Re Waratah Group Pty Ltd (in liq)
[2020] VSC 523
•20 August 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2020 02442
| IN THE MATTER OF WARATAH GROUP PTY LTD (ACN 607 483 803) (IN LIQUIDATION) | |
| BETWEEN | |
| SHANE LESLIE DEANE AND NICHOLAS GIASOUMI IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF WARATAH GROUP PTY LTD (ACN 607 483 803) (IN LIQUIDATION) | First Plaintiffs |
| and | |
| WARATAH GROUP PTY LTD (ACN 607 483 803) (IN LIQUIDATION) AS TRUSTEE FOR THE DOCKLANDS ABILITY GROUP UNIT TRUST | Second Plaintiff |
---
JUDGE: | DELANY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 7 August 2020 |
DATE OF JUDGMENT: | 20 August 2020 |
CASE MAY BE CITED AS: | Re Waratah Group Pty Ltd (in liq) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 523 |
---
CORPORATIONS – Liquidation of trustee company – Trustee right of indemnity – Application by liquidators for power of sale over trust assets, alternatively appointment as receivers and managers – Where company bare trustee and power of appointment of new trustee – Whether former trustee right of possession of trust assets against new trustee – Just and convenient to appoint liquidators receivers and managers – Application allowed – Pitard Consortium Pty Ltd atf the Pitard Trust v Les Denny Pty Ltd [2019] VSC 614, Re Parkway One Pty Ltd (No 2) [2020] NSWSC 191 considered – Trustee Act 1958 (Vic) s 63 – Supreme Court Act 1986 (Vic) s 37.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Ms C Rome-Sievers | Gadens |
HIS HONOUR:
Background
By originating process dated 4 June 2020, the first plaintiffs as liquidators (‘the Liquidators’) of the second plaintiff (‘the Company’) seek declarations, orders and directions to enable them to preserve, realise and distribute the assets of the Docklands Ability Group Unit Trust (‘the Trust’) and to ensure that payment of their remuneration and expenses is available from the Trust property.
The Company was incorporated on 5 August 2015. The Docklands Ability Unit Trust was established by an undated Trust Deed, but stamped 5 August 2015, the same day the Trust was registered for GST.
As discussed below, the evidence in support of the application establishes that the Company only ever acted as trustee of the Trust. On 6 November 2019, the Liquidators were appointed as administrators of the Company. On 11 December 2019, they were appointed joint and several liquidators of the Company.
Clause 6.4(a)(2) of the Trust Deed provides that ‘a Trustee will ipso facto cease to be a Trustee if, being a Corporation, such Trustee will go into liquidation …’.
Clause 6.4(d)(2) provides that the Unit Holders may decide at any time to appoint any person or corporation to be a substitute trustee, including in the case of a trustee ceasing. There is no evidence to suggest either that a new trustee has been or may be appointed. If such an appointment were to be made, the trust deed does not require that notice be given to the person who ceased to be the trustee.
In order to enable a company in liquidation that is a bare trustee, acting through its liquidators, to deal with the assets of the trust, it is necessary either that orders be made:
(a) pursuant to s 63(1) of the Trustee Act 1958 (Vic) (‘Trustee Act’); or
(b) pursuant to s 37(1) of the Supreme Court Act 1986 (Vic) (’Supreme Court Act’) that the liquidators be appointed receivers and managers to the assets and undertaking of the trust.
The preference on the part of the applicant Liquidators is that the Court should appoint them as receivers and managers, rather than make an order under s 63 of the Trustee Act.
The application by the Liquidators is not opposed. However, the making of such orders has significance for creditors of the Company and of the Trust, for those who hold units in the Trust and for those previously involved as directors of the Company.
The affidavit evidence
The substantive material relied on in support of the application is the affidavit of Shane Leslie Deane sworn 3 June 2020 (‘the Deane affidavit’) and the exhibits thereto. In addition, reliance is placed upon company searches exhibited to the affidavit of Cassie O’Bryan sworn 6 August 2020.
Detailed written submissions were prepared in advance of the hearing by Ms Rome-Sievers who appeared on behalf of the Liquidators.
Notice to interested parties
On 3 July 2020, notice of this application was given to the sole director of the Company, Moody Aboughattas and to all creditors of the Company known to the Liquidators.
