Bastion v Gideon Investments Pty Ltd

Introduction 1 The first plaintiff, Matthew James Jess (the Liquidator), is the liquidator of the second plaintiff, Westside Group Pty Ltd (in liquidation) (the Company). By an originating process filed on 8 September 2020, the Liquidator seeks orders under the Corporations Act 2001 (Cth) (Corporations Act) and the Trustee Act 1958 (Vic) (Trustee Act) for the purpose of facilitating his dealing with, and distribution of, assets of the Company, including to enable the winding up of the Company to be completed. The application is supported by an affidavit of Mr Jess sworn 18 August 2020 and an affidavit of the solicitor for Mr Jess, Murray George Pegg, sworn 16 October 2020. 2 The application is made because uncertainty attends the Company's current status as the corporate trustee of the Westside Group Trust (Trust). While the Liquidator has located a copy of a trust deed pertaining to the Trust, it is incomplete (comprising only a cover page, a "Schedule" and an execution page). Extensive efforts have been made to locate a complete copy of the trust deed but without success. 3 The issues raised by the application have been considered in a number of recent cases in which courts have made orders conferring upon a bare corporate trustee that is being wound up the power to carry on the business of the subject trust or, alternatively, have appointed the liquidators of the bare trustee as receivers (for the purpose of selling trust assets and distributing the proceeds among trust creditors): see for example Re Simpkiss Pty Ltd (in liq) [2018] FCA 2121 (Simpkiss); Re Matthew Forbes Pty Ltd (in liq) [2018] VSC 331 (Matthew Forbes); Re St George's Development Company Pty Ltd (in liq) [2018] VSC 595 (St George's); Re Asten Holdings Pty Ltd (in liq) [2020] FCA 1107 (Asten); Re Pako Supermarkets Pty Ltd (in liq) [2020] VSC 487 (Pako). 4 On 1 October 2020, I made directions requiring the plaintiffs to take all reasonable steps to provide notice of the originating process filed in this proceeding to all potentially interested persons including Mr Benny Paul Di Lorenzo (being the named beneficiary of the Trust), creditors of the Company and the Australian Securities and Investments Commission (ASIC), and to file an affidavit providing details of the notification and any response received. That direction was complied with. No response was received from any of those persons or entities and the application was unopposed. 5 For the reasons given below, I made orders largely in the form sought by the plaintiffs.

Factual background 6 The Company was incorporated on 24 April 2012. Its sole director and secretary since incorporation has been Mr Di Lorenzo. Prior to the appointment of the Liquidator, the Company operated a gas fitting business, primarily servicing one customer. 7 On 30 November 2018, and on the application of the Deputy Commissioner of Taxation, the Court ordered that the Company be wound up in insolvency and the Liquidator be appointed as liquidator of the Company. 8 In the period following his appointment, the Liquidator has arranged for the following reports to be provided to the Company's creditors: Advice to Creditors dated 4 December 2018; Advice to Creditors dated 23 January 2019; and Advice to Creditors dated 4 December 2019. In those reports, the Liquidator provided creditors with details of the Company's assets and liabilities and the asset realisations that have been undertaken including: (a) $67,444 recovered from a debtor of the Company, Downer; (b) sale of an Isuzu truck and sundry items of plant and equipment for $76,560; (c) sale by public auction of a Kuboto excavator for $14,592.45 (net of sale costs); and (d) sale by way of public auction of a Mercedes motor vehicle for $21,000, generating $14,807.02 for the Company after sale costs were met and the Commonwealth Bank of Australia's security interest over the vehicle was discharged. 9 Subsequently, the Liquidator accepted a settlement sum of $34,000.00 put forward by Mr Di Lorenzo in settlement of any potential claims against him and his related entities. 10 The evidence establishes on the balance of probabilities that the Company was appointed as trustee of the Trust pursuant to a trust deed that bears the same date as the date of the Company's incorporation. That evidence includes an incomplete copy of a trust deed which comprises: (a) a cover sheet titled "Discretionary Trust Deed establishing the Westside Group Trust"; (b) a schedule that states the date of the deed is 24 April 2012, the trustee is the Company, the named beneficiary is Mr Di Lorenzo and other beneficiaries are certain categories of relatives of Mr Di Lorenzo; and (c) an execution page which bears the signatures of Mr Di Lorenzo on behalf of the Company and by the settlor of the trust, Mr David Hili. 11 In addition, the Australia Business Register records that the Company operated under the ABN 49 507 546 989, as trustee for the Trust, and the trading name for the Trust was "Westside Group Pty Ltd". The Company's income tax returns are recorded as having been prepared for the "Westside Group Trust". Financial reports were also prepared for the "Westside Group Trust", but not for the Company as distinct from the Trust. Mr Di Lorenzo also verbally confirmed that the Company operated exclusively as trustee of the Trust. 12 Based on that evidence, the Liquidator formed the view that, in the period prior to his appointment, the Company operated exclusively as trustee of the Trust and incurred liabilities solely in its capacity as trustee of the Trust, giving the Company a right of indemnity from the Trust assets. That view was expressed in a report to the Company's creditors in January 2019. The view was amply supported by the evidence. 13 The evidence shows that the Liquidator has taken extensive steps to locate a copy of the entire trust deed. However, all persons contacted by the Liquidator have responded that they do not have a copy in their possession. The Liquidator gave evidence that, having regard to the steps that have been taken, he does not believe that a copy of the trust deed will be located. 14 The Liquidator gave evidence that, without a copy of the trust deed, he does not know whether the deed contains an "ipso facto" clause which operates to remove a corporate trustee from office upon it becoming the subject of a formal insolvency appointment (such as a winding up). As discussed below, such a clause renders the corporate trustee a bare trustee from the date of the commencement of its winding up. Uncertainty exists as to the powers granted to the Company as trustee under the trust deed both generally and in the circumstances in which the Company is in liquidation. 15 The Liquidator has made this application to confirm his authority to deal with the assets of the Trust in the winding up. The application was foreshadowed in the January and December 2019 advices to creditors.

Powers of the Company as trustee 16 The application raises legal issues about the powers of the Company and the Liquidator to deal with assets of the Trust. It is not a case where the Liquidator is seeking directions about commercial decisions that he ought make himself: c.f. Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at [44], [65]. The facts raise similar issues to those considered in Bastion v Gideon Investments Pty Ltd (in liq) (2000) [2000] NSWSC 939; 35 ACSR 466, in which Austin J observed (at [48]): In my opinion the subject matter of the first application is a proper subject matter for an application for directions under s 479(3). It is appropriate for the liquidator, confronted by unsatisfactory corporate records and uncertain indications that a large part of the company's business was conducted as trustee, to bring the facts before the court and seek the protection of directions under s 479(3). It is appropriate for the court to give the direction sought by the liquidator once it is satisfied, as I am, that all reasonable inquiries have been made by the liquidator to establish the true facts." 17 As indicated above, I am satisfied in the present matter that the Liquidator has made all reasonable enquiries to obtain a complete copy of the trust deed and thereby "establish the true facts". 18 By reason of the uncertainty over the contents of the trust deed, including the possible existence of an "ipso facto" clause, the Liquidator has a reasonable concern that the Company may be a bare trustee of the Trust (see for example Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677 (Caterpillar) at [6]-[9] (Gordon J)). As explained by Gummow J in Herdegen v Federal Commissioner of Taxation [1988] FCA 699; 84 ALR 271 at 281, a "bare" trust is "a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party". While a bare trustee has obligations to get in and protect the trust property (CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174 at [36]), in the absence of a Court order, the ability of a bare trustee to deal with trust assets, including to satisfy claims of trust creditors, is limited (Jones v Matrix Partners Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018) 260 FCR 310 (Jones v Matrix) at 210 at [44] (Allsop CJ), [138] (Siopis J) and [198] (Farrell J)). In Cremin, re Brimson Pty Ltd (in liq) [2019] FCA 1023; 136 ACSR 649, Moshinsky J observed (at [49]-[50]): It is now settled that the 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 Jones & Matrix at [44] per Allsop CJ (Farrell J agreeing at [196]); Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17 at [10]; Apostolou v VA Corporation of Aust Pty Ltd [2011] FCAFC 103 at [45]. The rationale for this position is that, on a proper understanding, the 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: see Jones & Matrix at [89]. 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). The courts are generally willing, upon an appropriate application, to make orders permitting the liquidator of a (former) corporate trustee to sell trust assets. In situations where the property of the trust will be exhausted following its sale and subsequent distribution to creditors, it may be appropriate merely to give the liquidator a power of sale: see Jones & Matrix at [91]. The more common course is, however, for the liquidator of the insolvent (former) corporate trustee to apply to be appointed a receiver for the purpose of selling the trust assets and distributing the proceeds among trust creditors ... 19 The orders sought by the plaintiffs are to facilitate the Liquidator dealing with and distributing assets of the Company to enable the winding up of the Company, without taking the step of appointing the Liquidator as receiver over the Trust property. As noted in the introduction, similar orders have been made in a number of recent cases.

