpretation Act 1901 (Cth) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act.

QUISTCLOSE TRUST – Whether there was an intention that the marketing fund would become an asset of the franchisor – Payment of levy –Termination of franchise relationship.

S 556 OF THE CORPORATIONS ACT 2001 (CTH) – Priority of distribution of assets in liquidation – s 501 of the Corporations Act2001 (Cth) – Whether marketing fund property of the Franchisor available for distribution amongst creditors – Whether Trade Practices (Industry Codes – Franchising) Regulations1998 (Cth) excludes ss 501, 555 and 556 of the Corporations Act 2001 (Cth).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Dr O Bigos	Ashurst Australia
For the Defendant	Mr R G Craig	Mills Oakley

TABLE OF CONTENTS

Introduction......................................................................................................................................... 1

Relief Sought...................................................................................................................................... 2

Background......................................................................................................................................... 3

The Court’s power to make the declarations and directions..................................................... 6

Is the money in the Marketing Fund held on express trust for the franchisees?................... 9

Legal principles............................................................................................................................. 9
The Franchise Agreement.......................................................................................................... 15
The Franchising Codes............................................................................................................... 19
The submissions of the parties................................................................................................. 23
Liquidator’s Submissions................................................................................................. 23
The submissions of the Commonwealth........................................................................ 24

Consideration.............................................................................................................................. 27
Explanatory Memorandum.............................................................................................. 27
Sole discretion.................................................................................................................... 30
Obligation to apply monies............................................................................................. 30
The Marketing Program................................................................................................... 30

Termination of franchise relationship...................................................................................... 35
Identification of contributions......................................................................................... 35

Ability of SIBMB to distribute purported beneficial interest............................................... 38
Conclusion as to the imputation of an express trust............................................................. 39

Is a Quistclose trust established?................................................................................................... 40

Legal principles........................................................................................................................... 40
Submissions of the parties......................................................................................................... 49
Consideration.............................................................................................................................. 51
Is there a specific purpose tantamount to a condition?............................................... 52
Was there an intention that the Marketing Fund become an asset of SIBMB?......... 53

Prohibition against distributing the Marketing Fund to discharge the company’s liabilities 56

Orders................................................................................................................................................. 59

HIS HONOUR:

Introduction

The first plaintiffs are the liquidators of the second plaintiff, Stay in Bed Milk & Bread Pty Ltd (In Liq) (‘SIBMB’). In that capacity, they seek declarations and directions from the Court pursuant to s 90-15 of Schedule 2 (Insolvency Practice Schedule) to the Corporations Act 2001 (Cth) (‘the Act’),[1] regarding the proposed distribution of funds held in a Marketing Fund. The Marketing Fund was established by SIBMB as franchisor for the purposes of marketing, as set out in the franchise agreements.
[1]The application was also brought under s 36 of the Supreme Court Act 1986 (Vic) and the Court’s inherent jurisdiction. It was accepted by the parties, however, that jurisdiction was afforded under s 90 – 15.

The declarations and directions sought surround whether or not:

(a) the money held in the Marketing Fund constituted funds held on express trust for the franchisees;

(b) the funds in the Marketing Fund are held on a Quistclose trust for the franchisees;[2]

(c) if the funds held in the Marketing Fund are not held on trust for the franchisees, are the Liquidators, by virtue of the Franchise Agreements and/or the Franchising Code,[3] enjoined from distributing the funds other than to the franchisees?

[2]Barclays Bank Ltd v Quistclose Investment Ltd [1970] AC 567.

[3]The Franchise Agreements were subject to two iterations of the Franchising Code. The first being from October 2005 to 31 December 2014, being the Schedule to the Trade Practices (Industry Codes-Franchising) Regulations 1998 (Cth) (‘Old Franchising Code’) and from 1 January 2015 pursuant to Schedule 1 to the Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth) (‘New Franchising Code’).

The Liquidators assert that the application is necessary as there will be insufficient proceeds from circulating asset recoveries to pay all employee entitlements. Consequently, the Fair Entitlements Guarantee Program (‘FEG’) would be called upon in relation to payments to employees.[4] As the entity responsible for administering the FEG, the Commonwealth opposes the declarations sought by the Liquidators.
[4]Plaintiffs, ‘Liquidators’ Outline of Submissions’, Submission in Stay in Bed Milk & Bread Pty Ltd (in liq), S ECI 2018 00205, 6 August 2018, 3.

It is common ground that if the funds in the Marketing Fund are not declared to be held on trust, they will be available to the Commonwealth as a priority under s 561 of the Act.[5]
[5]Commonwealth, ‘Defendant’s Outline of Submissions’, Submission in Stay in Bed Milk & Bread Pty Ltd (in liq), S ECI 2018 00205, 27 August 2018, 4.

Relief Sought

As set out in the originating process, the principal relief sought by the Liquidators is as follows:

1.A declaration that the Marketing Fund (as defined in the supporting affidavit of Craig Peter Shepard sworn on 3 July 2018) together with interest on the Marketing Fund from 7 March 2018 constitutes funds held on trust for the franchisees, in proportions which reflect the moneys paid into the Marketing Fund by those franchisees.
2.Further or alternatively to order 1 above, a direction pursuant to sections 65-25 and 90-15 of Schedule 2 (Insolvency Practice Schedule) to the Corporations Act 2001 (Cth) (‘CA’) as to whether the Second Plaintiff and [the liquidators] are justified in treating the Marketing Fund together with interest on the Marketing Fund from 7 March 2018 as funds held on trust for the franchisees of the Second Plaintiff, and in paying those funds to the franchisees in proportions which reflect the moneys paid into the Marketing Fund by those franchisees.

Additionally, in their reply submissions the Liquidators also sought the following in the alternative:

(a)A declaration that the Marketing Fund together with interest on the Marketing Fund from 7 March 2018 is not to be used in discharging the company’s liabilities (under s 478 of the Corporations Act) but rather to be applied for the uses set out in clause 31(3) of the Franchising Code or if it cannot be applied for these uses then the moneys are to be returned to franchisees in proportions which reflect the moneys paid into the Marketing Fund by those franchisees;
(b)Alternatively (if the Plaintiffs are unsuccessful in obtaining the relief sought in paragraphs 1 or 2 of the Originating Process and in sub-paragraph (a) above), a direction under s 90-15 of the Insolvency Practice Schedule that [the liquidators] are justified in applying the Marketing Fund together with interest on the Marketing Fund from 7 March 2018 to discharge the company’s liabilities.[6]

[6]Agreed Statement of Facts, 14 September 2018, [20]; The Commonwealth had no objection to the substance of the direction referred to in sub-para 6(b) but I have taken it that it did not cavil with the form of the declaration sought in sub-para 6(a).

The Commonwealth sought the following direction in the event that it is successful in its resistance to the relief sought by the Liquidators:

…[the] Marketing Fund is property of [SIBMB] comprised in or subject to a circulating security interest for the purposes of the Corporations Act… and is available for distribution to creditors of [SIBMB] in accordance with the provisions of the [Corporations Act].

The Liquidators had no objection to the substance of that declaration, although they might wish to be heard as to its specific formulation.

Background

The parties filed an Agreed Statement of Facts. It is convenient to set out that Agreed Statement almost verbatim as follows:

1.In October 2005 Stay in Bed Milk & Bread Pty Ltd (SIBMB) commenced trading (under the name Aussie Farmers Direct).
2.SIBMB’s business involved selling fresh produce, meal kits and pantry and household items to customers through its website. These products were delivered to homes and businesses via its franchised delivery network. At the Appointment Date… SIBMB operated in all Australian states and territories save for Tasmania and Northern Territory.
3.A franchise agreement (Franchise Agreement) was entered into between SIBMB and each of its respective franchisees.
4.At all material times up to the Appointment Date, the clauses in the Franchise Agreements entered into between SIBMB and its respective franchisees which deal with:
(a)the payment of a “Marketing Levy” by the franchisees to SIBMB; and
(b)the manner in which SIBMB can deal with the Marketing Levy as part of the “Marketing Fund”;

have remained the same. That is, each franchisee, regardless of when it entered into a Franchise Agreement with SIBMB, has agreed to the same terms concerning the payment of the Marketing Levy and the establishment and use of the Marketing Fund.

…
6.The Franchise Agreement is silent on what happens with the Marketing Fund in the event that SIBMB stops trading.
7.At all material times from October 2005 to 31 December 2014, the Schedule to the Trade Practices (Industry Code – Franchising) Regulations 1998 (Cth) (Old Franchising Code) was in operation.

…
9.From [the Liquidators’] investigations, it appears that prior to the establishment of the Account (defined below) in March 2015:
(a)the Marketing Levy was paid into and held in the general account of SIBMB and mixed with SIBMB’s other monies;
(b)at the end of each of FY12, FY13 and FY14, the balance of SIBMB’s general account was greater than the balance of the Marketing Fund at that time. [The liquidators] have been unable, in the time available, to determine whether this was the case for the financial years prior to FY12; and
(c)during FY12 and FY13, it is apparent that SIBMB used money (over and above the amounts derived from the Marketing Levies) from its general account to pay for marketing expenses.

10.At all material times from 1 January 2015 to the present, Schedule 1 to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) (New Franchising Code) was in operation. The New Franchising Code replaced the terms of the Old Franchising Code.

…
12.Following the introduction of the New Franchising Code, there was no variation to the written terms of the Franchise Agreement.
13.In March 2015, SIBMB opened an account with the Commonwealth Bank of Australia, named “AFD Marketing Fund”, BSB 063-000 Account Number 1275 1893 (the Account). At this time, the Marketing Fund was transferred from SIBMB’s general account to the Account.
14.From [the Liquidators’] investigations, it appears that at all relevant times:
(a)SIBMB paid franchisees “Delivery Fees” on a fortnightly basis with reference to being the rates set out in the Products and Delivery Rate Fee Schedule in Attachment D of the Franchise Agreement;
(b)when SIBMB paid the Delivery Fees to franchisees, it deducted the Marketing Levy (being 5% of Gross Delivery Fees plus GST payable by SIBMB to each franchisee) otherwise payable to franchisees. The amount deducted (being the Marketing Levy) was itemised in statements of account provided to franchisees;
(c) SIBMB prepared an accounting ledger reconciling the Marketing Fund each month;
(d)SIBMB accounted for the Marketing Fund in its financial statements for the years FY15, FY16 and FY17 as an “other asset” of the company and described the Fund in the notes as “Marketing Fund cash balance”. Cash, and cash equivalents, were accounted for separately. [The liquidators] have not sought to review earlier financial statements for the purposes of this application; and
(e)from at least FY07 onwards, SIBMB also prepared separate statements of account specifically for the Marketing Fund (which were reviewed and/or audited on a yearly basis (noting that, in the time available, [the liquidators] have not been able to locate the statements of account for the period prior to FY07 and for FY10 and FY11). These statements of account describe, amongst other things, how the Marketing Fund was spent.

