Bailey (Liquidator) v Trustee of the Bruce Bros Floor Coverings Trust, in the matter of Bruce Bros Floor Coverings Pty Ltd

GLEESON J: 1 The first plaintiff (Mr Bailey) was appointed as the liquidator of the second plaintiff (company) on 23 August 2018, after the sole member of the company, Daniel Bruce, resolved to wind up the company. 2 On 8 November 2018, I made an order pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth) appointing Mr Bailey without security as receiver of the assets of the defendant (trust). I also ordered that Mr Bailey have, in respect of the property of the trust, the powers that a liquidator has in respect of the property of a company under the Corporations Act 2001 (Cth) (Act) without limitation, including to do all things necessary to effect the realisation of the assets of the trust. 3 Having realised assets of the trust, Mr Bailey sought orders in respect of his costs, expenses and remuneration in his capacities as receiver and liquidator, including amounts for future remuneration. 4 In support of the orders sought, Mr Bailey relied upon his affidavits sworn 12 October 2018 and 4 July 2019, an affidavit of Angelina Kozary sworn 13 December 2018, an affidavit of Mr Bruce affirmed 8 November 2018, and written submissions filed on 21 November 2018 and 4 July 2019. Oral submissions were also made on 19 March 2019. Although it was clear that Mr Bailey was entitled to some payment from trust assets, questions remained as to the precise amount. 5 Ultimately, the matter was re-listed on 1 August 2019 and the Court heard oral evidence from Mr Bailey and further submissions. Mr Bailey did not press the proposed orders concerning estimated future remuneration. I was satisfied that an order should be made in relation to the payment of Mr Bailey's remuneration as liquidator from the trust assets and the following order was made: The first plaintiff is justified in applying the assets of the [trust] for payment of his remuneration as liquidator of [the company] in the amount of $51,863.00 plus GST. 6 Judgment on the balance of Mr Bailey's application was reserved.

Background to application 7 Prior to Mr Bailey's appointment as liquidator, the company was the trustee of the trust. The trust operated a business of supplying and installing carpet, timber and vinyl floor products. Based on Mr Bailey's investigations and his communications with Mr Bruce, who is also the sole director and secretary of the company, Mr Bailey concluded (and I accept) that the company's sole purpose was to act as the trustee of the trust. 8 The trust was established by a document entitled "Deed of Settlement to establish the Bruce Bros Floor Coverings Trust" dated 1 September 2007 (trust deed). The trust deed was varied by a deed of variation dated 26 February 2016 (variation deed). 9 Mr Bailey pointed to the following aspects of the terms of the trust: (1) Mr Bruce is the "Appointor". (2) The beneficiaries are identified broadly to include Mr Bruce and persons related to him. (3) The position of trustee became vacant when the company was wound up in insolvency but no new trustee had been or was expected to be appointed. (4) Under cl 11.2 of the trust deed, the company was entitled to be indemnified out of the trust's assets in respect of any liability it incurred as trustee. That right is in addition to a trustee's general rights of indemnification, which are enforceable by way of an equitable lien: Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 367; Rothmore Farms Pty Ltd v Belgravia Pty Ltd [1999] FCA 745 at [7] and [33]-[35]. 10 The company is insolvent. The purpose of the liquidation is not to amalgamate or reconstruct the company, but to realise all of its assets and to pay its creditors. As at 12 October 2018, Mr Bailey estimated the value of known assets of the company at $825,000, and monies owed to creditors by the company as trustee of the trust at $1,555,486.67. 11 Mr Bailey currently holds $136,808.71 in his capacity as receiver of the assets of the trust for distribution. This amount comprises total receipts of $183,876.51 less costs of realisation of $48,387.80, and an unidentified amount of $1,320.00. Mr Bailey is not holding any amount in his capacity as liquidator of the company. 12 Mr Bailey proposes to distribute the funds currently available in accordance with the priorities set out in s 556 of the Act. The result would be that the entirety of currently available trust assets will be applied to part payment of Mr Bailey's remuneration and expenses in his capacities as receiver and liquidator. That is, the amount available is substantially less than the total of the amounts of Mr Bailey's remuneration and expenses for which Mr Bailey seeks the Court's approval. 13 Mr Bailey then proposes to take steps to pursue a potential pool of claims against trade creditors, totalling approximately $422,000, based on unfair preferences. There are potential claims against Mr Bruce for insolvent trading or breach of directors' duties, however, Mr Bailey presently considers that pursuit of those claims is probably uncommercial. Thirdly, there is a potential pool of claims against trade debtors totalling around $600,000, including a single debt of $420,000, which Mr Bailey considers to be "highly collectable". 14 Mr Bailey's oral evidence and submissions made on his behalf satisfied me that the liquidation of the company, including the receivership of the trust, was not straightforward. In particular, when the liquidation commenced, the business was trading actively and had substantial work outstanding and work in progress. There were numerous creditors and debtors. The liquidation was precipitated by a family dispute in which the business was effectively locked out of its premises by Mr Bruce's stepmother, perhaps on the instructions of Mr Bruce's father. Mr Bailey's evidence was that he was required to threaten legal action in order to obtain access to the business's former premises, including books and records of the business. Stock was at various locations and there were competing claims over stock by customers and suppliers, as well as some overarching secured creditors. Many of the issues involved relatively small amounts of money. There is also an ongoing issue concerning security rights asserted by the National Australia Bank (NAB). 15 At the time of his appointment as liquidator, Mr Bailey was not informed of the existence of the trust. He became aware of it through examining the company's books and records.