Paragraph 1 of the originating process 20 By paragraph 1 of the originating process, the plaintiffs seek an order pursuant to s 90-15 of Schedule 2 of the Corporations Act (the Insolvency Practice Schedule (Corporations)) that he is justified and acting reasonably in proceeding on the basis that the Company carried on business as trustee of the Trust and that all assets of the Company are properly characterised as Trust property. 21 The relief sought can be granted pursuant to s 90-20 of the Insolvency Practice Schedule (Corporations) which enables a liquidator to apply to the Court for orders under s 90-15 in relation to the external administration of a company. Having regard to the enquiries made by the Liquidator, and where there is no evidence that the Company traded or held assets other than in its capacity as trustee of the Trust, in my view it is appropriate to give a direction in the form sought at paragraph 1 of the originating process. Orders of this kind were made in Matthew Forbes, St George's, Asten and Pako.

Paragraph 2 of the originating process 22 By paragraph 2 of the originating process, the plaintiffs seek an order pursuant to s 63 of the Trustee Act that the Company shall have the power to carry on the business of the Trust and act as trustee of the Trust. 23 Section 63(1) of the Trustee Act provides as follows: Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorized to be expended, and the costs of any transaction are to be paid or borne as between capital and income. 24 In Caterpillar, Gordon J confirmed (at [30]) that s 63 of the Trustee Act enables the Court to confer upon a company in liquidation that is a trustee the power to deal with trust assets including to meet claims under the Corporations Act in the course of the winding up of the company. 25 During the hearing, two questions arose as to the form of the proposed order. First, while s 63 of the Trustee Act empowers the Court to confer various powers upon a trustee, the section does not confer power on the Court to declare a person to be a trustee. For that reason, it is to be doubted that the Court is empowered by s 63 to make an order that the Company shall have the power to "act as trustee of the Trust". Counsel for the plaintiffs accepted that such an order is ambiguous as to its content and did not press an order in that form. Second, Counsel confirmed that the plaintiffs sought an order under s 63 both that the Company has the power to carry on the business of the Trust and that the Company has the power to deal with, hold, apply and/or distribute the Trust property in accordance with Parts 5.5 and 5.6 of the Corporations Act. Orders of this kind were made in Matthew Forbes, St George's, Asten and Pako. I consider that such an order is appropriate.

Paragraph 3 of the originating process 26 By paragraph 3 of the originating process, the plaintiffs seek an order pursuant to s 90-15 of Insolvency Practice Schedule (Corporations) that the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that he can deal with, hold, apply and/or distribute the Trust Property in accordance with Parts 5.5 and 5.6 of the Corporations Act. 27 Such a direction is consistent with the conclusion of the Full Court in Jones v Matrix. In that case, Allsop CJ observed (at [102] and [108]) in respect of similar circumstances as the present (where the company's activities have been solely in its capacity as corporate trustee): … In such circumstances, the property of the company that includes the right of exoneration and the funds obtained from its exercise is to be distributed in accordance with the statutory command: ss 501 and 556. In such circumstances, the words of the statute are to be applied to direct the distribution of the property of the company. … Where the corporation has only ever acted as trustee of one trust and that has been the totality of its affairs, there is no reason either in principle or by reference to context or text why the words of the statute setting out the order of priorities should not be followed. 28 Orders of this kind were made in Matthew Forbes, St George's, Asten and Pako. I am satisfied that it is appropriate to make such an order in this case.

