Australian Securities and Investments Commission v Enterprise Solutions 2000... [2002] NSWSC 641 | Case summary

The Liquidator's Application 7 The liquidator approaches the court seeking directions, first, that he would be justified in giving notice to all claimants of the moneys in the trust accounts in the form of a draft notice set out in a Schedule to the summons, and by: "(a) delivery to the International Air Transport Association; ["IATA"] (b) faxstream to all travel agents to whom the Company sold travel packages; (c) delivery to all person or their legal representatives who have indicated their intention to make a claim on the funds in the said account; (d) delivery to the Travel Compensation Fund; (e) advertisement in Travel Week magazine." 8 He also seeks an order that he would be justified in providing notice of the application by serving: "(a) a copy of the originating process on any person lodging a claim, and (b) a copy of the originating process and any supporting affidavit on the Department of Employment and Workplace Relations in relation to the General Employee Entitlements and Redundancy Scheme (GEERS) and any employees whose claims have not been paid or approved by GEERS." 9 The application also seeks some orders for the disposition of the balance of the funds. Apart from payment of the liquidator's costs, the substantial order that is sought is that the liquidator would be justified in distributing the balance of the funds in the trust account proportionately between all persons who, in the liquidator's opinion, or as determined by the court, have a claim on the trust account, or who have previously made such claim to the first applicant, or make a claim following the giving of notice in accordance with order 1 above within the time specified in the notice. Today I am asked to deal only with the application for the orders outlined in paragraphs 7 and 8 above. To What Trusts Is the Money in the Trust Account Subject? 10 The Company dealt with, among other people, airlines who were members of IATA. It made air transport services available to its customers pursuant to a passenger agency agreement between the Company and IATA. That agreement provided in clause 7.2 that: " ... the agent shall collect the amount payable for the transportation or other service sold by it on behalf of the Carrier. All moneys collected by the Agent for transportation and ancillary services sold under this Agreement, including applicable commissions which the agent is entitled to claim thereunder, shall be the property of the Carrier and shall be held by the Agent in trust for the Carrier on behalf of the Carrier until satisfactorily accounted for to the Carrier and settlement made." 11 There is clearly an available argument which, without having heard anything to the contrary and on the present incomplete evidence, appears a fairly strong one, that by paying money into an account entitled a "trust account" the Company became a trustee of it. Who the beneficiaries of any such trust are will depend on the circumstances in which each deposit was made. If that is so, and if the only money available is money which was held in the trust account, then it appears unlikely, at this stage, that there will be any money available for payment of the claims of employees. However, as this is an application for directions, it is not possible to express anything like a final view on that topic. It is, however, appropriate for the employees whose claims have not been paid or approved under the GEERS scheme, and for the Department administering the GEERS scheme, to be notified of the proposal which the liquidator makes for the distribution of the trust fund, so that those employees, and that Department (which is, I gather, in some way subrogated by the legislation establishing the GEERS scheme to the claim of the employees which it pays out) may put forward such arguments as they see fit for making a claim to the money in the trust accounts. The Liquidator's Role in Conducting any Trusts 12 The liquidator has, as is apparent from what I have said so far, been appointed as liquidator to a company which is trustee of a trust. When a company which is a trustee goes into liquidation, the company's assets remain vested in the company, including any assets which it holds on trust. The company remains the trustee of the trust, under the control of the liquidator: Whitton v ACN 003 266 886 Pty Ltd (1996) 42 NSWLR 123 at 157. The trust assets must still be administered in accordance with the equitable obligations which govern the trust. The liquidator, by being given effective control of the administration of the company, becomes obliged to: "… act in a responsible way in the administration of the trust in the name of the company ". Re Crest Realty Pty Ltd (No 2) [1977] 1 NSWLR 664 at 672." 13 This "responsible way" might involve the liquidator exercising the powers of the company to undertake the administration of the trust, or might involve applying to the court for the appointment of a new trustee. Whether the liquidator ought to seek the appointment of someone else as trustee will depend on whether there is a real prospect of a conflict of duties, or a conflict of duties and interest in the liquidator holding both offices: Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 at 162. Nothing that has been submitted to me suggests it is inappropriate for the liquidator to continue to administer the trust governing the trust accounts of the Company. Subject to a topic that I will return to concerning the costs of the liquidator, the assets which the Company owns beneficially are the ones which get administered in accordance with