Trust beneficiaries 16 From an analysis of the records of the company, Mr Bailey has determined that only the following individuals received distributions from the trust: (1) Damien Bruce, Mr Bruce's father who is now deceased; (2) Mr Bruce; (3) Lauren Wang, formerly known as Lauren Bruce; (4) Charlie Bruce, the infant son of Daniel Bruce and Lauren Wang; (5) Madeleine Bruce, the infant daughter of Daniel Bruce and Lauren Wang. 17 Mr Bailey has identified seven individuals who are beneficiaries or potential beneficiaries of the trust apart from those listed above. These individuals have been informed of Mr Bailey's application for remuneration by letters from Mr Bailey's solicitors. When asked whether they wished to oppose the solicitor's application, only one of these individuals responded and consented to the application. The remainder of them did not respond.

Liquidation 18 On 5 October 2018, creditors' resolutions were passed without a meeting approving Mr Bailey's remuneration as liquidator in an amount not to exceed $84,563.33 (inclusive of GST) and disbursements incurred as liquidator in an amount not to exceed $5,500 (inclusive of GST). 19 Mr Bailey sought an order that he be entitled to pay the remuneration for work done in his capacity as the liquidator of the company from the assets of the trust. The precise amount sought was $51,863.50 plus GST (total $57,049.85) for work done to 30 April 2019. 20 In this case, where the company conducted no activities other than as trustee, the liquidator's proper remuneration as well as costs and expenses duly incurred, are debts incurred in performing the trust so that the company is entitled to be indemnified out of the trust funds in the priority provided for by s 556(1) of the Act: In the matter of MINMXT Holdings [2017] NSWSC 156 at [14]; Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 354 ALR 436 at [105]-[106] per Allsop CJ and [201] per Farrell J. 21 Based on the creditors' October 2018 approval and Mr Bailey's evidence, I accepted that Mr Bailey was justified in paying the amount in [19] above from the trust assets on account of his work done as liquidator to 30 April 2019. As noted above, an order to this effect was made on 1 August 2019.