Paragraph 4 of the originating process 29 By paragraph 4 of the originating process, the plaintiffs seek an order pursuant to s 1318 of the Corporations Act and/or s 67 of the Trustee Act that the Liquidator be relieved from any liability arising from any dealing with the Trust Property between the date of his appointment and the date of the order. 30 As described above, in the period following his appointment, the Liquidator undertook a number of asset realisations. Counsel for the plaintiffs submitted that, by reason of the uncertainty concerning the Company's position as trustee of the Trust following the winding up order, there is some prospect that these dealings with Trust property occurred without power. In those circumstances, the plaintiffs seeks an order relieving the Liquidator from any potential liability arising from those dealings. Similar orders were made in Caterpillar, Matthew Forbes, St George's and Asten. 31 Section 67 of the Trustee Act is entitled "Power to relieve trustee from personal liability" and provides: If it appears to the Court that a trustee, whether appointed by the Court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the Court in the matter in which he committed such breach, then the Court may relieve him either wholly or partly from personal liability for the same. 32 Relevantly, the power to relieve a trustee from personal liability under s 67 is subject to two conditions. First, it arises where it appears to the Court that a trustee is or may be personally liable for any breach of trust. Thus, it is not necessary for the Court to conclude that a breach of trust has occurred; the power is enlivened if it appears to the Court that a breach may have occurred. Second, the Court is empowered to grant relief if it appears to the Court that the trustee has acted honestly and reasonably and ought fairly to be excused for the breach. 33 A similar power exists in s 1318 of the Corporations Act to relieve, amongst others, officers, auditors, receivers and liquidators of a company from personal liability in that capacity in respect of negligence, default, breach of trust or breach of duty. In the present context, the power to relieve a liquidator from personal liability is subject to substantially the same two conditions as apply to s 67 of the Trustee Act. First, it arises where a person has reason to apprehend that any claim will or might be made against the person (see s 1318(2)). Second, the Court is empowered to grant relief if it appears to the Court that the person has acted honestly and ought fairly to be excused (see s 1318(1)). 34 On the evidence before me, I am satisfied that the Liquidator satisfies the second limb of both provisions: that in realising the Trust assets for the purposes of the winding up, the Liquidator has acted honestly and reasonably and ought fairly to be excused from any breach of trust (arising from the uncertainty concerning the Company's powers as Trustee). 35 During the hearing, two questions arose. The first question concerned the first limb of both provisions: whether the Court can be satisfied that the Liquidator has reason to apprehend that a claim may (Trustee Act) or might (Corporations Act) be made against him. In Pleash, re Suncoast Restoration Pty Ltd (in liq) (2013) 211 FCR 203, Reeves J concluded that the word "might" in s 1318(1) of the Corporations Act must be taken to require that the claim is a real and not fanciful or remote possibility and expressed agreement with the observations of Campbell J in Re Vouris [2003] NSWSC 702; 177 FLR 289 at [116] that there "must be an objective basis for believing that the claim will or might be made against that person" (at [30]-[31]). A similar interpretation should be applied to the word "may" in s 67 of the Trustee Act (recognising that the power is not to be construed narrowly: Re Grindey [1898] 2 Ch 593 at 601 (Chitty LJ)). 36 The evidence establishes that the Liquidator has kept the creditors and Mr Di Lorenzo informed of each step taken in the liquidation and this application. There is no evidence that any person has raised a question or concern over the Liquidator's powers to realise the Trust assets for the purposes of the winding up. In Pako, an applicant liquidator did not press for such an order given the absence of any evidence of a threat of a claim (see [53]-[56]). Nevertheless, as observed by Markovic J in Simpkiss, in circumstances where the sale of assets has occurred in possible breach of trust (due to an absence of power), the prospect of a future claim by a beneficiary of the Trust cannot be ruled out (at [50]). Having regard to the purposes of the powers conferred by s 67 of the Trustee Act and s 1318 of the Corporations Act, I am satisfied that the Liquidator has sufficient reason to apprehend that a claim may or might be made against him arising out of the circumstances of this case to justify an order being made. 37 The second question concerned the form of the order made. I do not consider that it is appropriate to relieve the Liquidator from "any liability arising from any dealing with the Trust Property between the date of his appointment and the date of this order". As I observed in a similar context, the relief granted by the Court should be confined to the identified breach of trust that would be the basis of the possible claim: see Ozito Industries Pty Ltd v Australian Securities and Investments Commission [2020] FCA 1432 at [30]. Accordingly, the relief should be confined to any liability arising from any claim that the Liquidator did not have power to deal with the Trust property between the date of his appointment and the date of the order.

Paragraph 5 of the originating process 38 By paragraph 5 of the originating process, the plaintiffs seek an order pursuant to s 90-15 of Insolvency Practice Schedule (Corporations) that the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that the Liquidator is and was entitled to be paid from the Trust property his remuneration, costs and expenses properly incurred in the liquidation, including the remuneration, costs and expenses of and incidental to this application. 39 The details of the tasks undertaken and being performed by the Liquidator is detailed in the reports to the Company's creditors which were in evidence. The evidence establishes that the sole activities of the Company were as trustee of a trust. It follows that, save for its right of exoneration and the supporting lien, the Company has no assets of its own. In these circumstances, it is appropriate that the Liquidator's remuneration and expenses be paid out of Trust assets: Jones v Matrix, [105]-[106]. Orders of this kind were made in Matthew Forbes, St George's, Asten and Pako.

Conclusion 40 For the foregoing reasons, I made orders largely in the form sought by the plaintiffs. I also ordered that a copy of the Court's orders be served on the persons who were served with a copy of the originating process. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan.