Apostolou v VA Corporation of Aust Pty Ltd

Introduction 1 By an originating process filed on 18 June 2021, the first applicant (Liquidator) applies for directions under the Corporations Act 2001 (Cth) (Act) in relation to the second applicant (Company). The Company was wound up on 18 February 2021 pursuant to a creditor's voluntary liquidation. 2 The respondents to the proceeding are Gawn Enterprises Pty Ltd (Gawn Enterprises) and Robert Linton Gawn. As discussed further below, there is no serious dispute that, for some years prior to the winding up of the Company, Gawn Enterprises and Mr Gawn carried on business as a partnership (which I will refer to as the Gawn Partnership) and the Company was the manager of the Gawn Partnership. 3 The orders sought by the originating process included: (a) a direction that the Liquidator is justified in proceeding in the external administration of the Company on the basis that: (i) the Company conducted business as manager for the Gawn Partnership and, as such, has a right of indemnity and a lien over all assets (including any partnership assets) under its control or at its disposal in respect of debts it incurred as manager of the Gawn Partnership; (ii) as regards the winding up of the Company, the assets of the Company should be distributed to the Company creditors in accordance with the Act, including the provisions for statutory priorities under s 556 of the Act; (b) an order, on the grounds that the business property is held on trust for the Gawn Partnership, that the Liquidator be appointed as receiver and manager without security with the powers prescribed by s 420 of the Act (other than ss 420(2)(s), (t), (u) and (w)) as if references therein to "the corporation" were references to the property held on trust; (c) a direction that the Liquidator is justified in selling and liquidating the trust property; and (d) an order that the Liquidator's remuneration and costs of and incidental to this proceeding be paid from the proceeds of sale of the trust property. 4 The originating application was supported by an affidavit sworn by the Liquidator, Stephen John Michell, on 18 June 2021. 5 Aspects of the relief sought by the Liquidator were opposed by the respondents, who relied on an affidavit of Mr Gawn affirmed 25 August 2021. 6 At the hearing on 3 November 2021, the Liquidator pressed its application only in respect of the orders referred to in paragraphs (a) and (d) above. The Liquidator submitted that those orders are consistent with orders made by Robson J in Re Victoria Station Corp Pty Ltd (admins apptd) (2018) 56 VR 26 (Re Victoria Station), on which the Liquidator placed principal reliance. The Liquidator submitted that the Court has power to make those orders under sections 90-15 and 90-20 of Schedule 2 of the Act. The Liquidator otherwise sought an adjournment of the further relief sought in its originating application. 7 There was no significant dispute between the parties as to matters of fact, particularly the inferences that arise from the business records of the Company and the Gawn Partnership. The respondents largely confined their submissions to the appropriateness of the relief sought by the Liquidator. In that respect, the dispute was very narrow. 8 For the reasons that follow, I am satisfied that it is appropriate to make orders largely in the form sought by the Liquidator.