Receivership 22 In addition, Mr Bailey sought an order that his remuneration as receiver in the amount of $82,980.00 plus GST be paid from the trust assets in priority to the trust's creditors. 23 The amount of $82,980.00 plus GST comprised: (1) $61,302.25 plus GST ($67,432.48 inclusive of GST) for work done prior to his appointment as receiver (that is, for the period 23 August 2018 to 7 November 2018); (2) $27,016.25 plus GST ($29,717.88 inclusive of GST) for work done since his appointment as receiver (that is, for the period 8 November 2018 to 30 April 2019); less (3) $5,338.50, which Mr Bailey has written off. This amount relates to time-costed charges for work done by two staff members. 24 Mr Bailey's 4 July 2019 affidavit identifies the work performed by him and his staff in dealing with assets, claims and issues concerning the trust prior to his appointment as receiver as follows: (1) obtaining and securing all of the available books and records of the trust; (2) analysing the books and records of the trust and identifying the assets and liabilities of the trust; (3) obtaining and reviewing the Personal Property Securities Register (PPSR) with respect to the company's and the trust's identifiers and obtaining copies of the relevant security documents; (4) communicating and liaising with the NAB with respect to PPSR registrations over the assets of the trust; (5) reviewing the books and records of the company and identifying debtors of the trust; (6) reconciling the debtor ledger with invoices, account statements and other supporting documentation to determine the quantum of the claim against each debtor of the trust and considering any claims of set off raised by any debtors; (7) preparing and sending letters of demand to each debtor, attaching documents in support of the claim where necessary; and (8) analysing and considering proofs of debt received from the creditors of the trust. 25 The affidavit also identifies the work performed by Mr Bailey and his staff in dealing with assets, claims and issues concerning the trust since his appointment as receiver as follows: (1) liaising, corresponding and meeting with Mr Bruce with respect to the assets, and in particular motor vehicles, held by the trust; (2) analysing and assessing the claims against the debtors of the company, as well as the strength of any set off claims raised by the debtors; (3) corresponding with debtors with respect to amounts owed to the company and providing supporting documentation where necessary; (4) considering the settlement offers received from debtors in conjunction with the documentary evidence in support of the claim, as well as any set off claims raised by the debtor; (5) researching and considering the market value of the assets held by the trust; (6) liaising and corresponding with auctioneers in order to arrange for the collection of the books and records of the company and trust and also to arrange for the sale of the assets owned by the trust; (7) liaising and corresponding with the creditors of the trust with respect to the likelihood of dividend payouts and the status of the receivership generally; (8) analysing security documentation provided by creditors to determine the validity of their security interests; (9) retrieval of proofs of debt received online from the Fair Entitlements Guarantee (FEG) portal and inputting the relevant information into MYOB, and adjusting the inputs where necessary for the purposes of FEG subrogating as creditor for amounts paid to employees; and (10) liaising and corresponding with the NAB with respect to NAB's purported security interests in the assets of the trust. 26 From the oral evidence, it was apparent that the classification of the $61,302.25 plus GST as remuneration for Mr Bailey's work in his capacity as receiver (as opposed to liquidator) was somewhat arbitrary. Mr Bailey's evidence was that there was no sale of any trust asset prior to his appointment as receiver. Mr Bailey explained that the activities of assessing creditor claims and the process of realising the trust assets (starting from securing the assets and holding them safe) might be classified as activities in the course of the liquidation or the receivership. Most importantly, Mr Bailey verified that there was no overlap between his charges for work done as liquidator and work done as receiver. 27 Mr Bailey's evidence included detailed narrations of the work undertaken in the course of the liquidation including separate spreadsheets for the work for which Mr Bailey seeks remuneration as receiver. Mr Bailey identified the rates charged for various staff members and stated that the rates are his firm's standard hourly rates, which Mr Bailey considers appropriate. Although he did not explicitly say so, I inferred from the evidence that Mr Bailey had reviewed the amounts charged and written off $5,338.50, that Mr Bailey considered the work done to have been reasonably necessary and to have been delegated to staff of appropriate seniority.

Expenses 28 Mr Bailey also sought an order that he be entitled to pay expenses reasonably incurred in connection with securing, realising and dealing with assets of the trust in an amount of $77,508.83. 29 This amount included disbursements (substantially printing costs), comprising: (1) $5,528.91 (inclusive of GST) for the period 23 August 2018 to 7 November 2018, being expenses in dealing with the assets and liabilities of the trust prior to Mr Bailey's appointment as receiver; and (2) $3,389.83 (inclusive of GST) for the period 8 November 2018 to 30 April 2019, being expenses in connection with the receivership. 30 Mr Bailey verified that these disbursements were reasonable and necessary to the performance of his duties as receiver. 31 Mr Bailey also gave evidence that counsel fees of $10,000 inclusive of GST have been incurred in connection with the application now under consideration. 32 Finally, Mr Bailey gave evidence that he has incurred solicitors' fees comprising two invoices for work done in the period 3 September 2018 to 6 May 2019 (totalling $47,608.88 inclusive of GST) and work in progress of $11,792.00 (inclusive of GST). 33 Mr Bailey's evidence was that he has reviewed the solicitors' timesheets and he believes that the amounts charged are reasonable and the rates charged were in line with market rates. Mr Bailey stated that he considered the amounts claimed appropriate and reasonable and he was satisfied that the work performed was performed in accordance with his firm's instructions and were necessary for the purpose of Mr Bailey's appointments.

Legal principles 34 In Griffiths (Receiver and manager, and liquidator) of Samandac Pty Ltd (in liq) v Trustee for Chrisamanda Trust (No 2) [2018] FCA 1832, I noted the following relevant principles: 11. Generally, a liquidator of a company whose sole function was to act as trustee, appointed receiver and manager of the trust assets, is entitled to recover the costs of the receivership and the general costs of the liquidation from the trust assets: Re Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 1484 at [45]. … 13. Rule 14.24 of the Federal Court Rules 2011 provides that a receiver may apply to the Court to have the Court fix the receiver's remuneration. In In the matter of Say Enterprises Pty Ltd [2018] NSWSC 396 at [6], in reference to the equivalent r 26.4 of the Uniform Civil Procedure Rules 2005 (NSW), Brereton J at set out the following principles to be applied when fixing the remuneration of a court appointed receiver: (1) A receiver is entitled to the costs, charges and expenses properly incurred in the discharge of the receiver's ordinary duties, or in the performance of extraordinary services that have been sanctioned by the Court. (2) The ultimate question is what amount of remuneration is 'reasonable', and this involves considering whether the work in respect of which remuneration is claimed was reasonably undertaken in the due course of the receivership, and whether the amount claimed for it is a fair and reasonable reward for it. The objective is to award a sum or devise a formula which will reasonably and fairly compensate the receiver for the time and trouble expended in the execution of his or her duties and the responsibility he or she has assumed. (3) The receiver bears the onus of justifying the reasonableness and prudence of the tasks undertaken for which remuneration is sought, and the reasonableness of the remuneration claimed for them. (4) Remuneration may be allowed on the basis of a fixed salary, a commission on receipts, or a quantum meruit having regard to the time, trouble and responsibility involved. It is a matter for the Court to determine what basis is appropriate in the particular case, having regard to the principle that the remuneration must be reasonable. (5) If a time-based approach is adopted, the Court is guided by professional scales of charges, with emphasis on the broad average or general rate charged by persons of the relevant status and qualifications who carry out the relevant type of work. The Court will usually act on time sheets created in the receiver's office, provided that they do significantly more than merely detail the total number of hours spent by the receiver and officers of particular grades on his or her staff. (6) By analogy, the task involves consideration of the matters referred to in Corporations Act, s 425(8), which applies to receivers appointed under an instrument, namely: (a) the extent to which the work performed by the receiver was reasonably necessary; (b) the extent to which the work likely to be performed by the receiver is likely to be reasonably necessary; (c) the period during which the work was, or is likely to be, performed by the receiver; (d) the quality of the work performed, or likely to be performed, by the receiver; (e) the complexity (or otherwise) of the work performed, or likely to be performed, by the receiver; (f) the extent (if any) to which the receiver was, or is likely to be, required to deal with extraordinary issues; (g) the extent (if any) to which the receiver was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case; (h) the value and nature of any property dealt with, or likely to be dealt with, by the receiver; (i) whether the receiver was, or is likely to be, required to deal with: (i) one or more other receivers; or (ii) one or more receivers and managers; or (iii) one or more liquidators; or (iv) one or more administrators; or (v) one or more administrators of deeds of company arrangement; (j) the number, attributes and behaviour, or the likely number, attributes and behaviour, of the company's creditors; (k) if the remuneration is ascertained, in whole or in part, on a time basis: (i) the time properly taken, or likely to be properly taken, by the receiver in performing the work; and (ii) whether the total remuneration payable to the receiver is capped; (l) any other relevant matters. (7) Many of those factors - in particular, pars (d)-(e) and (g)-(h) - have as their unifying theme the concept of proportionality (being the relationship of the work done and the remuneration claimed to the value of the estate), which is an important consideration in determining reasonableness. … (Citations omitted.) 35 In Carello, in the matter of Gembrook Investments Pty Ltd (in liq) [2019] FCA 1143 (Gembrook), Colvin J considered an application for payment of the liquidator's expenses and remuneration from trust assets where the liquidator of an insolvent trustee had not applied for appointment as a receiver of the trust assets. At [20], Colvin J concluded that the Court might now approve the liquidator's actions on the basis that the steps that were taken reflected rights that existed at the time that the assets of the trust were realised. The reasonable costs incurred by Mr Carrello in realising the assets had been for the benefit of creditors and for that reason could be approved on the basis that they were properly costs of the liquidation.

