Bailey (Liquidator) v Rock Solid Rendering Pty Ltd

GLEESON J: 1 By originating process dated 7 April 2020, the plaintiff (liquidator) applied to be appointed without security as the receiver and manager (receiver) of the property, undertaking and assets of the Rock Solid Trust pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth) (FCA Act), and for ancillary orders. 2 The application was supported by the liquidator's affidavit sworn 5 March 2020. 3 On 4 May 2020, I made orders substantially in accordance with the orders sought. These are my reasons for making the orders.

Background facts 4 The liquidator was appointed as liquidator of Rock Solid Rendering Pty Ltd (company) on 28 March 2019 pursuant to s 513B of the Corporations Act 2001 (Cth). The shareholders are Jason Foy, who is the sole director of the company, and his wife, Natalie Foy. 5 The company operated a business specialising in the construction of residential homes in and around the Sunshine Coast area of Queensland. 6 The records provided to the liquidator include a copy of the Rock Solid Trust Deed dated 22 January 2004, by which the Rock Solid Trust was established. Mr Foy has informed the liquidator that, at its inception, he was the named trustee of the trust and that, at a time that he cannot recall, he retired as trustee and appointed the company as trustee of the trust. 7 The trust is a discretionary trust. Clause 8(3) provides for the trustee to be indemnified out of the trust fund. Clause 8(7) provides that the office of trustee shall be determined and vacated if the trustee shall have a liquidator appointed to it. Clause 7(3) provides that, if at any time no person has the power to appoint a new trustee or an additional trustee, the power shall be vested in the trustee for the time being of the trust. 8 By letter dated 30 April 2020, Mr Foy informed the Court, inter alia: At some time which I cannot recall now I exercised my power to remove myself as trustee of the Trust and appointed the Company to act as trustee in my place. To date, no new trustee or alternative trustee has been appointed as trustee of the Trust. From he time the Company became trustee of the Trust it did nothing other than enter into certain contracts and render certain invoices in connection with the business conducted by the Company in its own right. I am not clear on what assets the Company now owns in its own right or in its capacity as trustee of the Trust and consent to Mr Baileys appointment as receiver of the Trust for the purposes of realising those assets. 9 The liquidator is presently uncertain whether the company operated the business in its own capacity or in its capacity as trustee of the trust or sometimes in its own capacity and sometimes as trustee of the trust. 10 The assets which may be trust assets comprise accounts receivable. In his Report on Company Activities and Property, Mr Foy disclosed four debtors with an estimated value of $365,083.50 and no other assets. 11 The liquidator is pursuing proceedings initiated by Mr Foy in the Queensland Civil and Administrative Tribunal (QCAT) claiming $213,284.29 pursuant to a building contract. The liquidator presently considers that any damages recovered are likely to be assets of the trust. 12 In addition, the liquidator has received an amount of $20,140.44 being retention monies held pursuant to a subcontractor agreement, apparently in the name of the company in its capacity as trustee of the trust. 13 The liquidator identified two other potential recoveries, including an outstanding debt of $7,539.20 apparent owed to the company as trustee and an amount of approximately $20,970.75 for which the liquidator has not yet seen supporting documents that would identify the creditor. 14 The liquidator has identified potential secured creditors, priority creditors and unsecured trade creditors totalling $1,027,087.00. The liquidator has not finally determined whether the secured creditors are creditors of the company in its capacity as trustee of the trust. However, at least four of the registered security interests refer to the company as trustee of the trust. 15 Further, the Deputy Commissioner of Taxation (DCT) has lodged a proof of debt, which claims that the company as trustee of the trust owes $262,435.35 pursuant to its Superannuation Guarantee Charge liability, which includes general interest charges and penalties imposed for the period 1 July 2015 to 28 March 2019. 16 The liquidator has identified unsecured trade creditor claims, some of which are likely to be liabilities incurred by the company as trustee of the trust. In this regard, the DCT's proof of debt includes an additional tax liability of $155,223.60, claimed against the company as trustee of the trust. 17 The liquidator sought to be appointed as receiver to ensure that he was empowered to realise the assets of the trust, with a view to enforcing the company's indemnity against those assets.

Legal Principles 18 Section 57 of the FCA Act provides: 57 Receivers (1) The Court may, at any stage of a proceeding on such terms and conditions as the Court thinks fit, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just or convenient so to do. (2) A receiver of any property appointed by the Court may, without the previous leave of the Court, be sued in respect of an act or transaction done or entered into by him or her in carrying on the business connected with the property. (3) When in any cause pending in the Court a receiver appointed by the Court is in possession of property, the receiver shall manage and deal with the property according to the requirements of the laws of the State or Territory in which the property is situated, in the same manner as that in which the owner or possessor of the property would be bound to do if in possession of the property. 19 In Hillig (Liquidator), in the matter of SKC & Co Pty Ltd (in liquidation) [2020] FCA 454, I recently set out, at [12]-[13] the relevant principles as follows: [12] The general ground on which the Court appoints a receiver is the protection or preservation of property for the benefit of the persons who have an interest in it: Hosking, in the matter of Business Aptitude Pty Ltd (in liquidation) [2016] FCA 1438 (Hosking) at [17]. The Court may appoint a receiver over trust property to secure a former trustee's right of indemnity out of the assets of the trust: Hosking at [22]. This includes where it is necessary for a liquidator "to realise the assets of the trust so that the liabilities incurred by the defendant in the performance of the trust can be met, or met as far as possible": Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600 at [15]. [13] In Michell (Liquidator) v Delltta Holdings Pty Ltd (in liq) atf The Brookhill Trust [2019] FCA 2133 (Delltta) at [8]-][10], Davies J explained the relevant principles as follows: [8] The relevant principles in considering the application are not in doubt and are well-established. In short, where a trustee is removed, it retains a right of indemnity from the trust assets secured by an equitable charge over them for the liabilities it incurred by reason of acting as a trustee. The trustee does not have the right to retain as against the defendant possession of the trust assets in order to secure its right of indemnity but it is well-established that a receiver and manager can be appointed over trust property to secure the trustee's right of indemnity out of the assets of the trust: see [Hosking] at [17]-[22]; Cremin, in the matter of Brimson Pty Ltd (in liquidation) [2019] FCA 1023 ("Cremin") at [48]-[51]. [9] … [I]t is now settled that the liquidator cannot sell the trust property without an order of the court, or by the appointment of a receiver over the trust assets: Jones v Matrix Partner Pty Ltd; re Killarnee Civil & Concrete Contractors Pty Ltd (in liquidation) [2018] FCAFC 40; 260 FCR 310 at 323 [44] per Allsop CJ, Farrell J agreeing at 351 [196]. The reason, as explained by Moshinsky J in Cremin, is that trust assets are not the "property of the company" but are instead trust property in which the corporate trustee has a proprietary interest by way of lien or charge to secure its right of exoneration and thus to the extent that the subject of a sale is the whole of a trust asset, rather than merely the company's lien or charge in respect of that asset, it is not authorised by the power of sale in s 477(2)(c) of the Corporations Act 2001 (Cth): Cremin at [49]. [10] It has also recently become settled law that the proceeds from the exercise of a corporate trustee's right of exoneration may only be applied in satisfaction of the trust liabilities to which that right relates: Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20; 93 ALJR 807 at 821-2 [40] per Kiefel CJ, Keane and Edelman JJ, Gordon J agreeing at 835 [106].

Consideration 20 There are no defendants to the application, although notice was given to Mr Foy, the director of the company and the former trustee of the trust. Mr Foy consented to the liquidator's appointment as receiver of the trust for the purpose of realising the trust's assets. 21 On the available evidence, and although the position is not finally determined, there appear to be significant trust creditors, most probably in excess of the trust assets. 22 It was just and convenient to appoint the liquidator as receiver and manager of the trust to enable the company to exercise its right of indemnity from the trust assets for liabilities incurred in its capacity as trustee.

Costs 23 It was appropriate to make orders that the liquidator's costs, expenses and remuneration in acting as receiver and manager of the assets of the trust, including the costs of this application, are to be paid from the assets of the trust and, if they be insufficient, the assets of the company. 24 Further, I accepted that it was expedient to make an order for payment of remuneration in respect of the receivership, capped at the amount of $20,000, having regard to the liquidator's evidence as to the estimated costs of work necessary to be done as receiver and manager, and on the basis that the costs of pursuing the QCAT claim will likely be costs of the receivership. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.