13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd

1 This is an application by Mark Anthony Korda to have his costs, charges and expenses (including his remuneration) in acting as one of the joint receivers, then as provisional liquidator and finally as liquidator of C L Custodians Pty Ltd (in liquidation) (C L Custodians) paid out of assets that C L Custodians holds on trust. 2 C L Custodians is a company that was under the control of the late Max Paul Green. Green was a solicitor who practiced as a member of the firm Aroni Colman. In late 1997 and early 1998 Green procured a number of his clients and friends to invest in joint ventures that were to acquire plant and equipment to be leased to corporations involved in significant infrastructure developments. C L Custodians was to act as trustee for each joint venture. In a short period Green procured his clients and friends to invest in excess of $30 million in these ventures. 3 One of the ventures was purportedly established to acquire plant and equipment to the value of $20 million for lease to the consortium constructing the Sydney Harbour tunnel. The venturers were to invest a total of $5 million and the balance of $15 million was to be borrowed under a non-recourse loan. 13 Coromandel Place Pty Ltd (13 Coromandel) was induced to invest $1,190,000 in this venture. 4 In March 1998 Green was killed while in Cambodia. Shortly afterwards it was discovered that the various ventures were shams. No plant and equipment had been purchased by C L Custodians. There were no agreements with any developers to lease plant and equipment from C L Custodians. What had occurred was that almost all of the investors' funds had been misappropriated by Green. 5 The funds that had been invested in 1997 totalled approximately $14,456,000. Initially they were paid into the trust account of Aroni Colman. From that account $140,000 was paid on behalf of C L Custodians to the Australian Taxation Office (ATO) on account of withholding tax, approximately $2.7 million was paid to Australian Property Custodians Pty Ltd and the balance was paid into the Max Green & Associates trust account. The money in the trust account was dispersed to various persons, in Australia and elsewhere, and may not be recoverable. C L Custodians has made a claim on the ATO for a refund of the $140,000. If that amount is recovered it will be held on trust for some or all of the persons who invested funds in 1997. 6 In 1998 further amounts totalling approximately $16,660,000 were received from investors and also paid into the Aroni Colman trust account. From that account $7,510,000 was deposited into C L Custodians' account with the National Australia Bank Limited (NAB) and the balance of $9 million was paid to Max Green & Associates. With regard to the funds paid to C L Custodians all but approximately $1.9 million has been dispersed. The balance remains in the account. It is not disputed that this amount is held on trust for some or all of the persons who invested funds in 1998. 7 On the afternoon of 2 April 1998, 13 Coromandel applied for the appointment of receivers of the assets of C L Custodians to prevent their further dissipation. Because of the urgency of the matter 13 Coromandel had not yet commenced any proceeding against the company. I ordered that Mr Korda and David John Winterbottom, both members of Arthur Andersen, accountants, be appointed as receivers until 4.15pm on 9 April 1998. I also ordered that, subject to further order, the costs of the interim receivership be paid by 13 Coromandel. The latter order was made on the request of 13 Coromandel and, at the time, I assumed that I had jurisdiction to make it. It seems that I did not: see Boehm v Goodall [1911] 1 Ch 155; Evans v Clayhope Properties Ltd [1987] 1 WLR 225. Other orders were made but the only one that should be mentioned is that 13 Coromandel was required to issue and serve on the respondents to its proposed proceeding an originating application together with a statement of claim by 4.00pm on 7 April 1998. 8 13 Coromandel did commence an action against C L Custodians on 7 April 1998 wherein it sought relief in consequence of the fraud allegedly perpetrated against it. One of the orders sought is a declaration that C L Custodians holds the sum of $1,190,000 on trust for 13 Coromandel. Whether that sum is capable of being traced is a matter of doubt. 9 On 8 April 1998, 13 Coromandel instituted an application under the Corporations Law for an order that C L Custodians be wound up in insolvency. It also filed a motion seeking the appointment of a provisional liquidator. The motion was returnable the following day. 10 The application for the appointment of a provisional liquidator came before me on 9 April 1998 as did an application for interlocutory relief in the newly instituted proceeding against C L Custodians. In the proceeding 13 Coromandel did not seek a continuation of the receivership and I ordered that the costs of the interim receivership be taxed and paid out of the assets of C L Custodians. However, an order was made on the motion in the winding up proceeding that Mr Korda be appointed provisional liquidator of the company and that his costs were to be taxed and paid out of the assets of the company. 