Consideration 36 Having considered the affidavit evidence, as amplified by Mr Bailey's oral evidence, I accept that the charges for which Mr Bailey seeks approval were reasonably incurred. In relation to the charges for the period after his appointment as receiver, I am satisfied that the Court should fix the receiver's remuneration for the period 8 November 2018 to 30 April 2019 in the amount claimed, that is $29,716.77 inclusive of GST. 37 I am not satisfied that the charges for work done prior to Mr Bailey's appointment as receiver should form part of the remuneration fixed by the Court pursuant to r 14.24 of the Federal Court Rules 2011. 38 However, applying Gembrook, I consider that this work properly forms part of Mr Bailey's work as liquidator. As the creditors have already approved Mr Bailey's remuneration as liquidator in an amount not to exceed $84,563.33 (inclusive of GST), I will vary the order made on 1 August 2019 up to that amount (so that an additional amount of $27,513.48 may be paid from the available funds). 39 The same reasoning applied to the expenses incurred by Mr Bailey. Thus, I accept that the amount of $3,389.83 should be paid from the trust assets. 40 The expenses incurred prior to Mr Bailey's appointment as receiver properly form part of the expenses of the liquidation. As the creditors have approved payment of disbursements incurred as liquidator in an amount not to exceed $5,500 (inclusive of GST), Mr Bailey is justified in paying the amount of $5,500.00 from the trust assets on account of his expenses totalling $5,528.91. 41 I accept that Mr Bailey's reasonable expenses in connection with the receivership include counsel's fees in respect of this application of $10,000 inclusive of GST. 42 Reviewing the evidence concerning the solicitors' fees, I cannot readily identify the amounts that are properly attributable to the receivership as opposed to the liquidation. Further, notwithstanding Mr Bailey's evidence, even if I was able to identify the amount referrable to the receivership, I would have concerns about whether the whole of that amount was reasonably incurred. Those concerns arise from the fact that I felt constrained to seek further evidence and submissions in support of the application on two occasions (in March and June 2019) and ultimately requested that Mr Bailey attend court to give evidence because I could not readily identify the information necessary to address this application. Accordingly, I do not propose to permit payment of the solicitors' fees from the trust assets without more evidence. 43 It follows that Mr Bailey will remain unpaid in respect of work done prior to 8 November 2018. In addition, he expects to take further action in his roles as liquidator of the company and receiver of the assets of the trust. Accordingly, Mr Bailey should be granted liberty to apply for further orders in connection with payment of his remuneration in those roles.

Conclusion 44 As earlier noted, the evidence was that Mr Bailey held $136,808.71 in his capacity as receiver. 45 By virtue of the 1 August 2019 order, Mr Bailey was entitled to pay his remuneration as liquidator of $51,849 plus GST, namely $57,049.85 inclusive of GST, leaving a balance of $79,758.86. 46 The orders that I will make will permit Mr Bailey to pay a further amount totalling $76,120.08 ($29,716.77 + $27,513.48 + $3,389.83 + $5,500 + $10,000), leaving a balance of $3,638.78. 47 Mr Bailey will also have liberty to apply to make additional payments from the trust assets in connection with his role as receiver and to seek judicial advice in connection with the payment from the trust assets of his costs and expenses incurred as liquidator. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.