The Liquidators' Analysis and Submissions
40 Senior Counsel for the liquidators referred me to the decision of Austin J in Bastion v Gideon Investments Pty Ltd, a case in which his Honour addressed most helpfully a number of issues which call for consideration in the present case. At 473-474 [33]-[38], his Honour said:
The present applications have been made on the basis that the liquidator must decide whether there is a trust governing the investors' rights. The issue being uncertain, he properly seeks the protection of directions.
If there is no trust, the investors became unsecured creditors of the company when they deposited money with it. The liquidator must wind up the company and distribute its assets rateably to the unsecured creditors. The legal position is comparatively straightforward.
If there is a trust, the investors have equitable proprietary rights as beneficiaries and the company has the duties of a trustee, to be discharged by its liquidator. Those equitable proprietary rights are to be asserted against the trust fund and any assets into which the fund can be traced. It appears that there is no trust fund, but the company has acquired assets (the two insurance policies, the unit in Melbourne, and the shares) which might arguably be trust assets. The question becomes whether the beneficiaries can trace into those assets.
The evidence about the financial affairs of the company and the trust is very slim, and the position is unlikely to become much clearer through further investigations (given the thorough work that has already been done). However, we do have the statements by Ms Byrnes, which are consistent with information supplied by Mr Charlton, that the company did not maintain separate bank accounts for the trust or for moneys received from investors, and that Mr Bastion moved money in and out of accounts without any regard to the nature of the accounts or the sources of the money. Therefore (assuming there is a trust) the company has mixed all of the trust money received from investors with its own money, and has made some investments from the mixed fund and then dissipated the remainder. In such a case equity allows the beneficiaries to trace into the investments: Re Oatway; Hertstet v Oatway [1903] 2 Ch 356; see Jacobs' Law of Trusts in Australia, 6th ed, 1997, Butterworths, p 746. It follows, on this analysis, that all of the company's remaining assets are trust assets which it holds for the benefit of the investors as beneficiaries.
The evidence does not point to any identified voidable transactions which might be attacked by the liquidator. However, any recovery of this nature would probably augment the trust assets rather than the company's own property, since on the tracing analysis presented above, money or assets used by the company in any such transaction would be presumed to be trust money or trust assets. It is likely that the company as trustee has a claim against Mr Bastion's estate for misappropriation of trust assets by him, but it appears that the estate is insolvent. I am unable to say, on the evidence, whether there is any basis for recovery from Mrs Bastion as the remaining director and if so, whether the proceeds of recovery would be for the benefit of the investors.
If there is no trust, the five "non-trust" creditors rank as unsecured creditors with the investors, unless they have statutory liens or other similar protection. If there is a trust, the debts to the "non-trust" creditors are best regarded as debts incurred by the trustee in the course of management of the affairs of the trust. That would be so as regards debts connected with ownership of the Melbourne unit, and while the Telstra account is less clear, the trustee would be justified in treating it in the same way. Although the debts might have been incurred in the course of unauthorised activity, the trustee probably has a right of recoupment or exoneration out of trust assets for these debts, having regard to the nature of the debts and the terms of the trust deed. Consequently the debts are to be paid in full out of company's assets (all of which are trust assets, on the present analysis).
41 At 476-477 [51]-[56], his Honour said:
In my opinion the evidence, though in some respects flimsy (like the evidence that was before me in the Graf Holdings case), persuades me that the funds of investors were collected by Mr Bastion on behalf of the company as trustee of an investment trust, and it is more likely than not that the terms of the investment trust were contained in the trust deed. I have indicated that the trust deed is very much a draft document, noting particularly that internal cross-references were frequently incorrect. However, one can work out the correct references, with patience, and so in the end the terms of the trust are reasonably precise. The most serious problem is that the number of units held by each initial unitholder is not set out in the schedule, as it should be according to cl 3(2), but the liquidator appears to have worked out the value of their investments from other evidence.
