Bruton Holdings Pty Limited (In Liq) v Commissioner of Taxation

JUDGES: STONE, JACOBSON & EDMONDS JJ DATE: 17 JUNE 2011 PLACE: SYDNEY

Background 1 The parties appeal from a declaration and orders made by Graham J on 3 September 2010: Commissioner of Taxation v Bruton Holdings Pty Limited (in Liquidation) (2010) 188 FCR 516. Justice Graham retired from the Court on 5 September 2010. On 9 September 2010 Nicholas J made an additional declaration on the basis that if Graham J's reasons were correct the additional declaration should also be made: Commissioner of Taxation v Bruton Holdings Pty Limited (in Liquidation)(No 2) [2010] FCA 998. Given the circumstances in which the declaration by Nicholas J was made it is not necessary in these reasons to differentiate between the basis for that declaration and the declaration made by Graham J. Being based on the same reasons, the declarations stand or fall together. 2 The facts relevant to this appeal are not in dispute. The following account is largely taken from the reasons of the Graham J. In 1997, by deed of trust, the appellant (Bruton) was appointed as trustee of the Bruton Educational Trust (educational trust). On 10 October 2005, Bruton applied to the respondent (Commissioner) for endorsement as a tax exempt entity as from 1 July 2006. The application was refused, as was Bruton's objection to the Commissioner's decision. An appeal from the Commissioner's decision (objection appeal) was also dismissed. 3 Piper Alderman was the solicitor for Bruton in the objection appeal. Between October 2005 and February 2007 it was paid $470,000 by Bruton to be held in its trust account in respect of costs and disbursements of the proceedings including the endorsement application to the Commissioner. On 28 February 2007 administrators were appointed to Bruton and on 30 April 2007 the company's creditors resolved that it should be wound up. By virtue of ss 513B(b) and 513C(b) of the Corporations Act 2001 (Cth) the winding up was taken to have commenced on 28 February 2007. 4 Clause 10.2(b) of the educational trust deed provided that the office of the trustee was "immediately terminated and vacated" if the trustee went into liquidation. Accordingly, from 28 February 2007 Bruton ceased to be the trustee of the educational trust and became the bare trustee of the assets comprising the trust fund (Fund). As a consequence Bruton was no longer entitled to exercise any power including the investment, management or payment of trust monies arising from the educational trust deed. Its powers were limited to those that under the general law or statute are the powers of a bare trustee. 5 On 26 March 2007, the Commissioner issued a notice of assessment directed to the trustee calling for payment in the amount of $7,715,873.73 in respect of tax and the Medicare levy for the 2004 income year. Furthermore, after Bruton was wound up, the Commissioner lodged a Proof of Debt with the liquidators of Bruton for the amount stated in the notice of assessment. On 8 May 2007, the Commissioner issued a notice to Piper Alderman pursuant to s 260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) requiring the firm to pay $447,420.20 which it held in its trust account on account of the educational trust to the Commissioner. 6 On 30 May 2007 Bruton instituted proceedings in this Court (primary proceeding) seeking a declaration that the s 260-5 notice was void by virtue of s 500(1) of the Corporations Act. On 2 November 2007 Allsop J declared the notice was void (see Bruton Holdings Pty Ltd v Commissioner of Taxation (2007) 244 ALR 177). On 23 November 2007, his Honour made further orders including an order that Piper Alderman pay the $477,420.20 held in its trust account to the liquidators. The liquidators were to pay that money into an interest-bearing bank account and were restrained from spending that money except, inter alia, to pay expenses incurred by Bruton in respect of the primary proceeding and the appeal proceeding. His Honour ordered the Commissioner to pay Bruton's costs as well as those of Piper Alderman. 7 An appeal from Allsop J's judgment to the Full Court was allowed and Allsop J's judgment was set aside (see Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472. Bruton was granted special leave to appeal to the High Court. The High Court allowed the appeal with costs (see Bruton v Commissioner of Taxation [2009] HCA 32. It set aside the orders of the Full Court and in their place ordered that the appeal to the Full Court be dismissed with costs. 8 A dispute followed between the Commissioner and the liquidators concerning whether the shortfall between the amount of Bruton's solicitor and client costs and the amount of its party and party costs referable to the primary proceeding, the Full Court appeal, the application for special leave and the appeal in the High Court should be paid out of the Fund. This dispute over the payment of costs was the subject of the proceeding before Graham J (costs proceeding) and is the issue in the present appeal.