15.On 5 March 2018 (Appointment Date), at a meeting of the board of directors of SIBMB, [the liquidators] were appointed as joint and several voluntary administrators of SIBMB pursuant to section 436A of the Corporations Act 2001 (Cth) (Act).

16. As at the Appointment Date:
(a)SIBMB had 259 employees, who were owed approximately $4,263,654 in outstanding employee entitlements;

(b) SIBMB had 91 franchisees;
(c)SIBMB held $789,391.40 in the Account comprising the Marketing Fund; and
(d)all of SIBMB’s “present and after acquired property” was subject to security interests perfected by registration on the Personal Property Securities Register.

17.On 19 April 2018, at the second meeting of the SIBMB creditors, the voting creditors of SIBMB resolved pursuant to section 439C of the Act that SIBMB be wound up. [The liquidators] were appointed as liquidators of SIBMB.
18.[The Liquidators] do not consider that it is possible to use the reconciliations located in SIBMB’s electronic books and records as a means of directly calculating each franchisee’s interest in the Marketing Fund. However, [the Liquidators] have been able to identify:
(a)on the basis that the contributions to the Marketing Fund were spent on a “first in, first out” basis, that the entire Marketing Fund as at the Appointment Date accrued between 8 August 2016 and 17 February 2018 (Relevant Period);
(b)the franchisees that contributed to the Marketing Fund, and the amounts of their contributions during the Relevant Period.

19.Therefore, if the Plaintiffs are successful in their application, [the Liquidators] propose to distribute the Marketing Fund among franchisees in proportion to the franchisees’ respective contributions to the Marketing Fund.[7]
[7]Ibid [1]–[19].

The Court’s power to make the declarations and directions

It is not controversial that the Court has the power to make the declarations and directions pursuant to s 90-15 of Schedule 2 (Insolvency Practice Schedule) to the Act and, if necessary, s 36 of the Supreme Court Act 1986 (Vic).[8]
[8]Supreme Court Act 1986 (Vic) s 36 provides that a proceeding is not open to objection on the ground that a merely declaratory judgment is sought, and the Court may make binding declarations of right without granting consequential relief.

Section 90-15 provides as follows:

90‑15 Court may make orders in relation to external administration
Court may make orders
(1)The Court may make such orders as it thinks fit in relation to the external administration of a company.

Orders on own initiative or on application
(2) The Court may exercise the power under subsection (1):
(a)on its own initiative, during proceedings before the Court; or

(b) on application under section 90‑20.

Examples of orders that may be made
(3)Without limiting subsection (1), those orders may include any one or more of the following:
(a)an order determining any question arising in the external administration of the company;
…

Of relevance in approaching s 90-15 are the principles applicable to the former s 479(3) and s 511 of the Act.[9] Regarding the latter, in Erskine and Gooding v Elan Media Partners Pty Ltd,[10] Sifris J summarised as follows:
[9]See Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486, [41]; In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) (2018) 125 ACSR 355.
[10][2016] VSC 493 (‘Erskine and Gooding’).

[t]he purpose of the relevant provisions within the Act with regard to liquidators making applications to the Court, is to provide guidance and further, to give protection against a claim for breach of duty. The application for directions under the Act is an administrative non adversary proceeding, and the jurisdiction does not extend to determine the rights and liabilities arising from the company’s transactions before the liquidation. Additionally, it is the liquidator’s duty to make full and fair disclosure to the Court with regard to material facts. The Court is not required to resolve factual issues of the case.
In Re Murphy, McLelland J said:
A direction given pursuant to the section has no effect on the substantive rights of persons external to the winding up.

In Editions Tom, Lindgren J said:
‘The preponderance of authority is to the effect that on a liquidator’s application for directions under that provision or its predecessors, the court has no power to make orders binding upon, or affecting the rights of, third parties, and the view is also commonly taken that directions should not be given where the proposed acts of the liquidator which would be “sanctioned” by the directors would affect such rights.’

Pursuant to section 511(2), whether the Court is satisfied that the exercise of power by the liquidator is ‘just and beneficial’, is discretionary. In Re Great Southern Managers Australia Ltd (In Liq); Pritchard J said:
…
A determination under s 511 cannot, of itself, bind anyone except the liquidator and the persons entitled to participate under the winding up.
The effect of a direction or order under s 511 is not to determine rights and liabilities arising out of particular transactions, but to sanction a course of conduct proposed by a liquidator so as to protect the liquidator from liability for any alleged breach of duty as liquidator, to a creditor or to the company, in respect of anything done by the liquidator in accordance with the direction or order. (However, that does not mean that the court cannot determine questions involving substantive rights in an application under s 511, provided that all necessary parties are joined.)
…
The rationale for s 511 is that while a company and its creditors should be left, if possible, to settle their affairs without coming to the Court at all, the liquidator in a voluntary winding up should have a means to access the Court, in the same way as a liquidator in a compulsory winding up may seek the court’s direction, whenever any question arises in the course of the winding up. In many respects the Court’s jurisdiction under s 511 is analogous to, although not precisely the same as, its jurisdiction under s 479(3) of the Act. To that end, s 511 confers jurisdiction over subject matters and powers that the court might not otherwise possess.
A direction may be sought under s 511 in respect of any question arising in the course of a winding up, and the section should be interpreted widely to facilitate the liquidator’s functions. However, a direction will not be given merely because the liquidator has a feeling of apprehension or unease about the business decision and wants reassurance – it is not the Court’s role to make what are regarded as commercial decisions for liquidators. Consequently, there must be some issue which calls for the exercise of legal judgment so as to warrant its direction – whether that be a legal issue of substance or procedure, or an issue of power, propriety or reasonableness. However, those categories are not exhaustive and other special circumstances may exist which warrant the giving of a direction.[11]

[11]Ibid [30] – [33] (citations omitted).

As such, in obtaining guidance from the Court pursuant to s 90-15, a liquidator can acquire protection against a claim for breach of duty.[12]
[12]State Bank of NSW v Turner Corp Ltd (1994) 14 ACSR 480, 483.

In the current circumstances, I am satisfied that all the appropriate interests are represented. The liquidators have propounded a position for the benefit of the franchisees. The Commonwealth is an appropriate contradictor. The Commonwealth’s position is consistent with the interests of ordinary unsecured creditors. I am not required to resolve any questions arising pursuant to ss 560 or 561 of the Act in this proceeding.

I will now consider in turn the questions for determination.

Is the money in the Marketing Fund held on express trust for the franchisees?
Legal principles

In order to establish a trust, ‘the intention to do so must be clear and … it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries’.[13]
[13]Kauter v Hilton (1953) 90 CLR 86, 97.

It was not in contention that the Marketing Fund could form the subject of a trust.

On the issue of certainty of intention, where there is no express declaration of trust the Court of Appeal has summarised the relevant principles as follows:

[t]he applicable principles are well established. Courts will recognise the existence of a trust in a commercial setting, notwithstanding the absence of an express statement of intention to create a trust, when:
… it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended … In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention.[14]

Regard may be had to ‘what could fairly be inferred to be the interests and expectations of the two sides to the transaction in question’.[15] Subjective intentions are irrelevant.[16] With trusts as with contracts, the court is concerned not with ‘the real intentions of the parties, but with the outward manifestation of those intentions’.[17]

[14]Trident General Insurance Co Ltd v McNiece Bros PtyLtd (1988) 165 CLR 107, 121 and 148; Walker v Corboy (1990) 19 NSWLR 382, 384–5, 387–9 and 396–7; Byrnes v Kendle (2011) 243 CLR 253, 277, 263 and 288–9 (‘Byrnes’).

[15]Walker v Corboy (1990) 19 NSWLR 382, 385 (‘Walker’).

[16]Twinsectra Ltd v Yardley [2002] 2 AC 164, 185 [71].

[17]Commissioner of State Revenue v Snowy Hydro Ltd (2012) 43 VR 109.

An intention to create a trust will only be imputed if it is the appropriate mechanism to give legal effect to the relationship between the parties. In Korda v Australian Executor Trustees (SA) Limited,[18] Gageler J said:

[w]here there is no reason to consider that parties entering into a contract have not said what they meant or meant what they said, an express term in the contract that one party is to hold property on ‘trust’ for another party, or for a third party, will be recognised and enforced in equity as a trust. Conversely, where parties to a contract have refrained from contractual use of the terminology of trust, an intention to create a trust will be imputed to them only if, and to the extent that, a trust is the legal mechanism which is appropriate to give legal effect to the relationship, between the parties or between a party and a third party, as established or acknowledged by the express or implied terms of the contract. The question is whether recognition and enforcement of a trust is appropriate to give effect in law to entitlements and obligations which the parties, according to ordinary principles of contractual interpretation, can be taken together to have intended to exist in fact.[19]

[18](2015) 255 CLR 62 (‘Korda’).

[19]Ibid [109].

On the recognition of trusts in the commercial context, in Re Australian Institute of Professional Education Pty Ltd (in liquidation),[20] Black J noted authority establishing that:

the creation of a trust requires certainty of intention, particularly in a commercial context where acceptance of an assertion that assets are held in trust is likely to defeat the interests of creditors of the suggested trustee.[21]

[20][2018] NSWSC 1028.

[21]Ibid [46], citing Re Mowbray College (in liq) (rec and mgr apptd) [2013] VSC 565, [53] and Re Courtenay House Capital Trading Group Pty Ltd (in liq) and Courtenay House Pty Ltd (in liq) (2018) 125 ACSR 149, [19], [23] (‘Courtenay House’).

In considering the intention of the parties, of significance will be a requirement that the relevant fund is to be held separately from one’s own. Such an obligation has been described as a ‘hallmark duty of a trustee’[22] and the ‘most powerful indicium’ of a trust.[23] In Cohen v Cohen,[24] Dixon J observed that an obligation to hold money as a separate fund is indicative of a relationship of trustee and beneficiary:

[i]t is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is his cestui que trust. …[25]

[22]Associated Alloys Pty Ltd v ACN 001 452 106 (in liq) (2000) 202 CLR 588, 605 [34].

[23]Walker (n 15), 397.

[24](1929) 42 CLR 91 (‘Cohen v Cohen’).

[25]Ibid 101, quoting Channell J in Henry v Hammond (1913) 2 KB 515, 521.

However, this obligation is not always definitive. In Salvo v New Tel Limited,[26] Spigelman CJ noted that segregation of funds is indicative, but not conclusive, of an intention to create a trust.[27] Similarly, Robson J in Re Mowbray stated that ‘the mere existence of a “quarantined” fund’ was not sufficient to ‘evince an intention to create a trust’.[28]
[26][2005] NSWCA 281, [38].
[27]Ibid [38], citing Henry v Hammond [1913] 2 KB 515, 521; Walker, 397–398; Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491, 505–506 (‘Re Australian Elizabethan Theatre Trust’); see also CourtenayHouse.
[28][2013] VSC 565 [60].

The entitlements of the parties are to be understood in light of the applicable regulatory framework.[29] In Korda, French CJ determined that the applicable regulatory framework was capable of accommodating a variety of interests and arrangements, but did not mandate any trusteeship on the part of the alleged trustees.[30] In considering the point, his Honour referred to a discussion paper of a parliamentary committee that acknowledged the absence of such a mandate.
[29]Korda (n 18) 96.
[30]Ibid 75.

When determining the certainty of intention, an issue may arise as to how acts or conduct subsequent to the purported creation of the trust should be considered. In Spangaro v Corporate Investment Australia Management Funds Ltd[31] Finkelstein J stated that ‘it is sometimes appropriate to have regard to the promisor’s conduct’.[32] In the circumstances at hand, however, his Honour determined that the intention was to be found in the relevant documents.
[31](2003) 47 ACSR 285.
[32]Ibid 299; citing Heartley v Nicholson (1875) LR 19 Eq 233, 242.

A similar approach was taken in Sino Iron v Palmer (No 3).[33] There, the plaintiffs asserted that evidence that the alleged trustee did not mix its own monies in the relevant bank account could be admitted as evidence that the parties intended to create a trust. Without conclusively determining the issue, Jackson J noted that the fact that the alleged trustee did not mix its own monies was not relevant to whether the alleged trustee was obliged not to do so under the deeds in question.[34]
[33][2015] 2 Qd R 574, 586.
[34]Ibid.

In Kauter v Hilton[35] and Marriner v Australian Super Developments Pty Ltd,[36] the conduct of the parties was viewed as a relevant consideration in determining whether an express trust was formed. It is apparent, however, that in those cases the alleged trust was not said to stem primarily from a written agreement between the parties. In the former case, the evidence primarily consisted of oral statements and acts of the purported settlor. In the latter case, at issue was whether a Quistclose trust arose in circumstances where funds were transferred from a company to a related entity to cover certain bond moneys. Upon appeal, the company criticised the trial judge’s reliance upon evidence of how the funds were treated by the parties for accounting purposes.[37] On this point the Court of Appeal concluded:

[w]e would reject [the company’s] complaint that his Honour gave too much weight to the evidence of Whalley and Blashki about the accounting treatment of the bond moneys in the books of the various entities, although this evidence was not decisive as to the existence of a trust. It is true that even if [the related entity] was treated in company books as a debtor of [the company], rather than a trustee of the bond moneys, a debtor/creditor relationship and a trustee/beneficiary could have co-existed. However, the fact that the bond moneys were treated in the same way as other loans in company accounts must have considerable weight in determining the intention of the parties.[38]

[35](1953) 90 CLR 86.

[36](2012) 46 VR 213 (‘Marriner’).

[37]Ibid 228 [56].

[38]Ibid 234 [81].

The cases perhaps reflect the discussion by the learned authors of Ford and Lee, The Law of Trusts, regarding the limited use of extrinsic evidence where the parties intended a document to be the sole repository of intention.[39]
[39]Westlaw Australia, Ford and Lee, The Law of Trusts (at 1 June 2017) [2040], Construction of the language of a possible creator of a trust.

As recognised by Gummow J in Herdegen v Federal Commissioner of Taxation,[40] at times evidence of subsequent acts of the parties may be received as admissions against interest.[41] There, his Honour stated:

[i]n some factual situations where the existence of an express trust is in issue, it will be against the interest if the alleged trustee to admit the trust. Thus evidence of acts by him subsequent to the date of the alleged declaration of trust which tend to show the existence of the trust will be admitted as admissions against (but not for) his interest.[42]

[40](1988) 84 ALR 271.

[41]Ibid citing Shepherd v Cartwright [1955] AC 431, 445 and Calverley v Green (1984) 155 CLR 242.

[42]Ibid 28.

One of the cases his Honour cited in support of this principle was Calverley v Green.[43] In that case Mason and Brennan JJ held that:

[t]he Court of Appeal correctly took the time of the acquisition of the Baulkham Hills property as the material time for determining the beneficial interests of the parties. The evidentiary material from which the Court might have drawn an inference as to the intention of the parties included their acts and declarations before or at the time of the purchase, or so immediately after it as to constitute a part of the transaction. Evidence of those acts and declarations were admissible either for or against the party who did the act or made the declaration, but any subsequent declarations would have been admissible only as admissions against interest ...[44]

[43](1984) 155 CLR 242, 262.

[44]Shepard v Cartwright (1955) AC 431, [445]; Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353 [365].

In Korda however, the High Court appeared to eschew reliance on such evidence, as opposed to construction of the relevant written agreement. There, the respondents sought to rely on subsequent email evidence of an employee of the purported trustee providing that funds were held ‘on behalf of’ the alleged beneficiaries. On this issue Hayne and Kiefel JJ (Gageler J agreeing) stated:

[t]he issues in the case are to be decided by the proper construction of the documents. If the statements relied on by the Trustee Co as admissions bear the construction for which it contends, and if the statements are admissible against [the alleged trustees], their making neither requires nor permits any different conclusion about the construction of the documents.[45]

[45]Korda (n 18) 97.

French CJ approved the comments of Robson AJA in the Court of Appeal, that the admissibility of the evidence was ‘of little value in deciding the question to be addressed where there are indicators for and against the imputation of an express trust contained in an array of documents’.[46]
[46]Korda (n 18) 85 quoting Korda v Australian Executor Trustees (SA) Ltd (2014) 11 ASTLR 304 at 351 [241].

Ultimately, the question of intention must be determined with reference to ‘the language of the parties, construed in its context, including the matrix of circumstances’.[47] With this principle in mind, I turn to the relevant provisions of the Franchise Agreement and regulatory framework.
[47]Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, 121.

The Franchise Agreement

Each Franchise Agreement, regardless of when it was entered into, contains the same terms concerning the payment of the marketing levy and the establishment and use of the Marketing Fund.

Under the subheading ‘marketing fund and marketing program’, cl 13.1 provides:

The Franchisor has established and administers a Marketing Fund into which all franchisees that are part of the Network must pay a marketing levy. The Marketing Levy which is to be paid by the Franchisee is set out in Schedule Item 5.

Item 5 of the Schedule to the Franchise Agreement states:

Item 5Fees payable by Franchisee, Payment Terms and Method of Payment
(Clause 14)1. INITIAL FRANCHISE FEE – Not applicable
2. ONGOING FRANCHISE FEE – Not applicable
3. MARKETING LEVY – 5% of Gross Delivery
Fees plus GST payable by the Franchisor to the Franchisee under this Agreement

Terms of Payment:
The Marketing Levy shall be deducted from the Delivery Fees due and payable to the Franchisee and such deduction shall be itemised on the statement of account issued to the Franchisee by the Franchisor on a fortnightly basis in accordance with clause 15.

“Marketing Fund” and “Marketing Levy” are defined in cl 1 of the Franchise Agreement as follows:

1.32“Marketing Fund” means the marketing fund controlled or administered by [SIBMB] in accordance with the requirement of the Franchising Code into which the Franchisee is required to pay the Marketing Levy.
1.33“Marketing Levy” means the marketing levy calculated as set out in Schedule Item 5 by the Franchisee into the Marketing Fund.

Clause 13.2 provides that, in relation to the Marketing Fund and within specified timeframes, the Franchisor must prepare annual financial statements, have the statement audited and give to the franchisee a copy of the statement and audit report. The terms of cl 13.3 provide that the Franchisor does not have to comply with the auditing requirement if 75% of the Franchisor’s franchisees in Australia who contribute to the fund have voted to agree that the Franchisor does not have to comply.

Clause 13.5 of the Franchise Agreement states:

The Franchisor may use the funds in the Marketing Fund to:
(a)cover the costs of the Marketing Program (referred to in clause 13.6 below) and any other internal or external production, advertising, promotion and/or marketing of the System and the Products as the Franchisor decides, in its sole discretion, to be appropriate or desirable;
(b)any internal or external administration and professional fees incurred in relation to the fund including accountancy and auditing costs.

Money in the Marketing Fund need not be spent in the year in which it was received, and the Franchisor may if it thinks appropriate accumulate a reasonable reserve in the Marketing Fund. The Franchisor is not required to spend any particular proportion of the Marketing Fund on any particular area of expenditure or on any particular franchisee or group of franchisees.

Clause 13.6 provides:

Marketing Program
The Franchisor shall develop a Marketing Program for the Marketing Fund, on an annual basis for the marketing, advertising and promotion of the home delivery services for the Products under the Trade Marks (‘Marketing Program’). As a part of the Marketing Program, the Franchisor shall create a marketing plan and proposed marketing budget, which may be updated and changed having regard to changes in market conditions which effect the Network (‘Marketing Plan’).

‘Network’ is defined in cl 1.35 as follows:

…the Franchisor, franchisees and other persons involved in the supply, marketing and home delivery of Products to customers using the Trade Marks and System in Australia.[48]

[48]Affidavit of Craig Peter Shepard, sworn 3 July 2018, exhibit ‘CPS-4’.