Factual background 9 The Company was incorporated on 4 September 2006. According to a search of the Company on the ASIC registry: (a) on 4 September 2006, Mr Gawn was appointed as director of the Company; (b) between 4 September 2006 and 30 June 2014, Mr Russell Hahn was appointed as a director and secretary; and (c) between 1 February 2008 and 16 November 2011, Mr Peter Densley was appointed as a director. 10 Mr Gawn is the sole remaining director and secretary and the sole shareholder of the Company. 11 The Company carried on business selling new and used heavy equipment along with supplying skilled labour for the completion of shutdown, maintenance or installation work in the petromechanical, mining and power generation industry (Business). 12 The evidence shows that, by 1 January 2008, the Company conducted business as manager of a partnership comprising the Gawn Family Trust, the Densley Family Trust and the Hahn Family Trust partnership (Old Partnership). On that date, the Company became registered for GST conducting business in that capacity. Gawn Enterprises is the trustee for the Gawn Family Trust. 13 By a deed made 26 June 2014, the Old Partnership was dissolved and a new partnership was created (being the Gawn Partnership). The deed recited that the Company had acted as manager of the Old Partnership and, in that capacity, the Company had been operating the Business. The deed contained provisions for the dissolution of the Old Partnership, including various payments as between the old partners, and provided that: (a) the partners of the new partnership (the Gawn Partnership) are Gawn Enterprises (99%) and Mr Gawn (1%); (b) the Gawn Partnership will be entitled to the benefit of all debts and work in progress of the Business arising from work performed by the Old Partnership on or before the "Effective Date" (30 June 2014); (c) the Company and the Gawn Partnership will assume responsibility for all debts, claims and liabilities associated with the Business and incurred by the Old Partnership on or before the "Effective Date"; (d) the Company will continue to act as manager of the Gawn Partnership in relation to the conduct of the Business and will do so under the existing ABN for the Old Partnership. 14 At the time, the existing ABN for the Old Partnership was 23 319 133 669. According to an extract from ABN Lookup, the trading name of the ABN as at 1 January 2008, was "Petromech Pty Ltd as Manager for Gawn Family Trust, Densley Family Trust and Hahn Family Trust". The entity type was "Other Partnership" which cover "all partnerships that are not limited partnerships or family partnerships". Since that time, the ABN has remained associated with the Gawn Family Trust and Mr Gawn, although the designation of trading names has not been consistent over time. 15 On 11 July 2018, the Company entered into a lease for the premises located at 21 Star Crescent, Hallem (Lease). The Company operated from the premises until it was wound up on 18 February 2021. The Lease particulars identify the tenant as Petromech Pty Limited as trustee for the Densly Family Trust and the Gawn Family Trust and state the ABN as 23 319 133 669. I accept the submission of the Liquidator that that designation was erroneous. There is no evidence that the Company ever acted as trustee of a trust. The designation seemed to reflect (although not accurately) the Company's capacity as manager of the Old Partnership. However, by the time the Lease was entered into, the Old Partnership had been dissolved and the Gawn Partnership created. 16 Upon his appointment, the Liquidator undertook numerous tasks to identify, amongst other things, the assets of the Company. The Liquidator has been provided with copies of the Company's financial and tax records; however, he has not been provided with any management agreements in relation to the Old Partnership or the Gawn Partnership or any partnership agreements. 17 The financial and tax records in the possession of the Liquidator disclose that the Company conducted business and held assets and carried liabilities as manager of the Gawn Partnership. In that regard: (a) The financial statements prepared for the Company for the financial year ended 30 June 2020 are titled "Petromech Pty Ltd Trading as the Gawn FT & Robert Gawn Partnership". Although they are unsigned, the financial statements contain a "Partner Declaration" and contemplated that they would be signed by the partners (the Gawn Family Trust and Mr Gawn). (b) The relevant tax return for the financial year ended 30 June 2020 is a partnership return in respect of the Gawn Partnership with the ABN 23 319 133 669. (c) Sample invoices issued by the Company on 8 July 2020 carry the ABN 23 319 133 669. 18 At the date of appointment of the Liquidator, the Company owned three major assets. These assets were (a) a recycling unit; (b) a materials hander; and (c) a wheel loader. The recycling unit and wheel loader has now been sold. The Liquidator currently holds the proceeds of sale and has control of the Company's bank accounts. 19 I am satisfied on the evidence that at all times since the dissolution of the Old Partnership, the Company has carried on the Business as manager of the Gawn Partnership and, in that capacity, has acquired assets and incurred liabilities. That conclusion was not seriously contested by the respondents. I am also satisfied that the Company did not conduct business or acquire assets or liabilities in any other capacity.

The Company's rights and interests as manager 20 The rights and interests of a partnership manager in respect of the assets and liabilities of the partnership were considered by Robson J in Re Victoria Station, on which the Liquidator relies. His Honour reached three conclusions on the facts of that case, which, in my view, are equally applicable to the facts of this case. 21 First, his Honour found that the manager of the partnership conducted the partnership business in the capacity of an agent, not as trustee. As observed by his Honour (at [62]), the cases commonly identify two essential elements of an agency relationship: the consent or assent of both principal and agent and the conferral of authority on the agent to act on the principal's behalf. Some cases refer to a third essential element of agency: the principal's control over the agent's actions. In my view, each of those elements is present in this case. The partners (Gawn Enterprises and Gawn) and the manager (the Company) were party to the dissolution agreement by which the Old Partnership was dissolved and the Gawn Partnership was created and thereby consented to the conferral of authority on the Company as agent. The conferral of authority is also evidenced by the financial and tax records of the Gawn Partnership which show that the Company traded on behalf of the partnership and maintained books and records in the same manner. Assets, including bank accounts, were held in the name of the Company for the Gawn Partnership. In contrast, there are no documents or actions that suggest the appointment of the Company as trustee of an express trust of which the partners are beneficiaries for the purposes of conducting the Business. 22 Second, his Honour found that an agent acting as manager of a partnership holds partnership assets as trustee for the partners. In that regard, Robson J referred to the following statements of legal principle (at [39] and [40], citations omitted): 39 The general rule is recited by Clarke JA in Walker v Corboy that: if a person delivers goods to an agent to be sold, the goods remain the property of the principal until the sale takes place and the moment the proceeds of sale are received by the agent they become the property of the principal. … [that rule was] allied to a wider rule that where a principal entrusts money or property to an agent … for a specific purpose the agent is bound to hold the money or goods on trust to deal with them as directed. 40 Dixon J also stated the relevant principle in Palette Shoes Pty Ltd v Krohn that: In equity the relation of agent would carry with it a duty to account, and, as a rule, a duty if moneys are received in the course of the agency to hold them specifically for the principal … The reason why in equity the proceeds of property may be followed by the owner and treated as a fund held upon a constructive trust in his favour is that his beneficial ownership of the thing gives him, prima facie an equitable interest in its proceeds. 23 Third, in relation to an agent's rights and obligations vis a vis the principal, Robson J observed that: (a) (at [73]), in so far as an agent contracts on behalf of an undisclosed principal, then the agent may sue and be sued on the contract (and a creditor may elect to sue the agent or the principal); (b) (at [82]), at common law, an agent has a right of indemnity against his or her principal in respect of expenses incurred in performing the role of agent and that the indemnity is a right that, upon the insolvency of the agent, passes to the agent's trustees in bankruptcy; and (c) (at [84]-[86]), an agent has a possessory lien over property of the principal that is held by the agent as manager and the agent is entitled to retain the property by way of lien until the agent's claim for indemnity is satisfied. 24 On the basis of the facts stated earlier, I am satisfied that the Company has a right of indemnity against the Gawn Partnership (specifically, the partners) in respect of liabilities incurred in performing the role of manager of the Gawn Partnership and that the indemnity is a right that has passed to the Liquidator upon the insolvency of the Company. I am also satisfied that the Company has a possessory lien over assets of the Gawn Partnership held by the Company as security for the right of indemnity.