The costs proceeding 9 The costs proceeding was initiated by the Commissioner who sought a declaration that Bruton was not entitled to indemnification for the shortfall in costs by exoneration or recoupment out of the trust property. Justice Graham found that even without reference to the Deed, Bruton had rights of exoneration from the trust assets in respect of all obligations incurred by it in the administration of the educational trust. However, as bare trustee of the trust assets as from 28 February 2007, it was not part of Bruton's functions to institute the primary proceeding and the costs were therefore not 'properly incurred' by Bruton in the administration of the Fund. Although Bruton was ultimately successful, it was not acting as a trustee in discharge of its then trust obligations. Consequently, his Honour declared that Bruton was not entitled to indemnification by exoneration or recoupment out of the property of the Fund for the relevant expenses after 28 February 2007.

This appeal 10 In this appeal the liquidators seek to set aside the declarations made on 3 and 9 September 2010. They also seek a declaration that would uphold their right to be paid the costs shortfall however there was some vagueness about the exact terms of the declaration sought. This is discussed later in these reasons. The liquidators submit that Graham J erred in: (1) holding that Bruton did not have a right of exoneration, indemnity or recoupment out of the Fund for expenses incurred in the primary proceeding and the appeals from it; (2) holding that Bruton had not incurred the expenses in the administration of the trust and/or in proper performance of its duties or exercise of its powers; and (3) failing to hold s 556(1)(a) of the Corporations Act entitled Bruton to indemnity for the expenses. 11 The parties provided very comprehensive submissions, however both agree that the issue in the proceeding is limited to a discrete legal point concerning whether the obligations of Bruton, as a bare trustee of the Fund, extended to opposing by litigation the action of the Commissioner in issuing a notice to Piper Alderman pursuant to s 260-5. 12 It was not in contention, indeed it could hardly be doubted, that a bare trustee has an obligation to protect and maintain the trust property. Most recently the High Court has held so in CGU Insurance Limited v One.Tel Limited (in liq) (2010) 268 ALR 439. 13 The case concerned the position of a trustee appointed under a Deed of Arrangement with John Huyshe Greaves pursuant to Part X of the Bankruptcy Act 1966 (Cth). Mr Greaves was a former director of One.Tel Limited. He was liable under a judgment in proceedings brought against him by Australian Securities and Investments Commission (ASIC) to pay compensation to One.Tel in the amount of $20 million. Mr Greaves assigned to the trustee, inter alia, his rights under an insurance policy issued by CGU Insurance (CGU) from whom he claimed indemnity for his liability to ASIC. It was accepted that the assignment was valid although whether at law or in equity, it was not necessary to decide. 14 In October 2006 the trustee commenced proceedings in the New South Wales Supreme Court in respect of a $20m claim under the insurance policy. On 30 November 2007 the Deed of Arrangement expired by effluxion of time. Subsequently the summons in the Supreme Court proceeding was changed so that the plaintiff was no longer identified as trustee under the Deed of Arrangement but merely as David Patrick Watson. The primary judge in the Supreme Court proceeding held that as the Deed of Arrangement had terminated Mr Watson had no power to continue the proceeding. The NSW Court of Appeal allowed an appeal from the primary judge's order. 15 On appeal to the High Court CGU argued that the assignment did not give Mr Watson the power to continue the proceeding. The High Court held that after the termination of the Deed of Arrangement the trustee continued to hold the chose in action as trustee and that, even if after termination of the Deed the trustee held the chose in action on a bare trust, it "had an obligation to continue … to vindicate the rights associated with the trust property". At [36]-[37] of its reasons the High Court made the following statements about the position and obligations of a bare trustee: The trustee of a bare trust has no interests in the trust assets other than those which exist by reason of the office of trustee and the holding of legal title. Further, the trustee of a bare trust has no active duties to perform other than those which exist by reason of the office of trustee, with the result that the property awaits transfer to the beneficiaries or awaits some other disposition at their direction. One obligation of a trustee which exists by virtue of the very office is the obligation to get the trust property in, protect it, and vindicate the rights attaching to it. That obligation exists even if no provision of any statute or trust instrument creates it. It exists unless it is negated by a provision of any statute or trust instrument. Here no provision of the Act or the Deed negates it. Mr Greave's equitable assignment of his right to sue CGU under the Policy gave the Trustee the duty to vindicate that right. … Even assuming in favour of CGU that, after termination of the Deed, the Trustee no longer held the chose in action on the trusts of the Deed, the Trustee did remain a trustee, and did have an obligation to continue the process of complying with the duty to vindicate the rights associated with the trust property. It does not follow from CGU's contention that the Trustee had no entitlement to continue the proceedings which could be derived from the Deed once it had terminated that the Trustee did not have an entitlement to continue the proceedings after the Deed terminated which derives from a source other than the Deed. The latter entitlement derives from the duty and power of trusteeship. The Deed created a trusteeship with express duties. The termination of the Deed caused the Trustee to have duties and powers outside the Deed. Here the duty of the Trustee to vindicate the rights connected with the trust property related to a chose in action being enforced in the Trustee proceedings. The hoped-for fruits of those proceedings lay in an order for damages. Discontinuance by the Trustee with a view to letting some other person enforce the chose in action by starting a new action may have run the risk that the new action might be statute-barred, and would certainly have involved a waste of costs. In these circumstances the only way of protecting the chose in action, vindicating the rights attached to it and getting in its fruits was for the Trustee to continue the proceedings. 16 It has long been accepted that what a bare trustee must do in discharge of its obligations will vary with the nature of the trust property and whatever might threaten it. In the absence of any challenge to the property a bare trustee may remain passive however as Meagher JA (with whom Samuels JA agreed) said in Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 at 398, "almost no situation can be postulated where a trustee cannot in some circumstances have active duties to perform". In Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1998) 45 NSWLR 639 at 651 Mason P said that though active and bare trusts were generally distinguished by the presence of active duties of management in the former and not the latter, "[i]t is equally clear that some active duties, though not of management, are imposed on some, but not all, bare trustees". Those active duties will, at the very least, include actions necessary to protect the trust property. 17 The Commissioner submits that, despite the notice issued under s 260-5 being void, the actions of Bruton in this case were not necessary to protect the Fund because, ultimately the assets of the Fund were available to the Commissioner in payment (in part) of the educational trust's tax debt. Accordingly the Commissioner submitted that Bruton's actions were futile. 18 Before the High Court the Commissioner emphasised that Bruton's tax debt had not been paid so that its right at best was to exoneration not recoupment from the Fund. The Commissioner claimed to be subrogated to the exercise of that right and that there was no prospect of any excess being left for Bruton. The High Court, at [51], said: It is unnecessary to rule upon those submissions. This is for several reasons. The first is that for the reasons given above which concern the construction of the Administration Act, the remedy available to the Commissioner on the facts of this case was that under the regime for liquidations (s 260-45), not the garnishee regime provided by s 260-5. Secondly, the Commissioner takes inconsistent positions in making the above submissions. The garnishee regime, in its terms, only applies if the third party owes money to the taxpayer (s 260-5(2), (3)), yet the Commissioner denies that the third party, [Bruton], had any "property" within the broad meaning of "property" for the operation of s 500(1) of the Corporations Act. 19 There are two responses we would make in relation to the Commissioner's submission that Bruton's actions were unnecessary. First, while it may be that, as the Commissioner contends, it is entitled to the whole of the balance of the Fund and there are no competing interests, at least none with priority over the interest of the Commissioner (such as a secured interest), no evidence has been put to us on the point and no submissions (as distinct from unsubstantiated assertion) have been made. The appeal papers disclose the existence of at least one other possible creditor because the index to Part B refers to a proof of debt apparently lodged by a claimant. The document was not reproduced and we are therefore unaware of the nature or amount of the debt. In the previous proceedings in this Court and in the High Court there has been no finding to the effect that there is an absence of competing interests. 20 Subdivision 260-B of Schedule 1 of the Taxation Administration Act 1953 (Cth) provides for the collection and recovery of tax-related liabilities from liquidators. As the High Court pointed out, this subdivision provides the appropriate regime for the Commissioner to seek a remedy in respect of the unpaid liabilities of Bruton, either on its own behalf or as trustee of the educational trust; s 260-45. It was not for a bare trustee to comply with an invalid claim on the Fund on the basis that the invalidity should be ignored because the Commissioner could have obtained his remedy in another way. Once Bruton fell into insolvent administration, the question of who had access to the assets of the educational trust, and in what amount, was to be determined within the four corners of the liquidation: In Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 102. 