‘Products’ is defined in cl 1.38 as follows:

… the range of Australian produced or made products that the Franchisor markets and supplies to AFD Customers from time to time as a part of its home delivery business, as varied by the Franchisor. …[49]

[49]Ibid; See also Affidavit of Craig Peter Shepard, sworn 23 August 2018, exhibit ‘CPS-21’, [1.35].

‘Systems(s)’ is defined in cl 1.44 as follows:

…distinctive Image, operational and business procedures, systems and standards developed by the Franchisor for the marketing of Products and home delivery service and the home delivery of the Products to customers using the Trade Marks, whether detailed in the Manuel or otherwise.[50]

[50]Ibid; See also Affidavit of Craig Peter Shepard, sworn 23 August 2018, exhibit ‘CPS-21’, [1.41].

Clause 4 is the grant of the Franchise. Clause 4.1 provides as follows:

The Franchisor grants to the Franchisee the right to:
(a) operate the Franchise Business;
(b)use the System and the Franchisor’s Intellectual Property solely for the purpose of operating the Franchise Business;
(c)participate in the Network,

for the term of this Agreement, solely within the Territory, subject to the terms of this Agreement.

The relationship between the parties is referred to in cl 5 in the following terms:

5.1The parties acknowledge that they are independent contractors and no relationship of partnership agency or employment is expressly intended or to be implied into this Agreement.
5.2During the term of this Agreement the Franchisee shall at all times represent itself to Customers and the public as an independent contractor operating the Franchised Business under licence from the Franchisor.

Clause 14 of the Agreement sets out fees payable by the franchisee to the franchisor. Save for the Marketing Levy payments (cl 14.4) there is no requirement to pay franchise fees and other fees into any particular fund, nor is there any restriction upon the franchisor’s ability to appropriate or use the same.

Clause 15 deals with fees payable by the franchisor to the franchisee for delivery and other services. Clause 15.5 provides for the deduction or set off from any delivery fees due and payable to the franchisee, including (b), the Marketing Levy.

Termination by the franchisor is dealt with in cl 22, and termination by the franchisee in cl 23. The consequences of termination are dealt with in cl 24. Of specific note:

24.1The expiry or termination of this Agreement shall be without prejudice to the rights which have already accrued to either of the parties under this Agreement.
…
24.5Within thirty (30) days of the expiry or termination of this Agreement or such other period as agreed to by the parties in writing, the Franchisor will prepare and provide to the Franchisee a statement of account detailing all sums of money which are due or owing to:
(a) The Franchisor by the Franchisee; and
(b) The Franchisee by the Franchisor.
24.6The Franchisor shall deduct the sums of money due or owed by the Franchisee to the Franchisor from the sums of money due or owed by the Franchisor to the Franchisee and shall pay the remaining sums of money (if any) to the Franchisee within fourteen (14) days of the date of the statement of the account.
24.7The Franchisee shall pay the Franchisor any remaining sums of money (if any) which are due or owing as detailed in the statement of account provided by the Franchisor in accordance with clause 24.5, within fourteen (14) days of the date of the statement of account less any amount which the Franchisee has notified the Franchisor in writing is in dispute and the basis for disputing payment. …
…
Survival of clauses
24.9The following clauses shall survive the expiry or termination of this Agreement:
[the clauses deal with matters which would normally be expected including confidential information and non-disclosure; restraints and dispute resolution. Clause 13 or any other clause in relation to the Marketing Fund does not survive.]

The Franchising Codes

The current Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) (‘the New Franchising Code’) first came into operation on 1 January 2015. Prior to the New Franchising Code’s commencement, the governing code was the Trade Practices (Industry Codes –Franchising) Regulations 1998 (Cth) (‘the Old Franchising Code’).

Terms of the Old Franchising Code included:

17 Marketing and other cooperative funds
(1)If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the franchisor must:
(a)within 4 months after the end of the last financial year, prepare an annual financial statement detailing all of the fund’s receipts and expenses for the last financial year; and
(b)have the statement audited by a registered company auditor within 4 months after the end of the financial year to which it relates; and

(c) give to the franchisee:
(i)a copy of the statement, within 30 days of preparing the statement; and
(ii)a copy of the auditor’s report, if such a report is required, within 30 days of preparing the report.

(2)A franchisor does not have to comply with paragraph (1)(b) for a financial year if:
(a)75% of the franchisor’s franchisees in Australia, who contribute to the fund, have voted to agree that the franchisor does not have to comply with the paragraph; and

(b) either:
(i)that agreement is made within 5 months after the end of the financial year (the financial year for which agreement is reached);

or
(ii)the financial year falls within the period of 2 years after the financial year for which agreement is reached.

(3)A franchisor is taken to have complied with paragraph 12.1(h) of Annexure 1 if, to the extent to which the franchisor is aware of the details, the franchisor supplies the following information for the period before 1 July 1998 to the franchisee:
(a)the amounts of expenditure on production, advertising, administration, and any other category of expenditure stated in the disclosure document for each marketing or other cooperative fund controlled or administered by or for the franchisor to which the franchisee may be required to contribute;
(b)the percentage that each amount disclosed in accordance with paragraph (a) constitutes of the total expenditure disclosed in accordance with that paragraph.

(4)If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the reasonable costs of administering and auditing the fund must be paid from the fund.[51]

[51]An earlier version of this clause provided, inter alia, that the timeframe was 3 months and that a copy of the annual financial statement was required to be provided upon written request of the franchisee. That version was in force from October 2001 to February 2008.

In summary, the Old Franchising Code articulated that if a franchise agreement provides that the franchisee must pay money to a marketing fund or other cooperative fund, the franchisor must prepare annual statements detailing all of the funds receipts and expenses, have the statement audited, and give to each franchisee a copy of the statement and the auditors reports.

As already noted, prior to the establishment of a separate account in March 2015, the marketing levy was paid into and held in a general account of SIBMB and mixed with SIBMB’s other moneys.

The New Franchising Code provides, amongst other things included:

15 Copy of financial statements
(1)If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the franchisor must:
(a)within 4 months after the end of the last financial year, prepare an annual financial statement detailing all of the fund’s receipts and expenses for the last financial year; and
(b)ensure that the statement includes sufficient detail of the fund’s receipts and expenses so as to give meaningful information about:
(i) sources of income; and
(ii)items of expenditure, particularly with respect to advertising and marketing expenditure; and

(c)have the statement audited by a registered company auditor within 4 months after the end of the financial year to which it relates; and

(d) give to the franchisee:
(i)a copy of the statement, within 30 days of preparing the statement; and
(ii)a copy of the auditor’s report, if such a report is required, within 30 days of preparing the report.

Civil penalty: 300 penalty units.

(2)A franchisor does not have to comply with paragraph (1)(c) in respect of a financial year if:
(a)75% of the franchisor’s franchisees in Australia, who contribute to the fund, have voted to agree that the franchisor does not have to comply with the paragraph in respect of the financial year; and
(b)that agreement is made within 3 months after the end of the financial year.

(3)If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the reasonable costs of administering and auditing the fund must be paid from the fund.
…

Clause 31 – Marketing and advertising fees
(1)A Franchisor must maintain a separate bank account for marketing fees and advertising fees contributed by franchisees.
…
(3)Despite any terms of a franchise agreement, marketing fees or advertising fees may only be used to:
(a) meet expenses that:
(i)have been disclosed to franchisees under paragraph 15.1(f) of the disclosure document; or
(ii)are legitimate marketing or advertising expenses; or

(iii) have been agreed to by a majority of franchisees; or
(b)pay the reasonable costs of administrating and auditing a marketing fund.

As required by the New Franchising Code, in March 2015, SIBMB opened a separate account with the Commonwealth Bank of Australia named ‘AFD Marketing Fund’. At that time the Marketing Fund was transferred from SIBMB’s general account to the AFD Marketing Fund.

The submissions of the parties

The parties made extensive submissions in relation to the meaning and effect of various clauses in the Franchise Agreement. These submissions turned on the question of whether or not the clauses demonstrate an intention on the part of the parties to establish a trust.

Liquidator’s Submissions

The Liquidators argue that an intention to create a trust relationship exists on the facts.

First, on the basis of first in and first out, the liquidators submit that the only relevant code is the New Franchising Code and that the funds currently held by the liquidators represent levies deducted after March 2015.

As to the wording of cl 13.5 (set out at paragraph [38] above), the Liquidators submit that the words ‘may use’ in the opening sentence are intended to be read as ‘may use only to’. They submit that there is an element of exclusivity that requires the fund to be used only for the limited purposes set out in the clause. Secondly, the words ‘in its sole discretion’ in clause 13.5(a) are also used in a very limited way. Those words are not intended to give SIBMB general power to deal with funds as it so chooses. Rather, all those words do is confer a discretion upon SIBMB to allocate the moneys to the items specified in the clause and not to the general expenses. The clause also bestows a general discretion on SIBMB not to allocate any of the moneys. Although it provides for accumulation of reasonable reserve, the accumulated funds can only be used for the purposes set out in the clause.

Further, the Liquidators submit that cl 5 does not of itself exclude the concept of a trust. However, I find that submission unhelpful as cl 5 is directed as to the overall relationship. The defining of the relationship as one of ‘independent contractor’ is the antithesis of the relationship of trustee and beneficiary.

The Liquidators did not appear to identify the purported beneficiary with certainty. While the relevant trust is said to be for the benefit of the ‘franchisees’, it is unclear on the submissions whether this is a reference to the ‘franchisees’ as a class, or each individual franchisee. Further, the Liquidators did not seek to define a class of franchisees by reference to the franchisees existing at the time of each ‘contribution’ or the franchisees existing from time to time taking into account terminations and the addition of new franchisees.

The submissions of the Commonwealth

The Commonwealth argues that the language of the documents, statutory framework and subsequent conduct of the trustee are inconsistent with the assertion that the parties shared a mutual intention that the Marketing Fund be held on trust.

In opposition to the imputation of a trust, the Commonwealth submitted:

[t]he Franchise Agreement does not contain any obligation requiring the Marketing Fund to be held in a separate account, and several provisions of the Franchise Agreement are inconsistent with an intention that the Marketing Fund be held on trust. [52]

[52]Commonwealth, ‘Defendant’s Outline of Submissions’, Submission in Stay in Bed Milk & Bread Pty Ltd (in liq), S ECI 2018 00205, 27 August 2018, 18.

In support of the submission, the Commonwealth points to a number of factors:

(a) the use of the Marketing Fund was at SIBMB’s ‘sole discretion’ (and, consequently, the words ‘sole discretion’ in clause 13.5(a) should not be read in a limited way);

(b) there was no obligation to apply the monies in the Marketing Fund to the businesses run by the franchisees, despite the franchisees being the contributors to the Marketing Fund;

(c) the Marketing Fund (pursuant to cl 13.5 of the Franchise Agreement) was expressly available to cover the costs of the ‘Marketing Program’ and the promotion of SIBMB’s ‘System’ and ‘Products’. It was contemplated that the Marketing Fund would be used to promote and advertise the franchisor’s business as a whole rather the franchisee businesses;

(d) the franchisees did not have any recognised interest and any right to the monies held in the Marketing Fund; and

(e) the Franchise Agreement does not stipulate what is to happen to the Marketing Fund upon termination or the cessation of trading. Clause 13 does not survive termination or expiry of the Franchise Agreement. That the Marketing Fund does not need to be spent in the specific year it was contributed or even on the contributing franchisees, strongly indicates that funds contributed by any one franchisee were intended to be legally and beneficially held by SIBMB, even if that particular franchisee was no longer operating as a member of the franchise network. The structure of the Franchise Agreement is thus antithetical to the retention of a beneficial interest in those funds by a franchisee.

The Commonwealth submits that the opening of the separate bank account cannot be viewed in isolation and should be considered in context:

(a) for more than 10 years the Marketing Fund was not held in a separate account, but was held in the general accounts of SIBMB; and

(b) the separate account was only opened in March 2015, following an amendment to the Franchising Code of Conduct and the introduction of a new requirement that franchisors hold marketing funds in a separate account.

Although the Commonwealth concedes that segregation of funds is indicative of an intention to create a trust, it is certainly not conceded as being conclusive of such an intention. This is so when the separate account was only opened in March 2015 to comply the obligations under the New Franchising Code.

Further, the Commonwealth points to the difficulty in identifying who contributed to the Marketing Fund, and in what amount, as militating against the intention to form a trust. It is also said to be of significance that the Marketing Fund was recorded in SIBMB’s financial statements as an asset of the company both before and after the separate account was opened.

Finally, the Commonwealth sought to rely on the Explanatory Memorandum to the New Franchising Code, which is said to be of relevance to understanding the legislative framework underlying the Franchise Agreement. It is asserted that the notion that marketing funds be subject to a trust was expressly contemplated and rejected by the drafters of the New Franchising Code. In submissions in reply, the Liquidators object to recourse to the Explanatory Memorandum. They submit that evidence of legislative intention in relation to the New Franchising Code does not assist in this particular case, as the trust arises from the terms of the Franchising Agreement. Further, s 15AB of the Acts Interpretation Act1901 (Cth) provides that extrinsic material may only be considered in limited circumstances. Even if the material is allowed, however, the Liquidators assert that it is of limited assistance as the terms of the New Franchising Code are not inconsistent with the existence of a trust should that be a mutual intention of the parties.

Consideration

Explanatory Memorandum

It is convenient to first address the parties’ submissions in relation to the admissibility of the extrinsic material.

As set out above, the old Franchise Agreement did not require the franchisors to hold a Marketing Fund in a separate account. The obligation to separate funds was first introduced by the New Franchising Code.

Section 15AB of the Acts Interpretation Act1901 (Cth) provides as follows:

15AB Use of extrinsic material in the interpretation of an Act
(1)Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:
(a)to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or

(b) to determine the meaning of the provision when:
(i) the provision is ambiguous or obscure; or
(ii)the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable.

(2)Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes:
…
(e)any explanatory memorandum relating to the Bill containing the provision, or any other relevant document, that was laid before, or furnished to the members of, either House of the Parliament by a Minister before the time when the provision was enacted;

…

The Liquidators have relied upon the definition of the Marketing Fund pursuant to cl 1.32 of each of the Franchise Agreements (set out at paragraph [36] above).[53] Clause 1.32 required control or administration of the fund by the franchisor in accordance with the requirements of the Franchising Code.
[53]See Affidavit of Craig Peter Shepard, sworn 3 July 2018, exhibit ‘CPS-4’, Cl 1.32.

Whilst I accept that the relevant provisions of the New Franchising Code are not ambiguous or obscure, and nor is the ordinary meaning conveyed by the text such as to lead to a result that is manifestly absurd or is unreasonable, I am entitled to have resort to extrinsic material to:

…confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act. …[54]

[54]Acts Interpretation Act 1901 (Cth) s 15AB(1)(a).

In this regard, the learned authors Pearce and Geddes note that even where a provision is clear on its face, extrinsic materials may be used to confirm the ordinary meaning.[55] Cited in support of this proposition is Re Australian Federation of Construction Contractors; Ex parte Billing (1986) 68 ALR 416. I also note that in Korda, French CJ referred to extrinsic material when considering the applicable regulatory framework.
[55]DC Pearce and RS Geddes, Statutory Interpretation in Australia (LexisNexis, 8^th ed, 2014)[ 3.1].

Here, according to its ordinary meaning, cl 31 of the New Franchising Code provides that a franchisor must maintain a ‘separate bank account’ for the marketing fees and advertising fees contributed by franchisees. It does not, on its ordinary meaning, require the account in question to be a trust account. This interpretation is confirmed by reference to the relevant explanatory statement and explanatory memorandum. Specifically, cl 31 of Attachment B in the explanatory statement for the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 provides that ‘in conjunction with clause 15, clause 31 seeks to maintain a high-level of transparency about the management of marketing and advertising funds’,[56] and in Attachment D, the Regulatory Impact Statement, that a recommendation that marketing funds be held as trust funds was not adopted.[57] This point was similarly made in the explanatory memorandum for the Competition and Consumer Amendment (Industry Code Penalties) Bill 2014 (Cth), which amended the Competition and Consumer Act 2010 (Cth) ahead of the commencement of the New Franchising Code:
[56]Explanatory Statement, Competition and Consumer (Industry Codes—Franchising) Regulation 2014, 40.
[57]Ibid [77].

Keeping marketing funds in a trust account
[2.79]Among other reforms to the treatment of marketing funds, the Review recommended that marketing funds be held as trust funds. Stakeholders argued requiring marketing funds to be formally treated as trust funds would be problematic. In particular:
Given franchisors are not required to maintain a marketing fund, the additional compliance burdens associated with keeping a trust account may deter franchisors from setting up marketing funds at all. This may deprive franchisees of the transparency provided for relating to marketing by other provisions of the Franchising Code.
This could have an impact on taxation arrangements and the treatment from a taxation and accounting perspective. Some stakeholders argued this would significantly increase the legal and administrative burdens on franchisors.
If marketing funds were held in trust, this could impact franchisors credit worthiness or the cost of credit for a franchisor.
[2.80]Accordingly, while other recommendations relating to the treatment of marketing funds have been adopted, this particular recommendation is unjustified when the potential costs are considered.[58]

[58]Explanatory Memorandum, Competition and Consumer Amendment (Industry Code Penalties) Bill 2014 [2.79]-[2.80].

Although I am prepared to consider the extrinsic material, and note that the notion of the marketing funds being held in a trust account was rejected, such a clear statement does not assist me. The Liquidators do not rely on the wording of the New Franchising Code alone as creating an express trust. The argument is that from all the circumstances, including reference to the New Franchising Code, an intention to create a trust can be imputed. Consequently, while the Franchising Code does not mandate a trust, such a relationship may have been intended by the parties.

Sole discretion

I determine that there is nothing untoward about reposing the discretion of management of the Marketing Fund in SIBMB. The discretion is still limited by the clause 13.5 parameters. I do not consider that the conferral of sole discretion on SIBMB, in and of itself, precludes the imputation of a trust.

Obligation to apply monies

In isolation, reserving to SIBMB the right to determine when it is appropriate to apply funds in the Marketing Fund is not antithetical to the concept of a trust. Reserving that discretion merely assists in the administration of the fund. However, the discretion or lack of obligation must also be considered in the context of a termination of a Franchise Agreement which I discuss below.

The Marketing Program

Each of the franchisees is contractually bound to permit the application of funds to the Marketing Program. The Commonwealth submits that as the Marketing Program includes the promotion of the franchisor’s ‘System’ and ‘Products’, it was contemplated that the Marketing Fund could be used to promote and advertise the franchise business as a whole. It is common ground that SIBMB carried on no business other than that as franchisor. The argument is that the promotion of the ‘System’ is for the benefit of SIBMB rather than the franchisees. SIBMB’s pursuit of its own business cannot be considered as irrelevant given that at the appointment date it had 259 employees.

I have not been provided with any material as to how the Marketing Fund funds were applied. Nor was I provided with any material as to how the Marketing Fund was operated. There are no minutes of meeting or resolutions as to how the fund was to be expended. The Marketing Fund’s statements of account[59] are also not particularly elucidating as the major monthly expenditure seemed to be on ‘D2D’. I was not taken to what that entailed but I note that it appeared under the heading of ‘Customer Acquisition’ rather than under the heading ‘Marketing’. Further, in each month of the statements produced to me there is provision for an adjustment. The adjustments were both positive and negative but, in the main, were negative and reached a quantum of almost $85,000 in the month ending 28 October 2017. The negative adjustment was required when funds at bank exceeded the recorded balance at the marketing account. In the period 26 August 2017 to 24 February 2018, the balance of the adjustment was negative $204,634.76. Based upon the liquidators’ submissions, that sum represents funds sourced other than contributions from franchisees. Further, I note of the ‘outflows’ for the same period, the amount attributed to the item ‘marketing’ totalled $74,962.54. The amount attributed to the item ‘customer acquisition’ and specifically ‘D2D’ was $230,380.
[59]Affidavit of Craig Peter Shepard, sworn 3 July 2018, exhibit ‘CPS–6’.

It was put to me that expenses for the Marketing Program had been met by SIBMB which reimbursed itself. No supporting material was produced to confirm that the reimbursement represented funds that ought to have been debited from the Marketing Fund. Nor was there any explanation given as to why there is a positive adjustment in some months. What the adjustments demonstrate is that the concept of maintaining a separate fund to be used solely for marketing was not adhered to by SIBMB. Another way of looking at each monthly statement is to note that the balance contributed by the franchisees in each month was usually less, but not always, than the amount held in the bank account. Again, no explanation was given for that variance other than that SIBMB had contributed funds from its own account.

I refer to Mr Shepard’s affidavit sworn 3 July 2018, parts of which are set out in paragraph 91 hereof. In particular, I refer to Paragraph 36(a)(iv) of that affidavit wherein Mr Shepard noted ‘…the closing balance for FY16\opening balance for FY17 as per the report ($519,224) does not match the bank balance at the same date ($377,323.61). This could be due to a reconciling difference (e.g. the difference was yet to be transferred from SIBMB to fund the account) …’.

The yearly statements of the marketing fund account disclose that the balance as at 28 June 2014 was negative $67,896. The balance as at 1 July 2017 is recorded as $783,883. Given the adjustments referred to in the seven month period (CPS-6) , the balances in each of the financial year statements are not particularly helpful. Those statements do not disclose funds at bank at any one time, nor do they disclose the quantum of adjustments required for each period. The notes to the financial statements for SIBMB for the year ended 1 July 2017[60] disclosed that the current marketing fund balances (at bank) were $843,443 as at 1 July 2017 and $377,334 as at 30 June 2016.
[60]Ibid, exhibit ‘CPS-7’, [350].

Of itself, the failure to maintain the separate account and to provide statements of account to the franchisees which properly explained the transactions may be in breach of the New Franchising Code, but this does not necessarily negate the concept of a trust. However, the amount of the ‘outflows’ which are attributable to a ‘marketing’ for the financial year 2015 was $440,631, for the financial year 2016, $595,700 and for the financial year 2017, $322,831. In those circumstances, I find it extraordinary that the fund has accumulated the balance at bank of $789,391.40. The balance represents more than a year’s ‘outflows.’

The conduct of each of the franchisor and the franchisees in allowing that accumulation does not support the submission that a trust may be imputed despite the maintenance of discretion of when to expend funds. The conduct of SIBMB and each of the franchisees is more consistent with the proposition that the beneficial interest in the Marketing Fund has been conferred upon or delivered to SIBMB in its own interest.

Although the marketing fund financial year statements are consistent with the Liquidators’ submissions, that on the basis of first in, first out, the fund at bank represents contributions since the commencement of the new code, those marketing fund end of year financial statements are not elucidating to identify if the funds held at bank represent contributions by the franchisees alone or in combination with contributions or payments by SIBMB. Certainly, I cannot endeavour to work out the proportion of what each contribution might have been.

I was not taken to any material or evidence as to how special purpose accounts such as the Marketing Fund ought to be treated in compliance accounts for a corporation. However, both before and after opening the separate Marketing Fund account, the amount attributed to the Marketing Levy was included in the company’s statement of financial position as an asset. It was also included as a liability. It cannot be distilled whether the Marketing Levy was treated as income in the statement of comprehensive income for the year ended 1 July 2017. I note that advertising expenses were recorded at $6,806,549. However, in the absence of a note explaining how that figure is broken up I cannot conclude that it includes the Marketing Fund. Nor can I identify compliance and audit fees in relation to the Marketing Fund.

I was taken to the statement of financial position at 1 July 2017. Under the heading ‘Assets’ is ‘Other Assets’. At $2,477,732 which was up from the 2016 figure at $1,456,361. Note 8 explaining that entry sets out the figure for other assets including ‘Marketing Fund Cash Balance’ of $843,443 which was up from $377,334 for the period ending 25 June 2016.

Note 12 to the item ‘Trade and Other Payables’ under the heading ‘Current Liabilities’, sets out that it includes ‘Marketing Fund Balance’ $843,443 up from $377,334. On one view the balancing entries do not bear upon the characterisation of how the funds are held. Even though I’d expect the only asset to be recorded by a trustee, in its capacity as a trustee, to be the right of indemnity, I was not taken to any Australian standard or other accounting principle in relation to whether it was appropriate to record the Marketing Fund in the manner in which it was.

The Commonwealth points to the recording of the Marketing Fund in the financial statements both prior to and after the separate account was required and opened, as an admission against interest as referred to in Calverley v Green.[61]However, given the approach of the High Court in Korda, I view this evidence as of limited significance in circumstances where the intention of the parties turns upon the construction of the Franchise Agreement, read in light of the Franchising Code.
[61](1984) 155 CLR 242, 262.

Termination of franchise relationship

Clause 13, which establishes the Marketing Fund, does not survive upon termination of the franchisor–franchisee relationship.

Clause 24.5 requires the franchisor to prepare and provide to a franchisee a statement of account dealing with all sums of money which are due and owing to each other within 30 days of the expiry or termination of the Franchise Agreement. The process includes a deduction from funds due or owed and the payment of the balance as appropriate. In contrast, there is silence with respect to the taking of an account in relation to contributions to the Marketing Fund and what is to happen to any balance. That contrast, and the absence of any requirement to account for the Marketing Levy deducted from the franchising fees, is antithetical to the retention of the beneficial interest in those funds by a franchisee. An argument that the marketing fund was held on trust for the benefit of the franchisees as a class did not appear to be specifically advanced by the Liquidators. However, even if such a position was considered, a tension would arise regarding the class encompassing, for example, the franchisees ‘from time to time’, including any new franchisees, but not the terminated franchisee.

Identification of contributions

The contrast and silence in relation to the status of the Marketing Fund moneys after termination is also particularly germane to the analysis of the question of whether a Quistclose trust has been created. Accordingly, I will come back to it later. In the affidavit of Craig Peter Shepard sworn 3 July 2018, it was set out with respect to reconciliation of funds in the Marketing Fund as follows:

36.I am informed by Ms Martin and Mr Funston of the following with respect to that process:
(a)The previous management of SIBMB had advised them that the Marketing Fund had been reconciled on a round-by-round basis (noting that each franchisee had a delivery “round” or “rounds” allocated to them) for the period the Marketing Fund was open. Despite this, their review identified the following issues, which will prevent a complete round-by-round reconciliation:
(i)The Marketing Fund was established in March 2015, however Ms Martin and Mr Funston were unable to locate any data for FY15 to allow them to determine the contributions, expenses, net contributions or closing balances on a round-by-round basis for the period March 2015 to June 2015.
(ii)They located a report that shows the “closing balance” for FY16 on a round-by-round basis (totalling $118,672.50 or $120,982.86 depending which tab of the report is used). However, it is not clear whether these figures are the true closing position of the Marketing Fund for FY16 (i.e. includes FY15 and FY16) or whether they are just the net contributions for FY16.
(iii) They located a report that shows the first half of the FY17 contributions on a round-by-round basis (totalling $322,480.86). However, they have only located reports that show the second half of the FY17 contributions by ledger entry (which makes no reference to the relevant round) and as a grand total ($202,114.45 Jan-May 2017 plus $62,894.81 for June 2017 – they have not located data that shows contributions on a round-by-round basis.
(iv) At a company level, the closing balance for FY16 / opening balance for FY17 as per the report ($519,224.00) does not match the bank balance at the same date ($377,323.61). This could be due to a reconciling difference (eg the difference was yet to be transferred from SIBMB to the fund account), however there is no further information to confirm whether this is correct or not.
(v) At a round-by-round level, the closing balance for FY16 /opening balance for FY17 as per the report ($118,672.50 or $120,982.86 as discussed above) does not match the opening balance per the bank statement ($377,323.61 as discussed above). It is unclear what this difference relates to.
(vi) The FY18 reports appear to reconcile the Marketing Fund correctly at a fund level, however there is insufficient information to allocate the Marketing Fund on a round-by-round basis, because:
(A)The opening balance of FY18 ($408,219.52) does not reconcile to the closing balance of the FY17 reports ($199,699.92) for the round-by-round reconciliations. It is unclear what this difference relates to.
(B) No report clearly shows the round-by-round contributions or expenses, or in anyway reconciles with the fund balance.
(C) Franchise-wide expenses including brochures, print and radio advertisements, pallet storage, bank fees and other expenses were not allocated to individual rounds during FY18.

37. Given the above matters, I do not consider that it is possible to use the reconciliations located in SIBMB’s electronic books and records as a means of directly calculating each round’s (and therefore each franchisee’s) interest in the Marketing Fund.
38.I consider that the only practical method of distribution of the Marketing Fund among franchisees is in proportion to the franchisees’ respective contributions to the Marketing Fund. In this regard, I note the following:
a.During the period from 8 August 2016 to 17 February 2018, there were total contributions to the Marketing Fund of $815,536.93.
b. As at the date of the Administrators’ appointment the Account balance was $789,391.46.
c. On the assumption that contributions were spent on a “first in, first out” basis, the entire Marketing Fund as at the date of the Administrators’ appointment would therefore have been accrued between the period 8 August 2016 and 17 February 2018 (Relevant Period).

39. On the basis of the matters set out in paragraphs 36 to 38 above, I propose to allocate the Marketing Fund (after expenses) by reference to each franchisee’s round contributions during the Relevant Period. …[62]

[62]Affidavit of Craig Peter Shepard, sworn 3 July 2018, [36]-[39].

The Commonwealth contends that the absence of any documented mechanism for recording and quantifying the alleged beneficial interest of the franchisees tells against a mutual intention to hold monies on trust.

Whilst the records of SIBMB appeared deficient, in that it cannot identify particular contributions and how they have been expended, in the absence of anything more, I would be inclined to accept that the proposal set forward by Mr Shepard for allocation by reference to each franchisee’s round contributions during the relevant period would accord with the:

principle that all contributors to a deficient mix fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions or are equitable tenants in common of the mixed fund as a whole, including its traceable proceeds (subject to any dealings in costs) …[63]

[63]Plaintiffs, ‘Liquidators’ outline of submissions in reply’, Submission in Stay in Bed Milk & Bread Pty Ltd (in liq), S ECI 2018 00205, 5 September 2018, 6.

However, I am uncertain if such a proposal is appropriate in circumstances where it would appear difficult to identify if the marketing fund represents ‘contributions’ solely from the franchisees.

In obiter comments, the Court of Appeal referred to the following comments of Gummow J in Re Australian Elizabethan:

[t]he question as to the existence of any express trust will always have to be answered by reference to intention. … Ordinarily, the relevant intention is that of the alleged settlor, but where the subject matter of the trust is contractual rights against the settlor, conferred by the settlor upon the alleged trustee, the objective (or ‘purpose’) of the transaction being to benefit third parties, it may be appropriate to look at the mutual intention of settlor and trustee.[96]
[96](1991) 30 FCR 491, 502.

The Court of Appeal then commented:

[w]e would adopt as a correct statement of the position what was said by Gummow J in Re Australian Elizabethan Theatre Trust. However, as Gummow J also recognised, that does not mean that one does not have regard to the totality of the circumstances, or that one disregards [the alleged trustee’s] knowledge. Braham Investments’ own pleading reflects the importance of both those matters. This is because:
–In determining whether a trust relationship exists, regard must be had to the whole of the relevant circumstances.
–Whether an intention to create a trust exists must be determined by reference to the outward manifestation of such an intention within the totality of the circumstances.
–Trust obligations arise where equity operates on the conscience of the holder of the legal interest. A person cannot be a trustee of property if that person is ignorant of the facts alleged to affect his or her conscience. In other words, unless the putative trustee is aware that he or she is intended to hold the property for the benefit of others, his or her conscience will not be affected in a relevant way.[97]

[97]Braham Investments (n 94) [272]- [279].

In the event, the trial judge’s statement as to mutual intent was not considered ‘strictly accurate’.

Submissions of the parties

Liquidators

The Liquidators submit that the principles from Courtenay House are directly applicable as:

(a) SIBMB received funds in the form of the Marketing Levy and that it was only permitted to be used for a specific, exclusive purpose;

(b) Clause 13.5 of the Franchise Agreement supports this exclusive purpose; and

(c) Clause 31(3) of the New Franchising Code imposes further restrictions on the use of the marketing funds contributed by franchisees.

Ultimately, the liquidators submit that SIBMB holds the Marketing Fund on trust for the franchisees because the purpose for which the funds were paid by the franchisees can no longer be effectuated.

The Liquidators contend that in the present circumstances, unlike in Legal Services Commission v Brereton,[98] there was more than an expectation or general understanding in relation to the applications of the funds. The purpose specified was tantamount to an agreed condition on which the funds were provided. It was not merely a request or a preference as to how moneys were to be used.[99] Of relevance is cl 31(3) of the New Franchising Code, as use of the funds for a purpose other than the specified purpose in cl 31(3) would constitute a breach of the New Franchising Code and by virtue of s 51 ACB of the Competition and Consumer Act 2001 (Cth), such a contravention may lead to the imposition of a civil penalty.
[98](2011) 39 VR 126.
[99]See ReAustralian Elizabethan Theatre Trust (1991) 30 FCR 491, 501.

The Liquidators contend that it is irrelevant how SIBMB recorded the moneys in its own account. In any event a debtor/creditor and trustee/beneficiary relationship can co-exist, such that the treatment of the payment in SIBMB’s books and records is not determinative. Furthermore, the liquidators submit that Marriner supports the contention that ordinarily only the payer’s intention is relevant to determining whether a Quistclose trust arose.

The Liquidators argue that the Franchise Agreement, understood in the context of the relevant obligations imposed by the Franchising Code, provide for the advance or transfer of money from the franchisees to SIBMB for a specific purpose. By reason of the winding up of SIBMB, that purpose can no longer be carried out. Further, they argue that the critical time is when each of the levies is deducted or received into the fund, not when the Franchise Agreement was entered into.

Applying Twinsectra, the Liquidators submit that SIBMB has recourse to the money in the marketing fund for a specific purpose (the uses identified in cl 31(3) of the Franchising Code) without impeding on the franchisee’s property rights. Furthermore SIBMB had a positive duty to apply the money in the Marketing Fund only in accordance with the Franchising Code. Accordingly, SIBMB has no beneficial interest in the money that remains in the fund.

The Commonwealth

The Commonwealth submits that in the present circumstances, the evidence falls short of the intention necessary to support a Quistclose trust due to the following reasons:

1.…SIBMB acquired more than a ‘dry legal interest’; it had an absolute right to use and benefit from the Marketing Fund. That is, SIBMB could use the monies in the Fund to promote its “System”, “Products” and its trade marks (via the “Marketing Plan”), and it could be reimbursed for its costs of administering and auditing the Fund. SIBMB’s right to the Fund is consistent with its decision to treat the Fund as an asset of the company both before and after the opening of the separate account.
2.…[F]or more than 10 years the marketing fund was held within the general accounts of SIBMB… SIBMB opened the separate account for the purpose of complying with its statutory obligations, and not with the intention of creating a trust for the franchisees.
3.…[T]he franchisees did not retain any beneficial interest in the monies that were paid into the Marketing Fund and they had no right under the franchise agreement to be reimbursed should SIBMB stop trading or be unable to apply the funds.
4.…[T]he terms of the franchise agreement did not require SIBMB to use the Marketing Fund exclusively for a specific purpose. The ambit of the Marketing Fund was broad and SIBMB could use the monies in the Marketing Fund at its “sole direction” for any of the following purposes: the Marketing Program; or any other internal production; or any other external production; or advertising; or promotion; or marketing of the System and Products; or any internal and external administration and professional fees incurred in relation to the fund (including accountancy and auditing costs).
5.…Adapting what Tate JA said in Legal Services Commission v Brereton, the franchisees had no more than an expectation that the Marketing Fund would be used for the promotion and marketing of the franchise generally.[100]
[100]Commonwealth, ‘Defendant’s Outline of Submissions’, Submission in Stay in Bed Milk & Bread Pty Ltd (in liq), S ECI 2018 00205, 27 August 2018, [32]-[35].

Consideration

Here, unlike in Quistclose, the purported trust does not involve a loan intended for third party beneficiaries. Nor does it concern the transfer of investment funds, as in Courtenay House or George v Webb. Rather, the circumstances involve the application of funds for the indirect benefit of both the purported settlor, and purported trustee. Regardless, review of the relevant cases, indicates that in order to establish a Quistclose trust it remains necessary to demonstrate that the funds were paid:

(a) for a specific purpose, tantamount to an agreed condition rather than a ‘preference’ or ‘expectation’; and

(b) that it was the intention of the parties that the fund would not become an asset of the purported trustee. As noted in Marriner, of relevance in this regard is whether it was intended that the purported settlor would retain a beneficial interest in the funds until the specific purpose was fulfilled.

Additionally, it is clear that the ordinary principles for establishing a trust apply.

Regarding certainty of intention, on the basis of George v Webb and the Court of Appeal’s comments in Braham Investments, in the context of a contractual relationship between SIBMB and each franchisee, the question appears to surround mutual intention, rather than that of the purported settlor alone.

Is there a specific purpose tantamount to a condition?

The levies were deducted in accordance with cl 13.1 of the Franchise Agreement. Limits upon how the funds could be applied are provided in cl 13.5 of the Franchise Agreement and cl 31 of the New Franchising Code. The latter specifically overrides the former.

I consider that the specific purpose of deducting the levies, was tantamount to a condition for the transfer of the funds. Unlike Re Australian Elizabethan or Legal Services Commission v Brereton, there was more than a ‘preference’ or ‘expectation’ that the Marketing Fund was to be used for the purposes specified in cl 13.5 of the Franchise Agreement and cl 31 of the New Franchising Code.

Was there an intention that the Marketing Fund become an asset of SIBMB?

It must be established that when the levies were deducted, the parties intended to create a trust relationship. Specifically, that it was intended that the funds would not become an asset of SIBMB, or to use the language of Gummow J, that SIBMB would only hold a ‘dry legal interest’. Relevant in this regard is whether it was the intention of the parties that each franchisee was to retain a beneficial interest in their contribution to the Marketing Fund until the purposes specified in cl 13.5 were achieved.

A number of points are suggestive of an intention that the Marketing Fund was not to become an asset of SIBMB.

First, at least from 2015, SIBMB was obliged to hold the Marketing Fund in a separate account. As discussed, in isolation, the fact that funds are required to be held in a specific account does not necessarily lead to the conclusion that they are intended to be held on trust. In Jessup v Queensland Housing Commission[101] and Sino Iron Pty Ltd v Palmer (No 3),[102] funds were required to be held in specific accounts, but an intention to create a trust was not established. In the former case, the Commonwealth transferred funds to a service provider for certain purposes. According to the relevant agreement, amongst other things, the funds were to be deposited into an account nominated to the Commonwealth and the service provider had to organise its accounting system so that the income, expenditure, assets and liabilities from each amount of funding could be identified. Unspent funds could only be accumulated with the approval of the Commonwealth, otherwise they had to be returned to the Commonwealth. McPherson JA (Davies and Philippides JJA agreeing) determined that the funds were not held on trust for a number of reasons, including that the agreement did not preclude the service provider from mixing its own funds in the nominated account.
[101][2002] 2 Qd R 270.
[102][2015] 2 Qd R 574.

Similarly, Sino Iron Pty Ltd v Palmer (No 3)[103] involved contributions advanced to an ‘administrative fund’ for identified purposes surrounding the operation and maintenance of certain port facilities. The company administering the fund levied fees each year, that were required to be deposited in a bank or building society account in its name. Unspent funds were to be returned to each contributor, in proportion to their respective contributions. Jackson J found that a trust was not intended in the circumstances, chiefly because there was no provision (or other obligation) prohibiting the mixing of funds in the relevant account.[104]
[103]Ibid.
[104]Ibid 592; see also Compass Resources Ltd v Sherman (2010) 42 WAR, [70].

Here, from its commencement in 2015, the New Franchising Code obliged SIBMB to hold marketing fees and advertising fees in a ‘separate account’. Clause 13.4 of the Franchise Agreement also provides that SIBMB ‘does not contribute and is not required to contribute’ to the Marketing Fund. As such, when read together, the impression is that the Marking Fund was intended to be comprised entirely of funds contributed by the franchisees, and not mixed with those of SIBMB. As such, if it is accepted that the marketing fund comprises solely of the franchisee contributions, which has not been demonstrated with any certainty, then the current circumstances, at least from 2015, are distinct from those of Jessup and Sino Iron Pty Ltd v Palmer (No 3). Prior to that year, however, the approach that they adopted is of significance.

Second, the language of the Franchise Agreement refers to the Marketing Fund being ‘administered and controlled’ by SIBMB, a phrase not typically associated with ownership. SIBMB’s 2017 disclosure statement also refers to SIBMB controlling or administering a marketing fund ‘for franchisees’.[105] While this language is not akin to the language used in Courtenay House, it perhaps leans in favour of an intention that the Marketing Fund was not to become an asset of SIBMB.
[105]Affidavit of Craig Peter Shepard, sworn 3 July 2018, exhibit ‘CPS-15’, [674].

Additionally, SIBMB was obligated to keep and provide accounts regarding the Marketing Fund, in addition to having the accounts audited. The latter obligation could be waived with the approval of 75% of the franchisees.

On the other hand, in the Franchise Agreement the references are to a ‘marketing levy’ as a type of ‘fee payable’ for SIBMB’s obligation to develop and implement the Marketing Program. As discussed in Commonwealth v Booker,[106] ordinarily, where a fee is provided for a service, no trust attaches to the fee paid, albeit this position may be displaced by specific conditions.[107] As referred to in para 97(d) hereof, I repeat that while the obligations of SIBMB regarding the Marketing Fund may perhaps be viewed as more than providing a ‘service’, it remains relevant that the language ‘levy’ and ‘fee’ was adopted. Further, the relationship between each franchisee and SIBMB is described as that of ‘independent contractors’. This is at odds with SIBMB holding the Marketing Fund as a fiduciary, placing each franchisee’s interests ahead of its own. Moreover, SIBMB’s 2017 disclosure statement lists the Marketing Levy as being ‘[n]on-refundable, unless required by law’.[108]
[106][2002] NSWSC 292.
[107]Ibid [47].
[108]Affidavit of Craig Peter Shepard, sworn 3 July 2018, exhibit ‘CPS-15’,670.

Critically, as discussed above, in the context of termination the Franchise Agreement is silent regarding contributions of the franchisee to the Marketing Fund. The Liquidators seek to address this by drawing a distinction between termination and ceasing to trade. Upon ceasing to trade, the Marketing Fund could no longer be applied for the purpose to which it was provided. In contrast, upon termination, SIBMB by virtue of its discretion, was able to continue to apply the Marketing Fund for the benefit of the continuing franchisees. While that submission may be consistent with a contractual obligation,[109] it is inconsistent with the concept of the terminated franchisee retaining a beneficial interest in the Marketing Fund. To accept such a submission would mean finding that the parties intended the franchisee to retain its purported beneficial interest in the Marketing Fund only up until termination, at which point the beneficial interest would be abandoned. That submission is untenable and not supported by a construction of the franchise agreement.
[109]See affidavit of Craig Peter Shepard, sworn 3 July 2018, exhibit ‘CPS-4’, cl 13.5.

On balance, I conclude that the intention of the parties as revealed from the Franchise Agreement read with reference to the obligations and entitlements established by Franchising Code, was that the beneficial interest in the levies was to transfer to SIBMB at the time that they were deducted. That is, the Marketing Fund was intended to be an asset of SIBMB rather than each franchisee retaining a beneficial interest in their contributions.

Ultimately, although the Marketing Fund may have been identified for an exclusive purpose, it cannot be imputed that the parties intended the Marketing Fund to be impressed with a trust to the benefit of each franchisee until that purpose was satisfied.

Prohibition against distributing the Marketing Fund to discharge the company’s liabilities

The Liquidators’ outline of submissions in reply relevantly provides:

Clause 31 (3) of the Franchising Code is reproduced in paragraph 35 of the Liquidators’ submissions in chief. It limits the uses to which marketing fees may be applied, to meeting certain expenses or to pay the reasonable costs of administering and auditing a marketing fund.
The uses listed in clause 31(3) do not include distribution of the marketing funds among creditors of the franchisor, SIBMB.
The liquidation of SIBMB has meant that the marketing fees will not and cannot be applied to any of the clause 31(3) uses.
The Franchising Code is silent as to what happens when the marketing fees will not and cannot be applied to any of the clause 31(3) uses. As a matter of statutory construction, it is implicit that the marketing fees are to be returned to the franchisees (who paid the fees in the first place), because the Code does not allow the fees to be otherwise applied for the benefit of the franchisor. Allowing the fees to be applied to the benefit of the franchisor would directly contradict the purpose of clause 31(3). The Franchising Code also contemplates that the marketing fund would have its own financial statements (Annexure 1 to the Franchising Code, clause 15.1(e)); separate from the franchisor’s financial statements (Annexure 1, clause 21).
If the Court does not accept the Liquidators’ submission that the marketing fund is held on trust for the franchisees, there remains a question of statutory construction as to how clause 31(3) of the Franchising Code applies in the liquidation of the franchisor, where there are unused marketing fees in the bank account, and how this interacts with the general insolvency provisions of the Corporations Act that apply in the franchisor’s liquidation.
Section 478(l)(a) of the Corporations Act provides that a liquidator must cause the company’s property to be collected and applied in discharging the company’s liabilities. It is submitted that this must be read down, so that the marketing fund may be used only in discharging expenses and liabilities that come within clause 31(3) of the Franchising Code, and otherwise the moneys must be retained for the benefit of the franchisees.[110]

[110]Plaintiffs, ‘Liquidators’ outline of submissions in reply’, Submission in Stay in Bed Milk & Bread Pty Ltd (in liq), S ECI 2018 00205, 5 September 2018, [7]–[12].

The liquidators took me to In the matter of Australian Institute of Professional Education Pty Ltd (in liq),[111] where Black J was required to consider whether monies held in a bank account by the liquidator of a company could be utilised to meet the company’s liabilities, or whether it was held on trust for the benefit of the Tuition Protection Service (‘TPS’) director. TPS was an educational initiative of the Australian Government, established pursuant to statute, to protect money paid by students of an education provider such as the company.[112] Black J held that the deposit amount was available to the liquidators as an asset of the company to be dealt with in accordance with s 556 of the Corporations Act.
[111][2018] NSWSC 1028.
[112]Ibid [1].

In the above case, Counsel for the company’s liquidators submitted that all debts and claims rank equally, except as provided for in the Corporations Act, and the legislation governing the establishment of TPS (‘the Establishing Act’) did not specify how its provisions would apply in the event of a liquidation.[113]
[113]Ibid [19].

The Establishing Act provided that money paid into the accounts of the company could only be withdrawn to be paid to a student. It stipulated that the monies could not be used to otherwise pay the creditors of the company.[114] The question for Black J was whether this provision should be held to apply in the event of the company’s liquidation, an event apparently not contemplated in the Establishing Act.
[114]Ibid [14]-[15].

Black J held that it did not. He considered that absent clear statutory language, it was not open to him to determine that it was Parliament’s intention to exclude ss 501, 555 and 556 of the Corporations Act by the provision in the Establishing Act that prevented payment of account monies to creditors of the company. He therefore refused to impute a trust in favour of the Commonwealth.

The liquidators submitted that even if the Marketing Fund is the property of the company, then s 501 of the Corporations Act and cl 31(3) of the Franchising Code ought to be read harmoniously. The result is that s 501 would capture only property which the law otherwise would permit to be distributed among creditors.

Referring to Black J’s decision,[115] Counsel for the plaintiffs said this:

So Justice Black was concerned that if the director was correct, the moneys would have to sit there forever and would not be able to either be returned to the students or to be applied to unsecured creditors. In my submission, that is not the situation we would find ourselves in because, first of all, it is implicit at least that the monies can be returned to the franchisees in our case and to the extent that one needs to find the specific provision that allows that to happen, in my submission, it’s … clause 31(3)(a)(iii) of the Franchising Code which allows expenses which a majority of franchisees approve – it allows payment to be made for a purpose that a majority of franchisees approve and we could easily obtain through some sort of voting mechanism a majority of franchisees that would approve the moneys going back to them. It’s clear that they would want the moneys to go back to them.[116]

[115]Ibid[30].

[116]Transcript of Proceedings, Stay in Bed Milk & Bread Pty Ltd (in Liq) (Supreme Court of Victoria, S ECI 2018 00205, Associate Justice Randall, 18 September 2018) 43.

The argument is met by the Commonwealth succinctly. The Commonwealth adopts Black J’s reasoning and submits that if Parliament had intended to disturb the priority set out in the Corporations Act, it could have done so in the New Franchising Code. The New Franchising Code is silent with respect of distribution of funds upon liquidation. The provisions of the Corporations Act apply.

In the end, I can see no fault in this reasoning.

Orders

Given that I have rejected the Liquidators’ primary position in relation to trust, Quistclose trust and the prohibition against distribution, it is appropriate (and uncontroversial) that I make a direction under s 90–15 of Schedule 2 (Insolvency Practice Schedule) that the Liquidators are justified in applying the Marketing Fund together with interest on the Marketing Fund from 7 March 2018 to discharge the company’s liabilities.

There will also be an order that the costs of each of the plaintiffs and the Commonwealth be paid out of the Marketing Fund in the priority afforded by s 556(1)(a) of the Corporations Act on an indemnity basis.

I will make the orders in the proceeding unless the parties wish to be heard on the form of the order.

SCHEDULE OF PARTIES

S ECI 2018 0205

BETWEEN:

CRAIG SHEPARD AND LEANNE CHESSER (IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS of STAY IN BED MILK & BREAD PTY LTD (IN LIQUIDATION) (ACN 115 166 982)) First Plaintiff

STAY IN BED MILK & BREAD PTY LTD (IN LIQUIDATION) (ACN 115 166 982) Second Plaintiff

- v -

COMMONWEALTH OF AUSTRALIA, REPRESENTED BY THE AUSTRALIAN GOVERNMENT DEPARTMENT OF JOBS AND SMALL BUSINESS (ABN 54 201 218 474) Defendant

S ECI 2018 0205
BETWEEN:
CRAIG SHEPARD AND LEANNE CHESSER (IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS of STAY IN BED MILK & BREAD PTY LTD (IN LIQUIDATION) (ACN 115 166 982))	First Plaintiff
STAY IN BED MILK & BREAD PTY LTD (IN LIQUIDATION) (ACN 115 166 982)	Second Plaintiff
- v -
COMMONWEALTH OF AUSTRALIA, REPRESENTED BY THE AUSTRALIAN GOVERNMENT DEPARTMENT OF JOBS AND SMALL BUSINESS (ABN 54 201 218 474)	Defendant

[2019] VSC 181

22 March 2019