the statutory order of priorities; the assets which the Company holds on trust get administered in accordance with the trusts that govern them. On What Trusts is the Money Held? 14 There is a serious problem in ascertaining which are the trusts on which the Company's assets are held. Insofar as money was paid into the trust account and was received by the Company in anticipation of it being used for payment for air travel to be provided by some particular airline, there is clearly an argument available that it would, when received, have been held on trust for the airline: see cl 7.2 of the IATA agreement which I have earlier quoted in paragraph 10 above, and Stephens Travel Service International Pty Ltd (receivers and managers appointed) v Qantas Airways (1988) 13 NSWLR 331. While that may be the basis on which the money was originally received, there is also a question about how long that trust continues. It seems unlikely as a matter of construction of the agency agreement, as well as a matter of common sense, that it was intended that the trust would continue even if the airline did not provide the services for which the payment was made. In the present case, I gather there are some instances where airlines dishonoured issued tickets, and other cases where money was paid into the trust account for the purpose of purchasing air tickets, but no tickets were issued. 15 If the services of the airlines were not actually provided, money originally intended to be used to purchase airline tickets may then well be held on resulting trust for the client who paid the money. 16 In relation to the payment received from clients for some purpose other than paying for airline tickets, it may well be, as I have earlier said, that the mere payment into the trust account had the effect of impressing on those moneys a trust. Barring Unknown Claims 17 The liquidator is in the situation where he does not, at this stage, know all of the claims which might be made against him. It is appropriate for him to find out just what claims are being made. Only when he knows what claims are being made will he be in a position to decide exactly what he should do about them. 18 Because the liquidator is in the position of a trustee, he is able to avail himself of the provisions of s 60 of the Trustee Act 1925. That provides as follows: "(1) Where the trustee intends to convey or distribute any property to or among the persons entitled thereto, the trustee may give notice in the manner and form prescribed by rules of the Court of the intention so to convey or distribute the property. (4) At the expiration of the time fixed by the notice the trustee may convey or distribute the property or any part thereof to or among the persons entitled thereto, having regard only to the claims, formal or otherwise, of which the trustee then had notice. (5) If the notice has been given the trustee shall not, as respects the property conveyed or distributed, be liable to any person of whose claim the trustee has not had notice at the time of the conveyance or distribution. (6) Nothing in this section shall prejudice the right of any person to follow the property, or any property representing the same, into the hands of any person who may have received the same." 19 It will be seen that this requires the trustee to give notice in the manner and form prescribed by the rules of court. The relevant rule of court is Pt 70, r 16. That rule sets out one regime for trusts arising in respect of deceased estates, and a different regime for other trusts. For any trust which is not in a deceased estate, the notice is required to be published in a Sydney daily newspaper and may be in or to the effect of Form 121A. To effectively bar unknown claims it will therefore be necessary for the liquidator to publish notice calling for claims in not only the various media which he has proposed, but also in a Sydney daily newspaper. Further, the notice in the Sydney daily newspaper will need to be given by the trustee (ie the company), not by the liquidator, and to be in the form of Form 121A. How to Allocate the Money Between the Known Claimants 20 Once the claims are known, a question will arise about how those claims should be dealt with. There is evidence which shows that there are some serious difficulties in carrying out a conventional tracing exercise on the money which stands in the trust accounts. These are difficulties partly of expense, and partly of lack of necessary information. It is not clear, on the material which I have seen so far, however, that it is completely impossible to do that, nor that it is impossible to trace the source of, at least, the amounts of money that remained in the trust accounts at the start of the liquidation. The relevance of this will become apparent in due course. 21 It may well now be the law in New South Wales that where money has been deposited into a trust account, on trust for various individual depositors, and the trust account has been mismanaged so that the amount available in the account is not adequate to meet all claims on it, the account is held upon trust for the depositors collectively, with each depositor being entitled to a share proportionate to the contribution he or she has made to the account. In Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 Priestley JA dealt with this topic, at 460-461. His Honour described the point as one "of some importance". He said the point was one which was "not taken before this Court, and not noticed by the Court in the course of argument". The topic was, in Keefe, relevant to the formulation of a charge of professional misconduct against a solicitor, which in turn depended on