21 Second, it is relevant to consider the high standard of conduct to which all who have fiduciary obligations have long been held: Keech v Sandford (1726) 25 ER 223; Boardman v Phipps [1967] 2 AC 46. This high standard has many facets but all require that a trustee be diligent in discharging its duties and obligations. A trustee must discharge the duties of the trust, give careful consideration to the exercise of discretions under the trust and refrain from acting beyond the authorisation given by the trust deed and any relevant statute or other legal authority. A bare trustee has a duty to maintain and protect the trust property and to refrain from active management that does not fall within this duty. In determining this appeal it is not necessary for us to decide whether, if Bruton had complied with the invalid notice, it would have been in breach of trust - and we do not do so. 22 The question here is whether the proposition that Bruton, in refusing to comply with an invalid notice, was acting outside its authority as bare trustee or, as was put by the Commissioner, had not incurred the relevant expenses in the administration of the trust and/or in proper performance of its duties: see Suco Gold at 105. However, that begs the question as to whether, as a bare trustee, rather than as the former trustee of the educational trust under the terms of that instrument, Bruton was acting for an authorised purpose. There is no authority directly in point to which the Commissioner was able to refer. Conversely, the comments of the High Court quoted above at [15] above are plainly apposite. We do not regard the fact that in CGU Insurance the trustee's proceedings had commenced before the deed of arrangement terminated as a basis for holding that the general observations of the High Court are not relevant here. 23 Nor can the decision in CGU Insurance be distinguished upon the other bases suggested by the Commissioner. The relevant asset in the present case was a debt owed to Bruton by a third party. Litigation was not essential to its realisation but when the Commissioner sought to invoke the garnishee regime there would appear to have been no other way of protecting the asset against an invalid exercise of power. The primary proceeding was essentially a defensive action in response to the Commissioner's impermissible attempt to garnishee the debt: Putney Group Pty Ltd v Royal Rehabilitation Centre Sydney [2009] NSWSC 424 at [46]-[51]. In our opinion, this was sufficient to amount to an action that was necessary to protect the trust property against unauthorised appropriation. 24 The Commissioner sought to rely upon the remarks of the Full Court in Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472 at [79]. There the Full Court said that, given the limited role of Bruton, it was unlikely that the liquidator's costs and expenses were all attributable to the performance of the duties of a bare trustee. Their Honours also said that it was difficult to see how the liquidators could be justified in incurring costs and expenses in prosecuting the proceeding whilst resisting payment of the tax debt which gave rise to Bruton's entitlement to indemnity. 25 The short answer to this seems to us to be that the Full Court's remarks were obiter and in any event there is some tension between those remarks and the observations of the High Court in the passage set out at [15] above. It is true that the High Court did not rule upon the Commissioner's submission that there was no prospect of any excess for Bruton but once it is accepted that the proper regime for the Commissioner's remedy is the regime for liquidations, we do not see how the Full Court's remarks at [79] can have any continuing application. 26 Bruton argued the appeal on an alternative ground, namely that the primary judge erred in failing to hold that s 556(1)(a) of the Corporations Act 2001 (Cth) entitled it to indemnity for the expenses incurred in the proceedings. The effect of Bruton's submission was that the litigation expenses incurred by Bruton as a bare trustee were "properly incurred" in preserving the property of the company within s 556(1)(a). 27 Since we have come to the view that the primary judge was in error in finding that it was no part of Bruton's functions as a bare trustee to institute the primary proceeding it is unnecessary for us to determine the alternative ground of appeal. We observe however, that a difficulty arises as to whether s 556 governs the order of priority where trust assets are insufficient to meet the claims of all trust creditors. The learned authors of Jacobs' Law of Trusts in Australia 7th ed, LexisNexis Butterworths, Australia 2006 are of the view, at [2115], that s 556 addresses only the distribution of assets beneficially owned by an insolvent company. See also the remarks of McPherson J "The Insolvent Trading Trust" in Essays in Equity, PD Finn (ed), 142 at 154.

ORDERS 28 As Mr N Cotman SC acknowledged, issues concerning rights of indemnity and exoneration have, necessarily embedded in them, factual issues which were not encompassed in the appeal. We are therefore not prepared to make the omnibus form of declaration sought by Bruton in its notice of appeal. In our view it is sufficient for us to order that the appeal be allowed, that the orders and declarations made by Graham J and Nicholas J be set aside. 29 We would also make a declaration in the following terms:- Bruton Holdings Pty Ltd (in liq) is not disqualified from indemnification by exoneration out of the property of the Bruton Educational Trust for costs and expenses incurred in proceedings NSD 966 of 2007 or the appeal (including the application for special leave and the appeal to the High Court) therefrom. 30 We would also order the Commissioner to pay the costs of this appeal and of the proceeding before Graham J and the application before Nicholas J. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Stone, Jacobson & Edmonds.