13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd

COUNSEL : S Golledge (S) (Applicant Liquidator) SOLICITORS : The Argyle Partnership (Applicant Liquidator) CATCHWORDS : CORPORATIONS [245]- Winding up- Insurance broker- Only asset trust account- How distributed. LEGISLATION CITED : Insurance (Agents and Brokers) Act 1984 (Comm) ss 26, 28 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (1999) 30 ACSR 377 Mercantile Mutual Insurance (Australia) Ltd v Farrington (1996) 44 NSWLR 634 Re Berkeley Applegate (Investment Consultants) Ltd [1989] Ch 32 CASES CITED : Re Eastern Capital Futures Ltd (1989) 5 BCC 803 Re Eastern Capital Futures Ltd [1989] BCLC 371 Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674 Re Suco Gold Pty Ltd (1983) 7 ACLR 873 DECISION : Orders made.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION 1700 of 2000 YOUNG CJ IN EQ

Thursday 6 September 2001 Re Greater West Insurance Brokers Pty Limited

Judgment 1 His Honour: This is an application by a liquidator for directions under s 511 of the Corporations Act 2001 (Cth) with respect to the liquidation of Greater West Insurance Brokers Pty Limited (the Company). 2 The Company was an insurance broker. The evidence is that its only asset is $30,308.24 being the proceeds of its closed bank account. 3 That banking account was not styled a trust account, as it would seem it ought to have been, pursuant to s 26 of the Insurance (Agents and Brokers) Act 1984 (Cth) (the Brokers Act). However, the liquidator has conducted this litigation on the basis that the bank account was an account within s 26. 4 Section 28 of the Brokers Act is, so far as relevant, as follows: "28. Distribution of insurance broking account moneys on insolvency etc. (1) This section applies to and in relation to a registered insurance broker: (a) who has become an insolvent under administration; or (b that is an insolvent company under administration; or to and in relation to the estate of a deceased insurance broker that is being administered under Part XI of the Bankruptcy Act 1966 or under the law of an external Territory providing for the administration of insolvent estates of deceased persons. (2) This section applies notwithstanding anything to the contrary contained in the Bankruptcy Act 1966 or in a law (including a law of a State or Territory) that relates to companies. (3) Moneys in an account maintained with a bank by the broker under subsection 26(1), and securities in which moneys have been invested under subsection 26(4), shall be treated as though they were subject to a trust in favour of the persons who, under subsection 26(3A) or (3B), are taken to be entitled to receive payment from that account. (4) Moneys from such an account shall be paid as follows: (a) first, moneys that have been paid into the account in error shall be withdrawn from the account; (b) secondly, insureds shall be paid the amounts they are entitled to receive from the moneys in the account in respect of claims made pursuant to contracts of insurance; (c) thirdly, insureds shall be paid the amounts (other than amounts to which paragraph (b) applies) they are entitled to receive from the moneys in the account; (d) fourthly, after all payments have been made under paragraphs (b) and (c), insurers shall be paid the amounts they are entitled to receive from the moneys in the account. (5) If the moneys in the account that are available to make payments required under a particular paragraph (other than paragraph (a)) of subsection (4) are not sufficient to meet those payments in full, the payments required under the paragraph concerned shall be made proportionally. (6) Any moneys remaining after all payments have been made under subsection (4) shall be taken to be moneys payable to the broker. (7) Nothing in the preceding provisions of this section prevents moneys in the account being invested as mentioned in subsection 26(4) by a person, other than the broker, who has lawful custody or control of the moneys." 5 In Mercantile Mutual Insurance (Australia) Limited v Farrington (1996) 44 NSWLR 634, Bryson J considered that the Brokers Act as then in force did not operate to give an insurer (as distinct from the person who paid the money into the account) a trust interest in the funds in the account. The Brokers Act has since been amended to cover the point. That decision is the only decision on the Brokers Act brought to my attention. 6 The liquidator has received a communication from the controlling director of the Company that the funds in the account represent $24,255 in respect of cheques written to insurers or clients which were dishonoured by the bank when the liquidator closed the account; $285 refunds due to clients from cancelled policies; about $4,637 payable to insurers, and $1,145 in commissions due to the broker. There is a slight discrepancy presumably caused by bank fees. 7 Under s 28(4)(c) of the Brokers Act, the insureds must first receive all that is due to them from the account. This is easily done as these claims seem to amount to only $2,795. 8 Under s 28(4)(d) the insurers are entitled to the next $26,387. However, this would leave slightly over $1,000 to defray the costs and expenses of the liquidation. Although I do not know the amount of these costs, they are obviously in excess of that sum. 9 The question is whether the costs and expenses of the liquidation take priority over the insurers' rights under s 28(4)(d) of the Brokers Act? 10 Because of the small amount involved, the Court has only heard submissions by the solicitor for the liquidator. 