11 The application for the winding up of C L Custodians was heard on 15 May 1998. Orders were made that the company be wound up and that Mr Korda be appointed the liquidator of the company for the purposes of its winding up. 12 It is now necessary to mention certain proceedings in the Supreme Court of Victoria. On 30 March 1998, in an action commenced by originating motion, Victorian Lawyers RPA Limited (Victorian Lawyers) obtained an order that Kevin Joseph Power be appointed: "… Receiver of all or any property as defined by Section 248 of the Legal Practice Act 1996 which belongs to or is held by the Defendant or by him under the business name of Max Green & Associates or by any other person on behalf of the Defendant or Max Green & Associates or but for the death of the said Defendant or of him under the business name of Max Green & Associates would have been held by him or in the name Max Green & Associates or is recoverable by the said Defendant under his name or under the said business name of Max Green & Associates." 13 Victorian Lawyers is a recognised professional association accredited under s 299 of the Legal Practice Act 1996 (Vic). The association regulates legal practitioners in Victoria. Victorian Lawyers is given standing to apply for the appointment of a receiver in respect of a solicitor by s 249. That application can be made in a variety of circumstances including where there has been a defalcation by a solicitor, where a solicitor is unfit to engage in legal practice and where a solicitor has died. 14 On an application under s 249, the Supreme Court is given power to appoint a receiver of all or any property that is held by a solicitor or by another person on the solicitor's behalf or property that but for any default of the solicitor would have been held by him or property that is recoverable by the solicitor: see s 250. "Property" is defined in s 248 to include trust money. 15 If a receiver is appointed he or she may require the solicitor "or any other person" to deliver to the receiver any property of which the receiver has been appointed receiver: see s 254(1). Section 255 provides that the receiver may acquire or take possession of any property of which he or she has been appointed receiver or may apply to the Supreme Court for an order for the transfer or delivery to him or her of any property in the possession of the solicitor "or any other person" if the solicitor or that other person has been required to transfer or deliver that property to the receiver but has not complied with that requirement. Broad though these powers are, there can be no doubt that the reference to "any other person" in both s 254(1) and s 255 does not include a court or an officer of a court when acting in that capacity: see e.g. Cohen v MacDonough [1906] VLR 521 (reversed on appeal on other grounds: see [1907] VLR 7); Clyne v Commissioner of Taxation (No 7) (1983) 77 FLR 352; Kizon v Palmer (1997) 72 FCR 409. The receiver is entitled to deal with any property that he or she has acquired or of which he or she has taken possession in any manner which the solicitor might lawfully have dealt with it: s 264. If the receiver comes into possession of property that belongs to a client of the solicitor, he or she must return that property to the client. 16 The order made on 30 March 1998 did not have the effect of appointing Mr Power as receiver of the debt due to C L Custodians by NAB or the debt due by the ATO, if there is in fact any debt due by it. Those choses in action were not included in the description of the property which was the subject of the order. 17 On 7 April 1998 Victorian Lawyers brought on a further application under s 249 of the Legal Practice Act before the Supreme Court and obtained an order in the following terms: "That Kevin Joseph Power … be appointed Receiver of all or any property as defined by Section 248 of the Legal Practice Act 1996 which relates to any transaction or matter conducted by Max Paul Green or any matter in which Max Paul Green had a personal involvement or was involved in any other way (but not including matters in which the principal operator at all times has been a person who is presently a current practitioner at Aroni Colman) and which belongs to or is held by the Defendants or by them under the business name of Aroni Colman or by any other person on behalf of the Defendants or but for the death of the said Max Paul Green would have been held by them or is recoverable by the said Defendants under their names or under the said business name of Aroni Colman. 18 The terms of the order are wide enough to cover the money standing to the credit of C L Custodians in its account with the NAB and any debt due by the ATO. However, by the time the order was made both amounts were under the control of the receivers appointed by the Federal Court and neither those receivers nor C L Custodians was a party to the Supreme Court action. The general rule in that circumstance is that the receivership order will not affect the rights of parties who are not before the court: Davis v Duke of Marlborough (1819) 36 ER 555 at 559 per Lord Eldon. See also Salt v Cooper (1880) 16 Ch D 544 where it was held that a receiver appointed by the Court of Bankruptcy one hour before a receiver had been appointed by way of equitable execution was not postponed to the rights of the execution creditor: Lush LJ put the matter succinctly (at 558): "Here the property was already in the hands of the Court, and the equitable execution cannot effect it."