On 6 July 2020, notice of the application was given to the two unitholders in the Trust, AKBCA Pty Ltd, as trustee of the Docklands Group Trust, the holder of 11 units in the Trust, and AKBCA Two Pty Ltd the holder of 10 units in the Trust.
Notice of the application was also given to ASIC.
Each of the persons to whom notice has been given were provided with a copy of the application, the Deane Affidavit and exhibits, and a copy of the email from the Court advising of the return date for the hearing of the application. No response was received from any of those persons.
The Company
At the time of its incorporation on 5 August 2015, Moody Aboughattas and Miaogen Wu were appointed as directors of the Company. On 25 November 2015, Abdel (‘Abi’) Aboughattas was appointed director. On 27 June 2016, Miaogen Wu resigned as director. On 9 October 2017, Abdel Aboughattas resigned as director.
Shares in the Company are held by Moody Aboughattas (one share) and by AKBCA Two Pty Ltd (one share).
AKBCA Two Pty Ltd is wholly owned by AKBCA Pty Ltd. Moody Aboughattas holds 51 of the 100 issued shares in AKBCA Pty Ltd. Of the remaining shares, Abdel Aboughattas holds six shares, Craig Bradley 19 shares, Brett Chalmers five shares, and Stephen Kernahan 19 shares.
The directors of AKBCA Two Pty Ltd , each of whom were appointed on 22 February 2017, are Abdel Aboughattas, Craig Bradley, Brett Chalmers and Stephen Kernahan.
The evidence establishes that the business conducted by the Company involved the provision of printing services, mainly offset printing. The Company did not own any real estate.
The Company conducted its business as part of a loose group of companies known as the ‘Waratah Group’. Whilst some of the other companies in the ‘group’, also had ’Waratah’ as part of their name, including Waratah Direct Communications Pty Ltd and Waratah Digital Pty Ltd, there was not a coherent ‘Waratah’ group of companies.
Other companies in the ‘group’ which were operating entities like the Company itself were Waratah Brand Services Pty Ltd and Embassy Print (Aust) Pty Ltd. Those companies occupied separate premises and had their own staff, but shared services. In some cases services were provided between companies in the ‘group’ pursuant to services agreements, in other cases services were provided or shared without formal service agreements in place. The group’ conducted business in printing and associated industries, organised in a co-mingled fashion.
A chart of the relationship between the Company and other companies in the ‘group’ is included in the Deane affidavit. Many of the companies in the group’ are now in external administration.
The evidence discloses that in November 2019 when Mr Deane and Mr Giasoumi were appointed administrators, the Company had 114 employees. It operated from two leased premises, the first at 706 Lorimer Street, Port Melbourne and the second, to which it had recently moved some of its operations, premises at 10 William Angliss Drive, Laverton.
At and shortly after the appointment of administrators, the Company experienced difficulties retaining staff and there was a general lack of funds. The difficulties encountered by the Administrators are summarised in their 3 December 2019 report to creditors pursuant to s 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (‘the Rules’).
The turnover of the Company was substantial. In the 2018 financial year, the last financial year for which financial accounts and tax returns are available to the Liquidators, gross sales and other income exceeded $32 million. According to the management accounts for the year ended 30 June 2019, in that year sales and other income also exceeded $32 million. Whilst the accounts recorded a net profit of $153,113 for the year ended 30 June 2018, in the year ended 30 June 2019 the management accounts reported a loss of $1,643,283. On a balance sheet basis, the accounts as at 30 June 2018 recorded nett assets of ($145,736) whereas the management accounts for 30 June 2019 recorded nett assets of ($1,882,558).
The Deane affidavit includes evidence that the liabilities of the Company are estimated at $20.6m including $6.59m in related party unsecured creditors. The total realisable assets are valued at between $3.699m and $5.623m, including debts factored by Scottish Pacific Business Finance Pty Ltd (‘Scottish Pacific’) and payable to it in reduction of its security interest.
In their 10 March 2020 report to creditors as required by s 70-40 of the Rules, the Liquidators said that whilst their investigations were continuing, based upon available information, the Company was insolvent from 14 May 2018, leading to a potential claim for insolvent trading for an amount in excess of $8 million. There are other issues that the Liquidators propose to investigate. Those issues include possible breaches of directors duties as well as claims against other parties as shadow directors. In addition, potential unfair preference claims, the most substantial of which appears to be a payment of $2,217,683.31 made to the Australian Taxation Office on 24 June 2019.