11 The argument for the insurers is that the Brokers Act clearly states that the insurers are entitled to be paid what is owing to them from the account and, if there is insufficient in the account, to be paid pro rata. 12 Mr Golledge, the liquidator's solicitor, submits that the Act does not have this effect. He submits that pursuant to the provisions of s 28(3) of the Brokers Act, funds in the insurance broking account are to be treated as though subject to a trust in favour of the insurers or insureds. 13 He also submits that s 28 is a provision which is concerned with the regulation of claims to money as between insureds and insurers in the event of a deficiency. That is, it enacts a statutory priority in favour of insureds over insurers (s 28(4)). As between members of the same class, funds are to be returned rateably rather than in accordance with any rule based on the principle in Clayton's case. 14 However, the provision should not be interpreted as relating to or overriding the well-established principle regarding the allowance of a trustee's fees, including remuneration, from the charged assets. There is no basis in the Act itself to read such a provision into the section. Further, to do so is to act contrary to notions of equity as well as the dictates of public policy (liquidators and trustees cannot be expected to take on appointments unless they are entitled to be remunerated for their work). The principle has been applied in respect of many different types of funds. 15 The position is not as crystal clear as Mr Golledge would have it. Particularly under a regime where liquidators consent to take on a liquidation, a liquidator who takes on a non-paying liquidation will be assumed to act in the public interest on the basis of the well-known swings and roundabouts principle. However, after due consideration, I believe that Mr Golledge's submissions are basically correct. 16 There have been a number of cases recently where a liquidator has been appointed to a trustee company. I hasten to add that the present is not the classic case of the liquidation of a trustee company, as the Company was simply a trading company with a trust account. However, these cases need to be considered. 17 It has been clearly recognised that if a trustee company is in liquidation, the trustee remains the same, there is merely a change in control of the trustee; see Re Berkeley Applegate (Investment Consultants) Limited [1989] Ch 32, 44. However, one treats these cases as if the liquidator were in the shoes of the trustee and entitled to equivalent rights and subject to equivalent liabilities. 18 If there is a trustee under a trading trust, the trustee has the right to be indemnified from the assets used in the trading and this right is available to the creditors of the company in liquidation; see Re Suco Gold Pty Limited (1983) 7 ACLR 873. 19 The present Company is not involved with a trading trust. The decision of M.H. McLelland J in Re G B Nathan & Co Pty Limited (1991) 24 NSWLR 674 is thus more apposite. That case held that the principle to be applied is that where someone has an equitable claim to a fund, the claimant must meet the reasonable administration costs of administering the claim. Where the trustee is in liquidation these costs will certainly include the expenses of the winding up, at least to a certain extent. 20 Some of the English cases have distinguished between the costs of the winding up in administering the trust assets and the cost of the winding up generally; see Re Eastern Capital Futures Limited (1989) 5 BCC 803. However, in New South Wales, it has been recognised that it is often impossible to make that segregation; see Re G B Nathan & Co Pty Limited at p 688, and indeed see also the earlier aspect of the English case of Re Eastern Capital Futures Limited [1989] BCLC 371, 375. The Federal Court seems to have taken a middle position; see 13 Coromandel Place Pty Limited v C L Custodians Pty Limited (1999) 30 ACSR 377, 385. The bulk of authority, however, favours the position taken in the Nathan case. 21 It may be that in a particular case, beneficiaries under a trust will be able to show that it is inappropriate for the whole of the costs of the liquidation to be loaded onto the trust assets. However, the present does not appear to be such a case. The general rule is that the whole costs of the liquidator are charged on the trust assets. 22 In my view, the words of s 28(4) of the Brokers Act are not strong enough to make me hold that the Act intended some different result. Indeed, the reasons given in Re Suco Gold Pty Limited (supra) and taken up in Mr Golledge's submissions, would show that to take the contrary view would make it difficult to find liquidators to administer this type of company. 23 Thus, subject to the liquidator's reasonable costs and expenses being paid out of the trust moneys of the Company, the moneys held by the liquidator are to be paid first to the insured persons referred to in the letter of G D McDonald to the liquidator of 1 May 2001, and then to the insurers named in such letter as amended by the letter of 14 June 2001. 24 Accordingly the Court orders that:

1. The order of the Registrar of 17 April 2001 be set aside.

2. It is determined that, subject to the liquidator's reasonable costs and expenses being paid out of the trust moneys of Greater West Insurance Brokers Pty Limited, the moneys held by the liquidator to be paid first to the insured persons referred to in the letter of G D McDonald to the liquidator of 1 May 2001, and then to the insurers named in such letter as amended by the letter of 14 June 2001.

3. The costs of this application may be paid out of the said moneys.

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