19 In any event, Mr Power would be required to obtain the permission of the Federal Court before he could interfere with the possession of property under the control of a receiver appointed by the Court to avoid running the risk of being in contempt: Johnes v Claughton (1822) 37 ER 966; Evelyn v Lewis (1844) 67 ER 467; In re Metropolitan Amalgamated Estates Ltd [1912] 2 Ch 497 at 501-502. 20 The termination of the receivership did not improve the position of Mr Power. Immediately upon termination Mr Korda was appointed as the provisional liquidator and later he was appointed as the liquidator of C L Custodians. In those capacities Mr Korda took or maintained control of the choses in action. Mr Power could not interfere with that control without leave of the court (In re Henry Pound, Son & Hutchins (1889) 42 Ch D 402) unless Mr Korda recognised his claims and was willing to deliver or assign the choses in action to him (Landmark Corporation Ltd (in liq) [1968] 1 NSWR 705). 21 With this background in mind, the first matter to be determined is whether Mr Korda is entitled to have his costs and expenses of the receivership paid out of the assets of C L Custodians, notwithstanding that those assets are held on trust for investors. As to this, I have not the slightest doubt that the receiver is entitled to look to the trust assets for his indemnity. 22 When the court appoints a receiver it in effect assumes control of the assets over which the receiver is appointed: Gardner v London Chatham & Dover Railway Co (No 1) [1867] 2 Ch App 201 at 211 per Lord Cairns; Burt, Boulton & Hayward v Bull [1895] 1 QB 276 at 279-280 per Lord Esher. The receiver is not the agent of the parties to the action in which he is appointed and nor are they liable for his costs. The court itself cannot indemnify the receiver but it will ensure that the receiver will have his costs and expenses paid out of the assets under his control (Boehm, supra, at 161) or out of assets over which he was appointed but that did not come under his actual control (Mellor v Mellor [1992] BCC 513 at 521-522). 23 The fact that the assets do not beneficially belong to a party to the suit in which the receiver is appointed (as in this case) cannot effect the receiver's entitlement. That this should be so accords both with principle and authority. As regards principle, a receiver is appointed by the court because the court is satisfied that such an appointment is necessary to safeguard the interests of all persons who are interested or who may be interested in the assets placed under receivership: Tullett v Armstrong (1836) 48 ER 371; Owen v Homan (1853) 10 ER 997 at 1032. Once the court has decided that particular assets should be subjected to a receiving order it is right and proper that those assets should be applied to satisfy the receiver's costs. It would be extraordinary if a receiver's entitlement to costs was dependent upon it being established that the assets under his control, a control authorised by the court, were beneficially owned by a party to the proceedings. There will be many cases where a receiver will be appointed over property the ownership of which is not known at the time of appointment. If the receiver is not entitled to have his costs paid out of that property unless it is determined that the property belongs to a party to the proceeding few people will be willing to undertake the onerous task of acting as receiver. 24 If authority be needed for this view, it is to be found in the cases that speak of the receiver's indemnity subsisting over the assets under his control. I have already mentioned a number of them (see e.g. Boehm, above; see also Batten v Wedgwood Coal & Iron Co (1885) 28 Ch D 317), but there are also cases that are directly in point. In Eady v Eady (1895) 16 NSWLR (Eq) 70 Owen CJ in Equity held that a receiver was entitled to receive his commission out of assets under his control notwithstanding that those assets belonged to the official assignee in bankruptcy. The reason given was that the receiver was lawfully in possession of those assets by reason of the order of the court and that was sufficient to charge the assets with the receiver's costs. See also Bertrand v Davies (1862) 54 ER 1204 where the Master of the Rolls, Sir John Romilly, said (at 1207): "[W]here a receiver or manager is appointed by the Court, in a suit properly constituted, such manager is to be considered as appointed on behalf of all persons interested in the property, and he is entitled to his ordinary commission and allowance, and also to a lien on the estate, as against all persons interested in it, for the balance, whatever it may be, that shall be found to be due to him on taking his accounts." Reference should also be made to Skip v Hardwood (1747) 26 ER 1125.

25 I need not take much time in dealing with Mr Korda's claims with regard to his costs and expenses of the provisional liquidation. The cases show that the costs of a provisional liquidator are to be treated in the same way as the costs of a receiver appointed by the court. This is for the reason that the court will appoint a provisional liquidator in much the same circumstances as it would appoint a receiver, namely to protect property for the benefit of all persons who are entitled to it. The better known cases are collected in Shirlaw v Taylor (1991) 31 FCR 222. There the Full Court affirmed the principle that the appointment of a provisional liquidator is analogous to the appointment of a receiver and that the provisional liquidator has a lien for his or her costs and expenses over the assets under his or her control analogous to that of a court appointed receiver. 26 There is a further issue concerning the costs and expenses of both the receivership and the provisional liquidation. Mr Power, who was given leave to intervene, has filed evidence to the effect that much of the work carried out by Mr Korda was an unnecessary reproduction of work already performed by Victorian Lawyers or by Mr Power. Mr Korda strongly denies this allegation. I was not asked to resolve this dispute and on the evidence tendered thus far I could not do so. However, it will be necessary for Mr Korda to prepare accounts for both the receivership and the provisional liquidation and have those accounts passed before he will be entitled to recover his costs and expenses. It is appropriate, in my opinion, that Mr Korda also be required to support those accounts with an affidavit which explains why and for what purposes the work was undertaken and the costs and expenses incurred. The affidavit should set out what information was provided to Mr Korda by Victorian Lawyers or Mr Power concerning the affairs of C L Custodians and Mr Korda should state, in light of that information, the reason he was required to perform the work that he did. 27 This then brings me to the claim in relation to the costs and expenses of the liquidation. It is only on this aspect of the case that I have found some difficulty in arriving at a conclusion. 28 I can begin a consideration of the cases by referring to In re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171, a decision of Dixon J sitting as a single justice in the original jurisdiction of the High Court. There the liquidator had realised assets that were subject to a debenture creating a floating charge. The proceeds were not sufficient to satisfy the claims of the debenture holder and the question arose whether the liquidator was entitled to be paid his costs out of the proceeds. Dixon J said (at 174): "If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realisation of such assets. The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realisation of the fund affected by the security must be borne by it. . . . The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it. " (citations omitted) 29 The next case is Re Suco Gold Pty Ltd (in liq) (1983) 7 ACLR 873. I should mention that this case, a decision of the Full Court of the Supreme Court of South Australia, is in certain important respects in conflict with the decision of Full Court of the Supreme Court of Victoria in Re Enhill Pty Ltd (1982) 7 ACLR 8 but not on the aspect to which I will refer. Suco Gold was a trustee of two trusts. Prior to its winding up, Suco Gold had only acted in its capacity as trustee of those trusts; that is, it had not entered into any engagements on its own account. At the date of its liquidation there were still outstanding debts that the company had incurred in its capacity as trustee. Unless the assets of the trusts were realised those debts would not be paid. The question that arose for consideration was whether the liquidator's costs, expenses and remuneration incurred in realising the assets and in paying out the creditors could be charged against the trust assets. The Full Court held that they could. King CJ said (at 883) that this could be justified: "…by reference to the obligations of the trustee company arising out of the carrying on of the business authorized by the trusts. It is part of the duty of the trustee company to incur debts for the purposes of the trust businesses and, of course, to pay those debts. Upon winding up, those debts can only be paid in accordance with the provisions of the Companies Act. This requires necessarily that there be a liquidator and that he incur costs and expenses and be paid remuneration. . . . As the company's obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity. If that reasoning is wrong I would . . . be prepared to rely on the principle enunciated by Dixon J in Re Universal Distributing Co Ltd . . ." 