I am particularly influenced by the fact that the draft management agreement recites that the GHF Trading Trust was constituted by a deed dated 1 August 1993 (evidently the trust deed), and the evidence that investors believed that they were investing in accordance with it.
On the evidence before me I cannot reach the conclusion that the trust was amended by the management agreement. I note that the information memorandum appears to proceed on the basis that the management agreement was at that time operative, and some investors appear to have believed that they invested on the basis of the management agreement. However, the draft management agreement seems to contemplate the issue of new redeemable units, and I can see no evidence that any such units were issued.
Even if I had formed the view, on the evidence, that the management agreement became operative, its terms would not apply to investors who had become beneficiaries prior to its commencement.
The significance of this conclusion may be that it affects the question whether the company has acted in breach of trust by investing in property other than equities, bonds, currency markets and futures. It will be recalled that the powers of investment in the trust deed are very wide, but they would have been restricted if the management agreement had become operative.
In summary, I am prepared to give the direction sought in para (1) of the interlocutory process, since that paragraph identifies the trust deed but not the management agreement.
42 The liquidators submitted that, upon the basis of their investigations, the following matters were established:
(a) The company had, at one time or another, created or was in the process of obtaining 51,216 STCs;
(b) In respect of most of the STCs, the mandatory declaration sections of the assignment forms were left blank;
(c) Most of the STCs were registered in the STC Clearing House in the company's name, despite there being no formal assignment of entitlements to the company by the corresponding customers;
(d) The company has already sold approximately 15,158 STCs with an estimated current value of approximately $465,350; and
(e) There is a shortfall of 15,158 STCs between the actual number of STCs in the STC Clearing House and the number of STCs that ought to be in the STC Clearing House.
43 Senior Counsel for the liquidators also emphasised that:
(a) The STC registration system required strict compliance with the legislative requirements, including the proper execution of any assignment of STCs to a registered agent;
(b) In the absence of an assignment by a customer to the company of the right to create the STCs, the company was not entitled to create or deal with the STCs in its own right.
44 For the reasons captured in the submissions made by the liquidators which I have summarised at [42]-[43] above, the liquidators submitted that there was strong support in the material which they have uncovered for the proposition that, with the exception of a small number of STCs, the company held the STCs on trust for the named customers as beneficiaries. If that conclusion be correct, the STCs are trust property and are, for that reason, not assets which are available to the general pool of creditors of the company. In addition, because the company appears to have sold STCs without authorisation from the beneficial owners and applied the proceeds to its own account, there is a substantial shortfall in trust assets arising from the company's breach of trust as trustee. As a result, the beneficiaries would be entitled to pursue the company as trustee for any shortfall. This would make them creditors of the company to the extent of the shortfall.
45 The liquidators went on to submit that, if the STCs are held by the company on trust for the eligible beneficiaries, directions under s 479(3) of the Act would not be sufficient to protect the liquidators nor would they be sufficient to allow the trust to be managed and brought to an end. The liquidators submitted that, for these reasons, it was desirable that the Court appoint a person as receiver and manager of the STCs still held by the company pursuant to s 57(1) of the Federal Court of Australia Act 1976 (Cth).
46 At 478-480 [64]-[68] in Bastion v Gideon Investments Pty Ltd, Austin J said:
In the present case, in contrast with the Indopal case, there are no substantial trust creditors (assuming that the investors are beneficiaries), there is no suggestion of lack of cooperation by Mrs Bastion, and the assets are safely under the control of the liquidator. Nevertheless my opinion there is a justification for appointing a receiver and manager to the assets of the trust. Section 67 of the Supreme Court Act 1970 (NSW) gives the court a wide discretion to appoint a receiver and manager of assets upon an interlocutory application, and the jurisdiction is clearly available to protect trust assets. The appointment will not be made unless the case in favour of it is a strong one (Yunghanns v Candoora No 19 Pty Ltd (No 2) [2000] VSC 300 (unreported, SC(Vic), Warren J, 2093/99, 4 August 2000, BC200004629)), since receivership is an expensive process which could adversely affect rights of third parties. But the court will not hesitate to act where there is a real risk to the assets of a company or trust, as the Indopal case shows.
