Claim against the Liquidators
33 The applicants' claims against the liquidators are to the effect that the liquidators improperly prolonged the liquidation of VA Corporation, for two reasons. First, the liquidation was unnecessarily delayed by the liquidators issuing court proceeding seeking a judicial order to sell the mortgaged property. Second, once it became apparent to them that the company was solvent, the liquidators failed to take steps to terminate the liquidation.
34 Although the property was ultimately sold by Perpetual, shortly after their appointment the liquidators took steps to sell the property. One step was the application in the Supreme Court for an order authorising the sale. The issue is whether it was appropriate for the liquidators to institute that application and incur costs in so doing, rather than simply sell the property.
35 As has been pointed out, VA Corporation was the trustee of VA Unit Trust. It held the St Kilda Road property as part of the trust estate. The liabilities which VA Corporation owed (its only debts were those due to Perpetual, the State Revenue Office and the City of Port Phillip) were debts which the company had incurred in its capacity as trustee. The company had a right of indemnity against the trust estate in respect of these debts. The right of indemnity was supported by an equitable lien, or more properly described, an equitable charge over the trust assets: Hewett v Court 149 CLR 639, 663.
36 Prior to the mortgagee taking possession of the property, the liquidators took advice from solicitors concerning the company's position in relation to the discharge of the trust debts. The liquidators were advised that VA Corporation's right of indemnity over the trust property was "enforceable by a court order for sale of the trust property". The solicitors also pointed out that Mr Vasiliou and Ms Apostolou "are vigorous litigants and have no hesitation in issuing proceedings to protect their commercial interests". The liquidators were advised to issue proceedings to seek an order granting them permission to sell the property.
37 A key element of the solicitors' advice was that a trustee's lien can only be enforced through court process. Mr Randall for the liquidators made detailed submissions in support of that view. Given its general importance, it is necessary to consider the issue in a little detail.
38 The starting point is with the trustee's right of indemnity. Ordinarily the trustee does not require any assistance from a court to exercise his indemnity. The indemnity has two aspects which can be exercised as acts of self help: (1) the right in the trustee to reimburse himself out of trust assets in respect of payments made out of the trustee's own funds in satisfaction of trust liabilities (a so called right of reimbursement) and (2) a right to apply trust funds in direct satisfaction of trust liabilities (a right of exoneration): Chief Commissioner of Stamp Duties v Buckle (1998) 192 CLR 226, 246.
39 The trustee will, however, face difficulties if there are no funds against which to exercise the right of reimbursement or exoneration. The difficulty exists because an equitable lien or charge does not, in itself, carry with it a right of sale to enable trust assets to be converted to cash and stand as a fund from which the trustee can make payments to creditors and reimburse himself for lawful expenditure. It confers no right of sale because an equitable lien or charge does not grant title to the property over which the charge or lien is held: Hewett v Court 149 CLR 639, 663. It follows that, at least where there is no other source of power to sell charged property, a trustee's right of indemnity against non-cash assets must be enforced by the processes of equity, ie by judicial sale or the appointment of a receiver with a power of sale.
40 What is the position where the trustee who holds the legal title and has an equitable lien also has an express power of sale conferred by the trust instrument? Mr Randall submitted that even in those circumstances it is still necessary for the trustee to seek a curial order to enforce his equitable lien.
41 This submission is contrary to such authority as there is on the point. In Jennings v Mather 1902 1 KB 1, 6, Stirling LJ said that the trustee "has a right to resort to [the trust] property, without the assistance of the Court, for the purposes of indemnity against liabilities properly incurred by him in the administration of the trust". See also Re The Exhall Coal Company Limited (1866) 35 Beav 449, 453; Xebec Pty Ltd (In Liq) v Enthe Pty Ltd (1987) 18 ATR 893, 898; H A J Ford, 'Trading Trusts and Creditors' Rights' (1981) 13 MULR 1, 2; Scott on Trusts (5th ed, 2006), pp 1627-1628.
42 In Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd (2006) NSWSC 153 the trustee had an express power of sale conferred by the relevant trust instrument. The trustee was removed from office. Two days after being removed, the trustee purported to sell trust property in order to enforce its equitable lien. Austin J said (at [22]) that if the trustee had sold the property while remaining trustee, "it would have had the power to do so". The purported sale was outside power because at the time of sale the trustee had ceased to hold office.
43 Mr Randall relied upon cases, of which there are many examples, where it is said that the trustee's proprietary interest may only be enforced by judicial sale and not by sale without curial intervention. Some of the better known cases are Re Pumfrey (deceased); The Worcester City and County Banking Co Ltd v Blick (1883) 22 ChD 255, where the trustee sought a judicial sale because his power of sale had not yet arisen; Re Stucley [1906] 1 Ch 67, Davies v Littlejohn (1923) 34 CLR 174 and Hewett v Court (1983) 149 CLR 639, cases which concerned a vendor's or purchaser's lien; ANZ Banking Group Ltd v Intagro Projects Pty Ltd [2004] NSWSC 1054 a case where a former trustee had lost control of the trust assets and was not in a position to enforce its lien without approaching the court.
44 Another case which is commonly cited in this area is The Melbourne Tramways Trust v The Melbourne Tramway and Omnibus Co Ltd (1887) 13 VLR 487. The issue that arose for determination was whether a security granted to pursuant to specific legislation (The Melbourne Tramway and Omnibus Company's Act 1883 (Vic)) was intended to confer a power of sale. The legislation referred to the security as being 'chargeable' on the plant and rolling stock of [the defendant]. The Court said (at p490) that it was well understood that a 'charge' could only be enforced by court order.
45 In each of these cases, however, the court was only concerned to describe the right conferred upon the holder of a charge, such as a right of indemnity. The court was not dealing with a trustee who had been given an express power of sale in his trust instrument. Interestingly, Melbourne Tramways is cited by Sykes and Walkers' The Law of Securities (5th ed, 1993) at p 198 for the proposition that: "The remedies of an equitable chargee, unless contract adds others, are judicial sale and the appointment of a receiver. Both remedies are gained only through the court". (emphasis added)
46 It is, in my view, clear that where a trustee has legal title to property coupled with a power of sale and has a proprietary interest in that property by reason of his right of indemnity, the trustee may have recourse to the power of sale to get in funds against which his right of indemnity can be exercised. Here, such a power is to be found in clause 8.3 of the deed which established the VA Unit Trust.
47 In addition to the trust instrument, the liquidators had a separate authority to sell the property. Upon his appointment a liquidator has three main tasks: (1) to locate and get in the company's property; (2) to realise (ie sell) that property; and (3) to distribute the proceeds among those entitled to them. The liquidator is given statutory powers to perform each task. The power to sell is conferred by s 477(2)(c), which provides that a liquidator may sell or otherwise dispose of, in any manner, all or any part of the property of the company;
48 In the circumstances we are considering (ie where a corporate trustee holds legal title to trust property over which it also has a proprietary claim) the right of indemnity passes to the liquidator who may resort to the trust property to make good that right: In re Suco Gold Pty Ltd (in liq) (1983) 7 ACLR 873, 878, 881. There is no reason in principle why the liquidator's statutory power of sale is not available to enable the claim to be satisfied. To the contrary, it would be highly inconvenient if it could not and, instead, the liquidator was required to go to court. In my view, the power of sale conferred by s 477 may be exercised in respect of property in which the company in liquidation has an equitable interest, provided the liquidator has the legal title to dispose of. The statutory power of sale may be exercised by the liquidator of a trustee company even where the trust instrument itself did not confer a power of sale. See, for example, UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 457 where it was held that an unassignable chose in action could be sold by a liquidator under the statutory power of sale.
49 Mr Randall also suggested that because VA Corporation may have been replaced as trustee by Ms Apostolou, the liquidators were required to seek a judicial sale order. This is not correct. First, the removal of a trustee does not get rid of the trustee's right of indemnity: Coates v McInerney (1992) 6 ACSR 748; Dimos v Dikeakos Nominees Pty Ltd (1996) 68 FCR 39. Second, the appointment of a new trustee does not automatically vest Torrens land in the new trustee: Trustee Act 1958 (Vic) s 45(3)(c). In any event, only 'trust property' can vest in the new trustee. It is arguable that, whether or not the trust property is Torrens land, 'trust property' does not include property in respect of which the former trustee retains an equitable interest: Chief Commissioner of Stamp Duties v Buckle (1998) 192 CLR 226, 247; Xebec Pty Ltd (in liq) v Enthe Pty Ltd (1987) 18 ATR 893, 898; see also Ford and Lee Principles of the Law of Trusts (Lawbook Co, subscription service) [8400] (update 62).