30 There can be no difficulty with this ruling. All of the steps taken by the liquidator were to procure the performance by the trustee of its duties and it is no novel proposition that, in those circumstances, a trustee has a charge on trust property for the costs and expenses properly incurred in dealing with trust assets: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. 31 In one respect Suco Gold, and other cases that have applied the principle there stated, may be said to have overlooked the distinction between the trustee (the company in liquidation) and its liquidator. The liquidator is not, of course, the trustee but the person who has replaced the directors who formerly controlled the trustee. The distinction was noted by Mr Nugee QC sitting as a deputy High Court Judge in In re Berkeley Applegate Ltd (No 2) [1989] 1 Ch 32 where, in somewhat similar circumstances to the present case, it was held that the liquidator could look to the trust assets for his remuneration not for reasons akin to those expressed by King CJ but on "a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property.": see Berkeley Applegate at 50. 32 What of the case where the trustee does not carry on the business of trustee but nevertheless holds property on trust? That was the position in Re G B Nathan & Co Pty Ltd (in liq) (1991) 5 ACSR 673. There, the company had received funds from investors on terms that they would be invested in the money market; by loans to institutions and by the purchase of bills of exchange. At the time of its winding up the company held certain money and securities on trust for its clients. The liquidator applied for directions as to whether he was entitled to deal with the money and the securities by passing them on to the claimants without further investigation and whether he could deduct therefrom the cost, charges and expenses of the winding up. McLelland J gave certain directions concerning the manner in which the money and securities were to be dealt with and then turned to consider the question of the liquidator's costs. As to this his Honour said (at 687): "Where, as appears to be the position in the present case, the company holds assets on what are virtually bare trusts for other persons, there seems to be no sufficient reason why the liquidator should not simply cause the company to comply with any demand by the beneficial owners to transfer the assets to them, thus giving effect to, and terminating, the trusts. In such a case, the work of the liquidator in causing those assets to be transferred to those entitled to them wears the double aspect of work properly carried out for the purposes of the winding up, as well as work carried out in the 'administration' of the trusts. It seems to me that to the extent that there is a conflict between the views of Gibson J in Berkeley Applegate (No 3) and the views of Needham J in Crest Realty . . . as to the duties of a liquidator in relation to trust property held by the company, the views of Needham J are to be preferred, at least where 'administration' is confined to the process of identifying the trust assets and those entitled to them and taking such steps as may be appropriate in the circumstances for the purpose of divesting from the company the trust assets and any continuing obligations in relation to them, all of which processes may fairly be comprehended in 'winding up the affairs of the company'." However, as there were sufficient assets of the company to meet the liquidator's claim for costs, there was no need for any order against the trust assets. 33 The difference of opinion between Gibson J in Re Berkeley Applegate (Investment Consultants) Ltd (No 3) (1989) 5 BCC 803 and Needham J in Re Crest Realty Pty Ltd (No 2) (in liq) [1977] 1 NSWLR 664 to which McLelland J referred concerned which of the activities undertaken by a liquidator of a trust company could be characterised as work related to the winding up of the company and which could be described as work that related to the administration of trust assets. Gibson J suggested that there is a reasonably clear distinction between the two classes of activity, whereas Needham J tended to the view that a good deal of the liquidator's work would ordinarily fit within both categories. The importance of the distinction is that work that is solely concerned with the winding up and not with the administration of trust assets can not ordinarily be charged against those assets. 34 These cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them. 35 The position is a little more involved as regards work done and expenses incurred in what may be described as general liquidation matters. If that work is unrelated to the beneficiaries and their claims it is difficult to see how the cost could be charged against their assets. In the case of a company that has carried on the business of trustee it might be that much of the work involved in the liquidation is chargeable against trust assets if it can be shown that the liquidation is necessary for the proper administration of the trust. But it is unlikely that this will be so where the company did not act solely as trustee or at least did not act in that capacity to a significant extent. In that event, the liquidator will be required to estimate those of his costs that are attributable to the administration of trust property and only those costs will be charged against the trust assets. 36 There is insufficient evidence before me to determine whether the whole or only some part of the work performed by the liquidator is chargeable against trust assets. It does appear that a good deal of the work was concerned with the affairs of the trusts. But whether that work was reasonably required to be undertaken in the administration of the trusts I cannot say. In these circumstances, I am not prepared to make any order insofar as the costs and expenses of the liquidation are concerned. It will be necessary for the liquidator to prepare proper accounts to justify his claim for indemnity against the trust assets and make a further application in that regard. 37 There are two further difficulties with regard to the liquidator's claim. The first is that the beneficiaries who are entitled to the debt due from the ATO (assuming that it is recoverable) are not the same as the beneficiaries who are entitled to the deposit with the NAB. The liquidator is not entitled to charge the beneficiaries of one trust with the costs and expenses incurred in relation to the other trust. Accordingly, it will be necessary for the liquidator to estimate the costs and expenses incurred insofar as they relate to each trust and only charge those costs to the trust on whose behalf the work was performed. If that estimate is not possible then a pari passu distribution of the costs and expenses will be in order as was envisaged by King CJ in Suco Gold, supra. The second difficulty is the possibility that the liquidator has performed work on behalf of investors for whom no property is held on trust. If that is the case the liquidator could not look to the existing trust assets for the costs and expenses of that work unless, in accordance with the foregoing principles, the liquidator is entitled to charge those assets with a proportionate share of the costs. That would be so if the costs and expenses are not divisible. The accounts that the liquidator prepares should deal with these issues. 38 I will make orders concerning the work and expenses of the receivership and of the provisional liquidation as follows: (1) That the receivers are entitled to have deducted from any money that C L Custodians holds upon trust their just and reasonable costs, charges and expenses of the receivership. (2) That the provisional liquidator is entitled to have deducted from any money that C L Custodians holds on trust his just and reasonable costs, charges and expenses of the provisional liquidation. 39 I will hear the parties on what are the appropriate directions that should be given for the passing of the receivers' and provisional liquidator's accounts. When it is sought to pass those accounts the question whether the costs and expenses were reasonably incurred will be determined. I will not now decide whether, at that time, Mr Power has standing to appear to challenge the reasonableness of those costs and expenses. It may be that he does although, as presently advised, it seems to me that only the beneficiaries will be entitled to appear. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein

Counsel for 13 Coromandel Place Pty Ltd: Mr P Santamaria

Solicitor for 13 Coromandel Place Pty Ltd: Clayton Utz

Counsel for Mr Korda Mr G Garde QC Mr M Sifris

Solicitor for Mr Korda Freehill Hollingdale & Page

Counsel for Mr K Power Mr J Burnside QC Mr S Senathirajah

Solicitor for Mr K Power Victorian Lawyers RPA

Date of Hearing: 11 and 15 December 1998

Date of Judgment: 1 March 1999