Here the problem is not only that the affairs of the trust are in disorder. To a substantial degree that is a problem to be addressed by the liquidator as such, and he has ample powers to do so. The difficulty is that he is the liquidator of a company which may have duties as trustee to the investors, requiring the company to ascertain, protect and ultimately distribute trust assets to them. But he does not know whether there is a trust in favour of the investors, and consequently whether those duties apply. The court is able to give him directions which will protect him in the steps he takes as liquidator, to the effect that he would be justified in recognising the existence of the trust. But those directions would not give any protection to third parties, including those who may wish to acquire the assets from the liquidator should he decide to sell them in the course of administration.
It seemed to me, therefore, that if I leave the liquidator to discharge the company's duty as trustee by realising the assets for the purpose of making distributions, he is likely to have difficulty in persuading buyers, especially in the case of the real estate, that he has good title to the assets. The problem will be overcome if I appoint him receiver and manager with an express power of sale as well as the powers contained in s 420 of the Corporations Law. That is what I intend to do.
The functions of the receiver and manager will relate to protection and realisation of the assets of the company, which are trust assets on the analysis that I have presented. I shall make orders requiring him to prepare a report on the performance of his functions, and to distribute it to the investors for their consideration, and then to account as receiver and manager to the company as trustee for the amount realised, after taking into account the investors' views. I shall make an order treating the receiver and manager as a liquidator and the investors as creditors the purposes of Pt 5.6 Div 5 of the Corporations Law and Pt 5.6 of the Corporations Regulations, so as to provide machinery for the convening and conduct of the meeting of investors that I envisage. I have in mind that the realisation of assets, the report and the meeting should take place within three months of the date of this judgment, though I shall hear any submissions the liquidator has to make on that subject.
As long as he is required to report as receiver and manager to a meeting of investors in the manner that I envisage, I am prepared to appoint the liquidator as receiver and manager. The issue for the court to consider is whether there is any real possibility of conflict between the duties of the two offices, or between duty and interest, as McLelland J pointed out in the Grime Carter and Indopal cases. Given that the principal investigations have already been carried out, and in light of the limited functions of the receiver and manager, my opinion is that there is no such risk of conflict as would justify the cost involved in engaging another person as receiver and manager.
47 I have found the approach taken by Austin J in the paragraphs which I have extracted at [40]-[41] and [46] above to be most helpful in providing appropriate guidance in the present case. I intend to follow his Honour's approach in determining the present application.
48 At pars 56-69 of his first affidavit, Mr Hundy said:
56. The Originating Process sets out several alternative options for the administration of the STCs. I am uncertain of the nature of the equitable entitlement of the former customers of the Company because of the shortfall in STCs.
57. The first option set out in the Originating Process provides that the STCs are held on trust by the Company for the benefit of the Eligible Beneficiaries; the STCs are to be treated as a single pool of trust assets to be sold and distributed rateably between the Eligible Beneficiaries only without regard to any existing registration or official reference to any particular Eligible Beneficiary (Option 1).
58. Option 1 is the most efficient and cost effective solution to sell and distribute the STCs. However, this option will result in the Correct Holding Customers and Shortfall Customers that still have some STCs registered in their name receiving less than they are entitled to. This option will also disregard the Company's entitlements and any entitlements the general creditors of the Company may have to the proceeds of the sale of the STCs.
59. The second option set out in the Originating Process provides that the STCs with the exception of the Company STCs are treated as a single pool of trust assets to be sold and distributed rateably between the Eligible Beneficiaries and the Company STCs forming part of the general pool of assets of the Company to be divided between the general creditors of the Company (Option 2).
60. Option 2 is also efficient and cost effective, as the STCs can still be sold and distributed as in Option 1 with an additional effort in dealing with the Company STCs. The main feature of this option is that the general creditors will be given access to the proceeds of the sale of the Company STCs.