whether a sum of money which had been received from a client, and paid into the solicitor's trust account, had become unavailable to be paid to her or as she directed. His Honour considered the position at some length, as follows: "A question arises, on facts such as the present, whether the beneficiaries (the clients) entitled to the trust moneys in a trustee's (solicitor's) possession, when those trust moneys are less than the total due to all those beneficiaries, become rateably entitled to the available funds, or whether the shortfall should be allocated on a first in, first out basis. If the latter position is the correct one, then in the present case, if the dates listed in the trial balance set out above were the actual dates of deposit of each amount, Mrs Grapsas's money would be part of the $3,526.50 which had wrongly gone from the trust account and the solicitor was in breach of trust in regard to her. If the former (rateable) view is correct, then also there is no doubt the solicitor was in breach of trust in respect to her. The point was the subject of academic consideration by D A McConville (1963) 79 LQR 388 in an article entitled "Tracing and the Rule in Clayton's Case". The author advances powerful arguments for the rateable solution (at 403 and following). The same view is taken in the 6th ed (by Meagher and Gummow) of Jacob's Law of Trusts in Australia (1997) Butterworths, pars 2711 and 2712 at 749-751. At the level of legal precedent, the same view was adopted by Kearney J in Hagan v Waterhouse (1991) 34 NSWLR 308 at 358-359. His decision should, in my opinion, be approved by this Court. (The application of the rateable approach can itself be subject to complication depending on the timing of deposits to and wrongful withdrawals from a trust account in which the funds of different beneficiaries are held, as was pointed out by Learned Hand J in Re Walter J Schmidt & Co; Ex parte Feverbach 298 F 314 (1923). That does not however detract from the soundness of its application in straightforward situations.) On the rateable approach once the amount to the credit of the solicitor's trust account became less than it should have been, he was in breach of trust to all fourteen clients for whom funds were held in it. Thus, in Mrs Grapsas' case, assuming the correctness of the dates of deposit in the trust trial balance figures, on the rateable approach, part of the amount held by the solicitor on trust for Mrs Grapsas was paid away otherwise than in accordance with s 61, or, if the rateable approach be not correct, the whole of it was." (emphasis added) 22 This judgment of Priestley JA was agreed in by both Sheller JA and Powell JA. While it has, strictly, the status of obiter dicta, it is a considered statement, which must be considered very carefully by any trial judge. 23 Further, the result which was favoured in Keefe (rateable division) was the same result that had been arrived at in various earlier decisions, which reached their conclusion on various different bases: Re Jones (deceased); ex parte Mayne (1953) ABC 169; Windsor Mortgage Nominees Pty Ltd (as trustee) v Raymond Griffith Cardwell (1979) ACLC 40-540 at 32,199-32,200; Australian Securities Commission v Melbourne Asset Management Nominee Pty Ltd (receiver and manager appointed) (1994) 49 FCR 334 at 358-359, 365; Re Registered Securities Ltd [1991] 1 NZLR 545 at 555. 24 Some of these decisions relied on the impossibility of carrying out a tracing exercise as a ground for the decision, but that is not a requirement of the dictum as stated in the passage I have quoted from Keefe's case. 25 If one were to seek to apply the basis of those other decisions, namely impossibility of carrying out a tracing exercise, one would need to know in accordance with what principles that tracing exercise ought to be carried out. If Clayton's case (Clayton's Case; Devaynes v Noble (1816) 1 Mer 572; 35 ER 781) applies to such an exercise, then in many cases it will be possible to show that, at the least, the money of the last person who deposited money into the trust account still remains there. The article by D A McConville "Tracing and the Rule in Clayton's case", (1963) 79 LQR 388, to which Priestley JA referred in Keefe, has argued that the rule in Clayton's case is concerned with the state of account between banker and customer, and does not apply to the relationship between trustee and beneficiary. That article has been approved by Kearney J in Hagan v Waterhouse (1991) 34 NSWLR 308 at 358-359 (in the context of tracing the assets of a single trust), in Jacobs Law of Trusts in Australia 6th ed para [2709] and applied in the context of tracing the assets of different trusts mixed together in paragraph [2712], and approved by the Court of Appeal in Keefe at 460-461. Both Keefe and the analysis in Jacobs para [2709], [2711] and [2712] were adopted by Chesterman J in Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082 at paras[13] and [20] (and applied in a context where the assets of several different beneficiaries had been mixed together). 26 If the dictum in Keefe is applied as the law in New South Wales, the effect is that, where money held on several different trusts has been mixed in the one bank account Clayton's case cannot be used to identify for which of the beneficiaries the money in the account is held. This would mean that to the extent that the English Court of Appeal decision in Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22 contemplates that Clayton's case would have some ongoing role in effecting such identification, it is not the law in this State. The dictum in Keefe deals with a question which the High Court noticed but did not decide in Scott v Scott (1963) 109 CLR 649 at 663-664, and is consistent with some tentative views expressed by Hope JA (with whom Kirby P and Priestley JA agreed) in Stephens Travel Service International Pty Ltd (receiver and manager appointed) v Qantas Airways (1988) 13 NSWLR 331 at 348. 27 If the Keefe line is followed it has the advantage that the way in which the law decides the beneficial entitlement of beneficiaries whose assets have been mixed with those of other beneficiaries is the same, whether the mixing occurs in the bank account, or in some other form of assets: see Lord Provost of Edinburgh v Lord Advocate (1879) 4 App Cas 823. 28 I have spelt out the situation concerning the law on this topic in some detail (though not in anything like complete detail), to show that the decision facing the liquidator, about how to divide the money in the trust accounts amongst claimants, is not clear-cut. It seem to me that, while the liquidator will be able to make a distribution amongst only those claimants of whom he has notice after issuing the notice under s 60 of the Trustee Act, he will still be faced with a problem, which cannot be solved by a simple application for advice, about what he is to do to divide the money amongst those claimants. 29 It seems from the analysis of the trust accounts, which has been carried out in part by the liquidator, and is in evidence before me, that there might be some prospect of being able to identify at least one depositor whose money undoubtedly remained in the trust fund, if the rule in Clayton's case were to be applied in deciding entitlement to the money. Such a person would be one of the last few depositors. 30 It seems to me that it would be appropriate for the liquidator to consider whether it is possible to identify any such depositor by working backwards from the last deposit, to see whether there can be any tracing in accordance with Clayton's case of the money which remained in the trust accounts at the end. That exercise will either identify such a depositor, or show conclusively that the tracing exercise is impossible. If it is possible to identify a particular depositor who would, in accordance with Clayton's case, be entitled in specie to some of the money which remains in the trust accounts, it would be appropriate for that person to be nominated as a representative party in litigation brought by the liquidator to decide, on an originating summons, whether it is indeed correct that the rateable division approach supported by the dictum in Keefe ought to be applied to this situation. That person could be appointed to represent those who would be entitled to the funds if tracing in accordance with Clayton's case were to be carried out. It would also be necessary to nominate as another defendant, someone representing a class of people who had paid money which went originally into the trust account, who did not receive the travel benefits that they had paid for, and who would clearly not be entitled to any of the money remaining in the trust accounts, if tracing were to take place under Clayton's case. I suspect that any airline which provided travel to a customer of the travel agency but was not paid for it, might be in no materially different situation to members of the class I have just identified. If further consideration of how the airlines put their claim bears out this suspicion, the class I have just identified could be widened to include such airlines. If further consideration of how the airlines put their claim does not bear my suspicion out, a representative of the airlines could be added as a third defendant. 31 If that sort of litigation were to be conducted, it would be in a comparatively small compass, although the legal question involved in it is a difficult one. Alternatively, if the attempt at conducting the tracing exercise shows that it was indeed impossible, that would provide an alternative legal basis upon which the liquidator would be able to approach the court for orders. Liquidator's Costs 32 A question which arises concerns the liquidator's costs in carrying out the further inquiries which are needed. 33 When a company which is the trustee of a trading trust goes into liquidation, the proper costs and expenses of the liquidator can be met from the assets of the trust: In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99. This follows both as a matter of trust law (per King CJ in Suco Gold) and also as a matter of construction of the statutory provisions conferring priority, in liquidation, on a liquidator's costs and expenses (per Jacobs J, Suco Gold). 34 When a company which is both a trustee, and also an entity which carries on business in its own right, is placed into liquidation, there can be some circumstances in which the liquidator's costs and expenses concerning administration of the trust can be properly paid from the trust assets. However, where the company has assets which are not held on trust, the primary fund on which the liquidator's costs should fall is usually the non-trust assets of the company: see Re G B Nathan Pty Ltd (in liq) (1991) 24 NSWLR 674 at 685-689. See also the review of the authorities by Young CJ in Eq in Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301. 35 In the present case, where the only assets available to the liquidator are the trust assets, it would be appropriate for the proper remuneration of the liquidator, in taking steps which I propose today to authorise with a view to deciding to whom those assets should be paid, to be paid out of those assets.

Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd

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