The Deane affidavit sets out in some detail attempts to sell the business of the Company during 2019, both before and after the company went into administration. Those attempts involved a proposed sale of the business of the Company, together with five other ‘Waratah’ companies to Finsbury Green Pty Ltd, an unrelated company who, in 2019, was both a creditor and a customer of the Company.
In order for the Finsbury Green sale to proceed, the support of the secured creditor, Scottish Pacific was needed and all six companies in the group needed to act in conjunction with one another. When acting as voluntary administrators, the now Liquidators attempted to complete the proposed sale, but it was not achievable because other entities involved in the proposed transaction elected not to proceed.
After the administrators were appointed and while attempts were continuing to bring about such a sale the Company continued to trade in administration. The administrators stopped trading on 22 November 2019 after realising $968,739. On the same day, 22 November 2019, Finsbury Green paid $100,000 for assets that the administrators were able to sell and which were not subject to security interests.
In the opinion of the Liquidators a dividend is likely to be paid to priority creditors (employee claims total $4.431m) and secured creditors. The quantum of recoveries will determine whether a dividend is also able to be paid to ordinary unsecured creditors.
Did the Company trade in its own capacity or as trustee of the Trust?
In Re Amerind Pty Ltd (rec and mgr apptd),[1] Robson J listed a series of matters that have been taken into account by Courts in order to determine whether as a matter of fact a company trades in its own right or as trustee of a trust:
(a)the existence of constituent trust documents which establish a trust, including any draft trust documents which cross-reference one another;
(b)whether accounts were maintained separately to the company’s operational expenditure accounts and/or the company’s own property;
(c)whether the company’s name in its capacity as trustee was noted on key employment documents, such as letters of employment and tax file declarations;
(d)whether invoices rendered by the company in question were issued by the company in its capacity as trustee of the trust;
(e)whether company meeting minutes disclosed the existence of a trust, or disclosed that the company was operating as a trust;
(f)whether expenses were accounted as receipts of the company as trustee; and
(g)whether records, contained in the general ledger of the company, recorded activity consistent with the operation of a trust, such as the issue of units.[2]
[1][2017] VSC 127.
[2]Ibid [46].
The evidence concerning the operations of the Company discloses that in its short life the Company only ever acted in its capacity as trustee of the Trust. Such evidence includes:
(a) the Trust Deed to which I have previously referred;
(b) the registration of the Trust for GST purposes;
(c) the fact that the Trust has its own ABN;
(d) the tax returns filed by the Company in its capacity as trustee of the Trust for each of the 2016, 2017 and 2018 financial years;
(e) the financial accounts of the Company in its capacity as trustee of the Trust, also for the financial years ended 30 June 2016–30 June 2018;
(f) advice obtained by the Liquidators from the Tax Office that the Company only ever acted in its capacity as trustee of the trust and in no other capacity; and
(g) the fact that the liquidators have not identified any instances of the Company entering into transactions other than as trustee of the Trust.
The evidence is only one way. There is no doubt that the Company only acted as trustee of the Trust.
Orders under the Trustee Act: Appointment of Receiver & Manager: Relevant Principles
The comprehensive submissions filed on behalf of the liquidators helpfully set out a number of principles relevant to applications such as the present.
I quote from those submissions (citations in original):
(1)Where a trustee is removed from office, it retains a right of indemnity to resort to the trust assets to vindicate its right to be exonerated for the liabilities it incurred by reason of acting as trustee.[3]
(2)The right of exoneration generates a supporting lien or charge. The nature of the proprietary interest this creates in the trust assets in favour of the former trustee is a beneficial proprietary interest in the trust assets.[4] To the extent that this interest exists, which is informed by the extent of the trust liabilities, it pro tanto reduces the interests of the beneficiaries in the assets.[5]
(3)Upon its ouster as trustee, the former trustee holds legal title to the trust assets without the powers conferred under the trust deed, as a bare trustee. A bare trustee has only limited powers to deal with assets it holds on trust. It has a ‘duty to maintain and protect the trust property and to refrain from active management that does not fall within this duty’.[6]
(4)The former trustee is entitled to retain possession of the property as against the beneficiaries for the purpose of its right of indemnity.[7]
(5)There is conflicting authority as to whether the right of indemnity and supporting lien entitle a former trustee to retain possession of trust property as against a new trustee.[8] Recently the prevailing view appears to be that a former trustee does not have the right to retain possession of trust assets as against a new trustee in order to secure its right of indemnity.[9]
(6)However it is well established that a receiver and manager can be appointed over trust property to secure the trustee’s right of indemnity out of the assets.[10]
…
(8)‘The courts are generally willing, upon an appropriate application, to make orders permitting the liquidator of a former trustee to sell trust assets.’[11]
(9)It has also recently become settled that the proceeds from the exercise of a corporate trustee’s right of exoneration may only be applied in satisfaction of the trust liabilities associated with that trust.[12] In simple terms: trust assets may only be used to pay trust creditors.