61. The third option set out in the Originating Process provides that the Shortfall Customers and the Correct Holding Customers receive the full benefit of any STCs registered in their names, with the remaining STCs (Surplus Customers' STCs) to be distributed rateably to the Shortfall Customers (Option 3).
62. Option 3 is inefficient and less cost effective, as it involves more administrative costs in dealing with the distribution of the STCs either by sale or direct transfer to the entitled Eligible Beneficiaries. The problem with this option is that high administrative costs will result in a lower return to Eligible Beneficiaries. Further, there will be an unequal distribution between the Eligible Beneficiaries, as the Shortfall Customers will be disadvantaged in that they will receive a lesser distribution as compared to Options 1 or 2. This option will also disregard any entitlements the general creditors of the Company may have to the proceeds of the sale of the STCs.
63. The fourth option set out in the Originating Process provides that the Shortfall Customers and the Correct Holding Customers receive the full benefit of any STCs registered in their names with the remaining STCs (Surplus Customers' STCs), with the exception of the Company STCs, to be distributed rateably to the Shortfall Customers and the Company STCs forming part of the general pool of assets of the Company to be divided between the general creditors of the Company (Option 4).
64. The administrative costs associated with Option 4 are similar to Option 3 but this option has the additional requirement to deal with the Company STCs. This option further limits the return to Shortfall Customers.
65. The fifth option set out in the Originating Process provides that all STCs be treated as part of the general pool of assets of the Company to be sold and divided between the general creditors of the Company including the Eligible Beneficiaries (Option 5).
66. Option 5 is also efficient and cost effective but my main concern with this option is that the entitlements of the Eligible Beneficiaries to the Trust Assets will not be met. As mentioned in paragraphs 54 and 55 above, the total amount owed by the Company to its general creditors is large, which would likely result in the Eligible Beneficiaries receiving a small distribution or nothing at all.
67. Using the nominal figure of $26 per STC, a conceptual example of the financial effects of the above options is as follows:
68. It is for the above reasons that I am seeking a direction from the Court that I am justified in taking one of the alternative courses set out in the Originating Process. From my perspective the most efficient course is for Option 1 being as follows:
a. finding that all of the STCs still held by the Company are held on trust for the benefit of the Eligible Beneficiaries;
b. proceeding with a sale of the STCs and distributing the proceeds of sale as follows:
i. Paying the costs and expenses of the joint & several Administrators and joint & several Liquidators in determining, reconciling and preserving the trust assets and determining the entitlements of the Eligible Beneficiaries.
ii. Paying the costs and expenses of the Receiver & Manager in realising and distributing the trust assets to the Eligible Beneficiaries.
iii. Distributing the balance to the Eligible Beneficiaries who are to rank rateably according to the number of their STCs.
69. I consider that the proposal set out at paragraph 67 is the most practical, cost effective and timely means of finalising the distribution of the STCs, because the 'first in first out' rule of the Clearing House means that any STCs sold by this avenue could be waiting for an unspecified and indeterminable period of time as the value of the STCs on the open market is currently less than the statutory guarantee of $40 for STCs sold through the Clearing House.
49 When Mr Hundy refers to "paragraph 67" in par 69 of his affidavit, I have taken him to be referring to par 68 of that affidavit.
50 The liquidators also mentioned a theoretical Option 6. This option would involve seeking to recover the amounts already paid to Class B beneficiaries and adding those amounts to the overall pool, which would then be shared among all beneficiaries including members of Class B. Quite apart from legal difficulties thrown up by such a course, the liquidators submitted that the course was impractical because it would require the liquidators or receiver and manager to bring a string of small claims against beneficiaries for relatively small amounts of money in each case. It was submitted that it was likely that the recovery costs would far outweigh any benefit obtained by the process, even if recovery was achieved. In addition, the liquidators submitted that it was likely the purchases were bona fide purchases for value, in any event, with the result that the purchasers would be able successfully to resist any claims brought by the liquidators or any receiver and manager.