50 Third, even if trust property includes property in which the former trustee retains an equitable interest, the retiring trustee is entitled to retain possession of the trust property, subject to a court order to the contrary, until it is paid what it is due or until it sells the property. I acknowledge that Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344 holds that a retiring trustee cannot retain possession of trust property as against a new trustee. With respect, in my opinion there is no doubt that a retiring trustee can hold trust property to secure his right of reimbursement against both the beneficiaries and a new trustee. Stott v Milne (1884) 25 Ch Div 710, a decision of a powerful Court of Appeal presided over by the Lord Chancellor, states the rule in unqualified terms. So also does G Bogert, Trust and Trustees (2nd ed, rev 1982) s718 in the following passage:
If a successor trustee has been appointed, he cannot recover possession of the trust property from the retiring trustee until the latter is paid from the trust property for all advances from his own funds properly made for the benefit of the trust. If there is a duty on the part of the trustee to convey the property to a beneficiary at the termination of the trust, the trustee can insist on reimbursement for expenses incurred by him for the benefit of the trust before he is obliged tot execute a conveyance. The trustee may assert this right of retention against principal or income of the trust.
51 That the right of indemnity is not lost if possession is given up is not, contrary to what is said in Lemery Holdings, to the point. Nor, also contrary to what is said in Lemery Holdings, is there a principled distinction between a claim for possession by a beneficiary (whose claim is said to be defeated by the lien) and a claim for possession by a new trustee (whose claim is said to defeat the lien). Lemery Holdings bases the distinction on the potential for the destruction of the security interest, considering it less likely if the property passes to a new trustee. In the end, the risk depends upon the honesty of the individual, not the legal capacity in which the individual holds the property. This is not to suggest that in an appropriate case, a court does not have power to order that trust property be delivered into the hands of the new trustee on terms by which the old trustee's indemnity is fully protected: see eg Global Funds Management (NSW) Ltd v Burns (in prov liq) (1990) 3 ACSR 183.
52 In passing I note that although Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153 is authority for the proposition that the original trustee could no longer exercise the power of sale conferred by the trust instrument, it appears not to have been argued that the liquidator could have recourse to s 477.
53 Notwithstanding the existence of a power of sale, there were in this case good reasons for the liquidators to apply to the court for permission to sell. First, there was in existence a transfer by which VA Corporation had purported to transfer the property to Ms Apostolou. The transfer had been lodged in the Stamps Office and had been assessed to duty. That assessment was being challenged. Second, Mr Vasiliou had informed the liquidators that VA Corporation had no right to remain as the registered proprietor of the property. Third, Mr Vasiliou also denied that the trustee had a right of indemnity. Fourth, Mr Vasiliou was making a variety of complaints about the liquidators' conduct. Finally, the liquidators were acting on their solicitors' advice regarding matters which were not legally straightforward.
54 These reasons made it proper, if not necessary, for the liquidators to seek the protection of a court order. No doubt proceedings would have been issued challenging any attempt on their behalf to sell the property. As things turned out, it was unnecessary for the Supreme Court to rule on the liquidators' application. The mortgagee's taking of possession rendered the liquidators' application redundant.
55 Another complaint raised against the liquidators is that they unnecessarily prolonged the winding up of a company which was clearly solvent, and failed to assist the beneficiaries of the unit trust in their attempt to refinance the property so that the liquidation could be brought to an end.
56 This complaint raises the issue of what a liquidator should do when he discovers that the company in liquidation, having been wound up in insolvency, turns out to be solvent and all that is required to pay out creditors is some reorganisation of the company's finances. It is not difficult to appreciate that, in those circumstances, it may be in the interests of the company (creditors and contributories) for the liquidators to facilitate a restructure of the company's debts. A stay of the winding up could then follow.
57 I am of opinion that if a reasonable restructuring is proposed by the contributories, the liquidator should take the steps necessary to facilitate that restructure. What kind of facilitation is required depends upon the facts of each particular case. Sometimes it will be no more than the provision of information about the affairs of the company. On other occasions, the refinancing may require the liquidator to take positive steps to facilitate an arrangement. Of course, in no case will the liquidator be obliged to incur any personal liability in relation to any substitute loan. Such liability could easily be avoided with an order under s 471A by which the director is given power to execute documents on behalf of the company.
58 In considering whether it is in the company's best interests to stay the liquidation, the liquidator will need to consider the factors relevant to the court's discretion as regards whether to grant a stay. A stay order will usually be made if all creditors are paid out, the liquidator's costs and expenses are covered and the members agree. It may be accepted that there will be exceptional cases where it would not be appropriate to stay the winding up of a company simply because it is solvent. For example, where it is "detrimental to commercial morality and to the interests of the public at large" a stay will not be granted: Re Telescriptor Syndicate Limited [1903]2 Ch 174, 180. See also Re Warbler Pty Ltd (1982) 6 ACLR 526; Anderson v Palmer [2002] NSWSC 192. The reasons that lie behind that rule will usually have no application to a company which has not engaged in trade and has incurred only a handful of debts.
59 If application for a stay is to be made, the liquidator could bring the application. After all, the liquidator has standing to make the application: see ss 482 and 511 of the Corporations Act.
60 In the case of a solvent trustee there will be even greater imperative to arrange for a refinancing of, or assist the beneficiaries in their endeavour to refinance, the trust debts. It is, after all, a paramount duty of the trustee to preserve the trust estate if its preservation is both reasonable and possible. If the trust estate can be preserved then that is what the liquidator of the trustee should do. It may not be necessary to stay the liquidation. It might suffice for the liquidator to apply for the appointment of a new trustee. Whether there should be a stay of the liquidation or the appointment of a new trustee will also depend upon the circumstances of the case.
61 I should indicate that I did stay the winding up. That order was made following the sale of the St Kilda Road property. Its purpose was to ensure, so far as was possible, that all debts having been paid and no further costs would be incurred by the liquidators that would cut into the surplus.
62 Turning to the facts in this case, as has been observed it is highly likely that VA Corporation was solvent when it was wound up. At the time, in addition to the debt due to Perpetual the company had only two other unsecured creditors, the State Revenue Office which was owed $147,525.31 for unpaid land tax together with interest and the City of Port Phillip to which was due $55,188.93 for unpaid rates and costs.
63 Mr Randall said that the solvency of the company was only apparent after the outcome. This is putting the position too favourably for his clients. The liquidators knew from at least March 2007 that the company's liabilities were in the vicinity of $1.4 million (although this figure grew over time as the liquidator and mortgagee incurred fees dealing with Mr Vasiliou). In mid-2006, the liquidators had received an offer of $1.75 million for the property. During 2007, they received numerous expressions of interest from potential purchasers of the property. In these circumstances, it seems that the liquidators had strong reason to believe that the value of the property well exceeded the quantum of the company's liabilities.
64 It is also important to note that from shortly after their appointment, the liquidators had been in discussions with Mr Vasiliou regarding a potential refinancing of the property. Mr Vasiliou had indicated that he could not refinance the property while the company was in liquidation and while he could not use the property as security to obtain finance. It is fair to say that the liquidators did not go out of their way to assist Mr Vasiliou, or to raise with him the possibility of seeking a stay or alternative orders to facilitate a potential refinance. For example, at one stage the liquidators informed Mr Vasiliou that a proposed refinance could only occur if Mr Vasiliou procured the payment to the company of sufficient funds to enable all the debts to be discharged, implicitly without being able to use the property as security for any loan that may be required.
65 I have some reservations about the manner in which the liquidators dealt with Mr Vasiliou's refinancing proposals. Ultimately, though, there were a number of factors which would have justified a decision not to facilitate a refinance of the company's debts. Most importantly, Mr Vasiliou would not have gone along with any arrangement that would have resulted in the payment of the debts due to the State Revenue and the City of Port Phillip. For reasons which I do not understand, Mr Vasiliou is convinced those debts were not due. He had instituted proceedings to challenge the claims of the State Revenue and the City of Port Phillip. Yet there is nothing to suggest those debts were not due.
66 By reason of Mr Vasiliou's attitude concerning the company's debts, it was inevitable that there would be no arrangement which the liquidators could reasonably adopt, and that the property would be sold by either the liquidators or the mortgagee so that the company's debts were paid.
67 For the foregoing reasons the application will be dismissed with costs.
I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.