[3]Jones (Liquidator) v Matrix Partners Pty Ltd, re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; 260 FCR 310 at [85] per Allsop CJ, [142] per Siopis J, [198] per Farrell J (‘Jones v Matrix Partners’); Cremin, re Brimson Pty Ltd (in liq) [2019] FCA 1023 at [48] per Moshinsky J (‘Cremin, re Brimson’).
[4]Jones v Matrix Partners [2018] FCAFC 40; 260 FCR 310 at [49] and [87] per Allsop CJ; Carter Holt Harvey Wood Products Australia Pty Ltd v Commonwealth [2019] HCA 20; 368 ALR 390 at [133]-[134] per Gordon J (‘Carter Holt’).
[5]Connelly, re Gregorski Investments Pty Ltd (in liq) v 320 Nominees Pty Ltd atf the Gregorski Property Trust [2019] FCA 1400 at [23] per Derrington J (‘Connelly, re Gregorski Investments’); Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 369–70 (‘Octavo’).
[6]Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation (2011) 193 FCR 442 at [21].
[7]Octavo (1979) 144 CLR 360, 369-370.
[8]See generally Pitard Consortium Pty Ltd atf the Pitard Trust v Les Denny Pty Ltd [2019] VSC 614 at [10]–[38] per McDonald J (‘Pitard Consortium’).
[9]Michell (Liquidator) v Delltta Holdings Pty Ltd (in liq) atf The Brookhill Trust [2019] FCA 2133 at [8] per Davies J (‘Deltta Holdings’) and Pitard Consortium [2019] VSC 614 at [34]–[38] per McDonald J, applying Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; 74 NSWLR 550 at [46] per Brereton J (‘Lemery Holdings’).
[10]Delltta Holdings [2019] FCA 2133 at [8]-[10], citing Hosking, re Business Aptitude Pty Ltd (in liq) [2016] FCA 1438; 34 ACLR 16 at [21] and Cremin, re Brimson [2019] FCA 1023, [48]-[51] per Moshinsky J.
[11]Cremin, re Brimson [2019] FCA 1023 at [50] per Moshinsky J.
[12]Carter Holt [2019] HCA 20; 368 ALR 390 at [34]-[44] per Kiefel CJ, Keane and Edelman JJ, [91]-[92] per Bell, Gageler and Nettle JJ, [149]-[158] per Gordon J.
In the present case, the question for the Court is whether powers should be conferred upon the Liquidators pursuant to s 63 of the Trustee Act or whether the Liquidators should be appointed receivers and managers pursuant to s 37(1) of the Supreme Court Act.
Those provisions are as follows:
Section 63 Trustee Act:
(1)Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, it is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorised to be expended, and the costs of any transaction are to be paid or borne as between capital and income.
(2)The Court may from time to time rescind or vary any order made under this section, or may make any new or further order.
(3)An application to the court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.
Section 37 Supreme Court Act:
Injunctions and receivers
(1)The Court may by order, whether interlocutory or final, grant an injunction or appoint a receiver if it is just and convenient to do so.
(2)An order made under subsection (1) may be made either unconditionally or on such terms and conditions as the Court thinks just.[13]
[13]Subsection (3) relates only to injunctions. It is also noted that rule 39.02 of the Supreme Court (General Civil Procedure) Rules 2015 states that the Court may also appoint a receiver at any stage of a proceeding.
Submissions in support of appointment as receivers and managers
In support of an appointment of the Liquidators as receivers and managers, counsel for the applicants advanced the following propositions (citations omitted):
21.First, there remain some minor assets to be sold. The usual course is the appointment of receivers with a power of sale.
22.Secondly, it is evident that the Liquidators are continuing to investigate related party dealings. Mr Deane states in his affidavit that the Liquidators intend to further investigate and potentially prosecute claims in relation to related party dealings and potential claims against the director or others, including for insolvent trading. The Liquidators are considering conducting public examinations. It may be possible that the most valuable assets of the Trust will prove to be these choses in action.
23.In Lemery Holdings, also a case where the trust property included choses in action, Brereton J held that the former trustee was not entitled to retain possession of the trust assets as against the new trustee.[14] His Honour noted that by operation of s 9 of the NSW Trustee Act, those assets had already vested in the new trustee. He made orders that the new trustee be substituted for the old as the relevant party in each of the proceedings.[15]
24.In this case the unitholders are entitled to exercise their power of appointment to appoint a new trustee at any time. They are both related entities of the director. Under section 45(1) of the Trustee Act 1958 (Vic), the property of the trust would, upon execution of the instrument of appointment, vest in the new trustee. Appointing the Liquidators as receivers of the trust assets would obviate the potential for problems down the track.
[14][2008] NSWSC 1344; 74 NSWLR 550.
[15][2008] NSWSC 1344; 74 NSWLR 550, [54]-[56].
In oral submissions, counsel for the liquidators was careful to distinguish between the existence of the right to appoint a new trustee pursuant to clause 6.4 (d)(2) of the Trust Deed and evidence of any threat by any person or any unit holder to do so. In the present case there is no suggestion that those having power to appoint a new trustee either are in the course of so doing, or are likely to seek to do so. Nevertheless, the power to appoint remains.
Should the Court confer power under the Trustee Act, or should it appoint the Liquidators as receivers and managers?
It is clear from the cases to which I have been referred that there is no ‘bright line’ that provides assistance to the Court to determine whether, in circumstances such as the present, the preferable course is to confer power pursuant to the Trustee Act or, instead, to make an appointment pursuant to the Supreme Court Act.
In Mutton (liquidator) in the matter of Balsub Pty Ltd (in liq) Anastassiou J observed that orders under state legislation such as s 63(1) the Trustee Act[16] are appropriate where:
(a)the company has become a bare trustee of the assets of the trust upon the appointment of the liquidator;
(b)the company had acted only as trustee of the trust and in no other capacity;
(c)all assets owned by the company were held by it as trustee and all liabilities incurred by it were incurred in its capacity as trustee; and
(d)no new trustee had been appointed.[17]
[16][2020] FCA 741, [20] (‘Mutton, re Balsub’). See also Riddle v Riddle [1952] HCA 12; 85 CLR 202, 221 (Williams J), Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677, [30], [35]-[36] (Gordon J) (‘Caterpillar Financial’), and Re Mamounia Pty Ltd (in liq)(No 3) [2018] VSC 65 (Robson J).
[17]Mutton, re Balsub [2020] FCA 741, [25] (Anastassiou J).
In St George’s Development Company Pty Ltd (in liq) Kennedy J took a similar approach. Her Honour considered it appropriate to make orders under the Trustee Act for the avoidance of doubt and so that the affairs of the trust might be finalised prospectively and efficiently.[18] In Re Mandeville Group Pty Ltd (in liq) the liquidator sought powers under the Trustee Act to preserve, realise and distribute trust assets and to pay the liquidator’s fees and expenses, alternatively appointment as receiver. Sloss J chose to proceed under the Trustee Act, noting that on the evidence before her there would be no surplus after paying sale costs, creditors and liquidator’s costs for distribution to unitholders.[19]
[18][2018] VSC 595, [28].
[19][2020] VSC 293, [204]-[208] (‘Re Mandeville’).
In other cases, in similar factual circumstances Court have chosen to appoint the liquidator as receiver and manager, rather than to proceed under state trustee legislation.
In Cremin, re Brimson the liquidator applied for orders in the alternative. Moshinsky J chose to appoint the liquidator as receiver and manager saying that the more common course is to appoint the liquidator as receiver for the purpose of selling the trust assets and distributing the proceeds among trust creditors.[20]
[20][2019] FCA 1023, [50].
In Connelly, re Gregorski Investments the appointor had appointed new trustees who proposed to sell the main trust asset.[21] The liquidator of the former trustees applied for appointment as receiver of the trust assets pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth). Derrington J made the order sought. When discussing the principles to be applied on an application to the Federal Court under that section his honour observed as follows:[22]
Where a trustee is removed, it retains a right of indemnity from the trust assets secured by an equitable charge over them for its liabilities incurred by reason of acting as trustee: Re Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 1484; (2014) 291 FLR 17 (‘Re Stansfield’) at [10].
There is a conflict of authority as to whether the liquidator of a corporate trustee, which has ceased to be trustee, has the power to sell trust assets to enforce the (former) trustee’s right of indemnity. In Apostolou v VA Corporation of Aust Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84, Finkelstein J held, at [48]-[50], that the liquidator of a corporate trustee which held legal title to trust property in which it also had an equitable interest could sell the subject property pursuant to the power of sale conferred by s 477 of the Act and that this survived the removal of the corporate trustee.
However, in Re Stansfield, Brereton J disagreed with the decision of Finkelstein J and held (at [10],[16]-[20],[30],[33]) that, if a trustee company ceases to be trustee of a trust it can no longer exercise the trustee’s power of sale under the trust instrument or general law and that s 477(2)(c) of the Act does not empower the liquidator to sell property held by the trustee company on trust, even if the trustee company has an equitable charge over it, because the property is not in itself ‘property of the company’.
Notwithstanding this conflict of authority, it is well-established that a receiver and manager can be appointed over trust property to secure the trustee’s right of indemnity out of the assets of the trust: SMP Consolidated Pty Ltd (in liq) v Posmot Pty Ltd [2014] FCA 1382 (‘SMP Consolidated’) at [7] citing Re Indopal Pty Ltd (1987) 12 ACLR 54 at 57; Kerr, Re Angel’s Castle Pre-School Pty Ltd (in liq) [2010] FCA 786 (‘Angel’s Castle Pre-School’) at [25]; Re Gramarker Pty Ltd; Clifford Sanderson (as liquidator of Gramarker Pty Ltd) v Kerr [2014] NSWSC 243 at [6]–[7]; Re Stansfield at [31], [33], [45].
[21][2019] FCA 1400, [5], [28].
[22]Ibid [19], quoting Hosking, re Business Aptitude Pty Ltd (in liq) [2016] FCA 1438, [17]-[22] (Gleeson J) (citations in original).
In Delltta Holdings, Davies J appointed the liquidator as receiver and manager of trust assets to secure the former trustee’s right of indemnity out of the assets of the trust.[23] Her Honour did so in circumstances where a replacement trustee had been appointed and there were otherwise insufficient cash resources in the possession of the plaintiff as liquidator to satisfy the liabilities of the company when acting as trustee and the liquidator’s remuneration and expenses.
[23][2019] FCA 2133.
In Re Parkway One Pty Ltd (No 2) there had been no replacement trustee appointed and the trust deed did not contain an ‘ipso facto’ clause. However the trust deed provided for the removal of a trustee by the unit holders. It did not contain any requirement to notify the trustee in the event that the trustee had been removed and a new trustee appointed. Rees J considered there was some ambiguity and uncertainty as to the liquidator’s position due to the purported appointment by a certain number of the unit holders of a new trustee. In order to eliminate that uncertainty, the Court determined that the liquidator ought be appointed as receiver and manager of the trust property.[24] Her Honour made such orders for the following further reasons:
It seems to me that, as submitted by the liquidator, the relief sought is necessary and appropriate as his appointment as receiver will enable the liabilities of the company to be met to the extent possible, with proper recourse to the trust assets. This is necessary to enable Mr Scott to fulfil his statutory function and ‘get in’ the assets of the company. Those assets include its right of exoneration and lien with respect to debts incurred in the proper administration of the trust.
Further, uncertainty persists regarding the office of the trustee. To the extent that the company may have been removed and replaced, it is proper and necessary that Mr Scott be appointed receiver, as the company's powers under the trust deed will have been extinguished.
In addition, the appointment of Mr Scott will address difficulties that may arise if a replacement trustee is appointed at an unknown time in the future without notice to Mr Scott. Given the apparent need to sell the properties to administer the liquidation of the company, a contract for sale could be frustrated by the ill-timed replacement of the company as trustee in the future.[25]
[24][2020] NSWSC 191, [11] (‘Parkway One’).
[25]Ibid [14]–[16].
Consideration
Whilst the two available alternatives are finely balanced in this case, I will order that the liquidators be appointed receivers and mangers of the trust pursuant to s 37 of the Supreme Court Act.
Pursuant to s 37 of the Supreme Court Act, the Court may by order, appoint a receiver and manager where it is ‘just and convenient’ to do so. The principles to be applied on an application under the section were discussed by Warren J (as her Honour then was) in Yunghanns v Candoora No 19 Pty Ltd (No 2).[26] The circumstances in which an appointment might be made include where to do so is necessary for the protection or preservation of trust property for the benefit of persons who have an interest in that property.[27] It seems to me that both of those considerations are either present, or potentially present in this case.
[26][2000] 35 ACSR 34; [2000] VSC 300, [64]-[76].
[27]Ibid.
As identified by Rees J in Parkway One, the appointment of the liquidator now, as receiver and manager of the trust assets, serves to address in advance difficulties that may arise if a replacement trustee were to be appointed to the Trust at an unknown time in the future.[28]
[28][2020] NSWSC 191, [11].
Counsel for the liquidators has made clear in her submissions that there is no suggestion of any of steps being taken by the unit holders to appoint a replacement trustee. Nevertheless, there are a number of unit holders. On a practical level, those persons who stand behind the unit holders may be the target of recovery actions instituted by the liquidators for insolvent trading or for breaches of directors duties, whether as director or as a de facto director. Should such events come to pass, those who are the target of action on the part of the liquidators may be motivated to take steps to appoint a new trustee.
It is by no means clear that sufficient funds will be recovered by the liquidators to cover the priority creditors and their own costs and expenses. If a new trustee were to be appointed the liquidators would be faced with a very real problem, due to conflicting authority, as to whether they would have power to retain trust property as against the new trustee in order to enforce their right to be indemnified.
The competing authorities were carefully reviewed by McDonald J in Pitard Consortium:[29]
[29][2019] VSC 614, [10]–[38] (citations omitted).
10A trustee is entitled to retain possession of trust property as against a beneficiary until its right of indemnity is exercised. There is conflicting authority as to whether a former trustee is entitled to retain possession of trust property as against a new trustee until the former trustee’s right of indemnity has been exercised. In Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd, having undertaken a careful review of relevant case law, Brereton J correctly observed that the authorities were ‘in a state of some disarray.’ Ultimately, Brereton J concluded that:
[A] former trustee does not have a right to retain, as against a new trustee, the trust assets as security for an accrued right of indemnity, though the former trustee is entitled to ensure the new trustee does not take steps which will destroy, diminish or jeopardise the old trustee’s right of security, which subsists in the trust assets after their transfer to the new trustee.[30]
[30](2008) 74 NSWLR 550, 561 [50]; [2008] NSWSC 1344 (‘Lemery’).
11I agree with Brereton J’s conclusion as set out above. This conclusion rests upon Brereton J’s finding that a trustee’s right of indemnity is an equitable lien which does not confer a right of possession, but rather is ‘enforceable by the trustee only by judicial sale or appointment of a receiver, and not by foreclosure or by sale out of Court’. One of the authorities cited by Brereton J in support of this proposition is the judgment of the High Court in Hewett v Court. As to the nature of an equitable lien, Deane J stated:
An equitable lien is a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness. Though called a lien, it is, in truth, a form of equitable charge over the subject property in that it does not depend upon possession and may, in general, be enforced in the same way as any other equitable charge, namely, by sale in pursuance of court order or, where the lien is over a fund, by an order for payment thereout.
This passage has been cited with approval by the Victorian Court of Appeal in McDonalds Australia Ltd v Bendigo and Adelaide Bank Ltd, and the Western Australian Court of Appeal in Coad v Wellness Pursuit Pty Ltd (In liq).
…
13The characterisation of an equitable lien as conferring a beneficial interest in property, but not in the nature of a possessory security, underpins the statement in Jacobs’ Law of Trusts in Australia:[29]
The better view is that the former trustee does not have the right to retain, as against the new trustee, possession of trust assets as security for an accrued right of indemnity, although the former trustee is entitled to ensure that the new trustee does not take steps which will destroy, diminish or jeopardise the former trustee’s right of security.[30]
…
15The judgment of the High Court in Octavo supports the proposition that a trustee is entitled to retain possession of trust property as against a beneficiary in aid of the trustee’s right of indemnity.[31] … There is no scope for the application of this principle as between a former and new trustee. The former trustee’s equitable lien is not a right of possession. It is a security which survives the transfer of trust property to a new trustee. Further, it can be enforced against trust property in the hands of the new trustee. The new trustee receives the trust property subject to the former trustee’s equitable lien.
[31]Octavo (1979) 144 CLR 360; [1979] HCA 61 (citation added).
16Lemery has been cited with approval by the Western Australian Court of Appeal in Franknelly Nominees Pty Ltd v Abrugiato.
17I shall now consider authorities which have concluded, contrary to Lemery, that a former trustee does have a right to retain possession of trust property as against a new trustee as security for an accrued right of indemnity.
18The leading authority is the judgment of the Full Court of the South Australian Supreme Court in Re Suco Gold Pty Ltd (In Liquidation). King CJ (Jacobs and Matheson JJ agreeing) expressly addressed the right of a trustee to retain possession of trust property as against a new trustee:
The trustee’s lien is an equitable lien which confers on him a charge over the trust property, whether in his possession or not, for the purpose of protecting and enforcing the right of indemnity. It also confers on the trustee a right to possession of the trust property for the purpose of protecting and enforcing the right of indemnity. The right of possession of the trustee, until his right of indemnity is exercised, is superior to those of a new trustee or the cestuis que trust.
…
Having carefully reviewed the relevant authorities, McDonald J determined that if a new trustee is appointed the former trustee does not have the right to retain trust assets as security for an accrued right of indemnity. Whilst unnecessary for me to decide on this application, it seems to me that the considered view expressed by his Honour is correct.
If no appointment as receivers and managers is made and a new trustee is appointed, for whatever reason, the trust property will not have been preserved for the benefit of the liquidators and trust creditors (including former Company employees) as persons interested in that property. Attempts by the liquidators to fulfil their statutory obligation to get in and take possession of the assets may be frustrated, as would the objectives of the Act.
The appointment of the liquidators as receivers and managers pre-empts any such potential difficulties. In circumstances where the trustee is in liquidation and where there may be insufficient resources to meet the liquidator’s remuneration and expenses all that can be done to minimise future costs and disputes and to aid the conduct of the administration in insolvency should be done. It is just and convenient that an order be made appointing the Liquidators as joint and several receivers and managers.
In the case of such an appointment Rule 39.05 of the Supreme Court (General Civil Procedure) Rules provides that unless the Court otherwise orders a receiver shall give security approved by the Court.
As is usual in cases such as the present, I do not propose to require that security be provided by liquidators on their appointment as receivers and managers.[32] As contemplated by Rule 39.05 of the Supreme Court (General Civil Procedure) Rules 2015, I will ‘otherwise order’.
[32]Pursuant to r 39.05 of the Supreme Court (General Civil Procedure) Rules 2015 the Court is ordinarily required to make an order for security unless the Court otherwise orders. In Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd (No 2) [2011] FCA 714 at [4] Besanko J held that it was an appropriate case to ‘otherwise order’, given that the receivers and managers were joint and several liquidators and, therefore, subject to obligations under the Act. See also Re Pires Consulting Holding Pty Ltd (in liq) [2019] VSC 384, [48]-[49] (Kennedy J) (‘Pires’).
I was informed that previously the liquidators had some involvement in the sale of an Isuzu truck registered in the name of the company and subject to a security interest.[33] In Re Mandeville, Sloss J considered it appropriate to make an order under s 63 of the Trustee Act nunc pro tunc, to avoid any requirement for the Court to make any associated ‘relieving’ order under s 1318 of the Corporations Act 2001 (Cth). For the same reason, an order that the appointment of the liquidators take effect nunc pro tunc is appropriate in this case.[34]
[33]Transcript of proceedings (7 August 2020) 4.9; CB 21, 156.
[34][2020] VSC 293, [199].
Otherwise the draft form of order provided closely follows the form of order made by Kennedy J in Pires and is appropriate.[35]
[35][2019] VSC 384, [55].
20
10
0