Relief sought by the Liquidator 25 The Liquidator seeks an order of the Court to enable it to deal with partnership assets held by the Company in respect of which the Company holds a possessory lien, in order to satisfy the Company's right of indemnity for liabilities incurred as manager of the Gawn Partnership. 26 It is now clearly established that a liquidator of an insolvent (former) corporate trustee cannot sell the trust's property without order of the Court, or by appointment of a receiver over the trust assets: see Re Cremin, Brimson Pty Ltd (in liq) [2019] FCA 1023; 136 ACSR 649 at [49]-[50] per Moshinsky J, referring to Jones (in his capacity as liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (in liq)) v Matrix Partners Pty Ltd (2018) 260 FCR 310 at [44] per Allsop CJ (Farrell J agreeing at [196]); Re Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 1484; 291 FLR 17 at [10]; and Apostolou v VA Corporation of Aust Pty Ltd [2011] FCAFC 103 at [45]. As Moshinsky J there observed, the courts are generally willing, upon an appropriate application, to make orders permitting the liquidator of a (former) corporate trustee to sell trust assets. Orders of that kind were made in Re Simpkiss Pty Ltd (in liq) [2018] FCA 2121; Re Matthew Forbes Pty Ltd (in liq) [2018] VSC 331; Re St George's Development Company Pty Ltd (in liq) [2018] VSC 595; Re Asten Holdings Pty Ltd (in liq) [2020] FCA 1107; Re Pako Supermarkets Pty Ltd (in liq) [2020] VSC 487; and Jess, in the matter of Westside Group Pty Ltd (in liq) [2020] FCA 1586. 27 In my view, analogous principles apply in the context of an insolvent (former) corporate manager of a partnership in respect of the partnership's assets held by the manager and in respect of which the manager holds a possessory lien. The Court will, in an appropriate case, make orders permitting the liquidator to sell such partnership assets. An order of that kind was not ultimately opposed by the respondents. 28 In Re Victoria Station, Robson J made directions to the following effect (see at [121]): The administrators are justified in proceeding in the relevant administrations on the basis that: (a) [the manager] conducted the business as manager and agent for the partnership between [the partners] and, as such, has a right of indemnity and a lien over all assets (including any partnership assets) under its control or at its disposal in respect of debts it incurred as agent for the partnership; (b) as regards the winding up of [the manager], the assets of [the manager] (including any moneys it receives as a consequence of its lien) should be distributed to its creditors (including employees) in accordance with the Act, including the provisions for statutory priorities under ss 556, 560-1. 29 I am satisfied that it is appropriate to make orders in a similar form to those made by Robson J, namely a direction that the Liquidator is justified in proceeding in the external administration of the Company on the basis that: (a) the Company conducted business as manager and agent for the Gawn Partnership and, as such, has a right of indemnity and a lien over all assets (including any partnership assets) under its control or at its disposal in respect of debts it incurred as manager and agent for the Gawn Partnership (Available Assets); (b) as regards the winding up of the Company, the Available Assets of the Company should be distributed to its creditors in accordance with the Act, including the provisions for statutory priorities under s 556 of the Act. 30 Those orders were ultimately not resisted by the respondents. 31 The Liquidator also sought an order that the Liquidator's remuneration and costs of and incidental to this proceeding be payable out of the funds realised from the property of the Gawn Partnership. The language of the order proposed by the Liquidator was, in my view, imprecise with respect to the assets or fund from which those costs are to be paid. I consider it preferable to order that the Liquidator's remuneration and costs of and incidental to this proceeding be payable out of the funds realised from the Available Assets. Again, I understood that an order to that effect was not ultimately resisted by the respondents. 32 The Liquidator otherwise sought the adjournment of the originating application. The Liquidator submitted that there has been no adjudication on the proof of debts and there may be sufficient funds from the sale of the Available Assets to pay out the creditors. If that transpires, there will be no need for any further orders with respect to assets of the Gawn Partnership. The respondents submitted that there was no proper basis for the Liquidator to obtain the other relief sought in the originating application and that the appropriate course was for the Court to otherwise dismiss the originating application. In my view, it is not necessary to make any determination in respect of the respondents' contention with respect to the other relief sought in the originating application and the more efficient course is, at this time, to adjourn the remainder of the application.

Conclusion 33 In conclusion, I will make orders as discussed in these reasons. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan.