CONSIDERATION
30 The power of sale conferred on liquidators under s 477(2)(c) of the Act does not, without more, extend to property that an insolvent company holds on trust (see Taylor (Liquidator) v CJ & KL Bond Super Pty Ltd (Trustee), in the matter of CJ & KL Bond Pty Ltd (in liq) [2018] FCA 1430 at [16(c)] and the cases cited therein). Instead:
[T]he appropriate course for a liquidator to take when seeking to sell assets of a trust in the exercise of the trustee's right to indemnity is for the liquidator to apply to be appointed as a receiver to realise the assets of a trust in the exercise of a lien or charge securing a trustee's right of indemnity.
See Carrello, in the matter of Gembrook Investments Pty Ltd (in liq) [2019] FCA 1143 (Carrello) at [21] and the cases cited therein.
31 It is for these reasons that the Liquidators have applied under s 57(1) of the FCA. That section provides that "[t]he 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". This discretion has been widely construed (see Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Oswal (No 4) [2011] FCA 1503 at [5], Porter v Australian Prudential Regulation Authority (2010) 184 FCR 382; [2010] FCA 125 at [27]-[28], Coeclerici Asia (Pte) Ltd v Gujarat NRE Coke Limited [2013] FCA 882 at [107]-[108]).
32 As I remarked earlier, there is a long series of decisions of this Court in which s 57 of the FCA has been used, the two most recent of which are: Naidenov, in the matter of The Sweet Life Farms Australia Pty Ltd (in liq) v Dahbella Pty Ltd [2020] FCA 1474 (Naidenov) per Markovic J and Elkerton (liquidator), in the matter of CGB Property Holdings Pty Ltd (in liquidation) [2020] FCA 1464 (Elkerton) per Farrell J.
33 It should, however, be noted that the position with this Trust is somewhat different to that encountered in many of these decisions. Here, as the Liquidators have acknowledged (see at [28(a)] above), Royal National continues to be the Trustee of the Trust. That is to say, the Trust Deed does not contain a provision under which the company's position as Trustee was automatically terminated when the Liquidators were appointed (cf, for example, Naidenov at [6] and Elkerton at [12(b)]).
34 Furthermore, this Trust continues to operate in the sense that, as is mentioned above (at [17]), Royal National as Trustee is the registered proprietor as mortgagee in possession of the Southport property. It also holds the right to enforce the deeds of guarantee against Mr Roddenby and Captain Enterprise Holdings. As well, given the terms of the allegations made in the statements of claim in the proceedings that are presently on foot (see at [18]-[20] above), some of the proceeds of those proceedings, if successful, may constitute property of the Trust.
35 This means that the total debts of $1,160,000 for which Royal National as Trustee is seeking to enforce its right of exoneration comprise a relatively small proportion of the value of the assets of the Trust. On one measure, the debts comprise approximately 22% of the estimate Ms Yang has proffered for the upper value of the Southport property, namely $5,000,000. This, in turn, means, among other things, that the enforcement by Royal National of its right of exoneration will not exhaust the trust property such that the Trust will cease to exist once that right has been exercised (see In the matter of Austec Wagga Wagga Pty Limited (in liquidation) [2018] NSWSC 1476 (Austec) at [19] per Brereton JA).
36 However, the orders sought by the Liquidators do not reflect the somewhat unusual circumstances of this Trust. Specifically, while they anticipate a distribution of funds to those entitled to them as a consequence of the Trustee's right of exoneration in proposed order 7(g) (see at [25] above), their orders do not contain any provision for the distribution of the remaining funds or assets of the Trust to the Members as beneficiaries. Indeed, the only mention of the beneficiaries, or Members, of the Trust in their proposed orders is order 7(c) (see at [25] above) and that does not expressly address how it is proposed to deal with their beneficial interests in the remaining funds or assets of the Trust. Furthermore, the process outlined in their proposed orders does not appear to acknowledge the distinction made in cl 7.7 of the Trust Deed (see at [11(j)] above) between the general expenses of the Trust and those associated with particular mortgage investments.
37 I have highlighted these matters to make the point that simply appointing either the Liquidators, or the alternative receivers, as receivers of the trust property of this Trust does not address the more fundamental questions that arise in the circumstances of this matter: is it intended that this Trust be wound up by the receiver, so appointed and, if so, by what process?
38 The answer to the first question can, perhaps, be inferred from the tenor of the parties' submissions to be "yes". But there is little in their submissions to indicate that they have considered the second question. In this respect, Brereton J in Austec pertinently observed (at [13]) that:
In the absence of provision in the trust instrument, a trust cannot be wound up in the same way as a company. A trust is not a legal entity, as a company is. There is no statutory right or power to wind up or terminate a trust, and generally speaking it is unconventional to speak of 'winding up' a trust…
(Footnotes omitted)
With respect to the "statutory right or power" his Honour mentions in these observations, I interpose to note, as I did earlier, that this trust is not a managed investment scheme under Part 7.9 of the Act. Accordingly, the statutory processes set out in that Part, as discussed in decisions such as Park, do not provide guidance in answering this question. However, as it turns out, his Honour's earlier mention of a "trust instrument" does provide that guidance.
39 It can be seen from the terms of the Trust Deed (at [11(l)] above) that cl 10 expressly deals with the "Winding up of the Trust". Moreover, cl 10.1 makes it clear that the Trust "shall only be wound up in accordance with this Trust Deed" (emphasis added). Then the succeeding subclauses of cl 10 set out how such a winding up is to occur. First, to dispose of the possibility that the Trust has been, or is about to be, terminated, it is to be noted that the term of the Trust is fixed by cl 3.7 to be 80 years. It follows that the termination of the Trust effected by cl 10.3(a) will not occur until 2095. Secondly, cl 10.2 provides the Trustee with a discretionary power to wind up the Trust if it considers the circumstances described in cll 10.2(a) and (b) exist. Thirdly, cll 10.3(b) and (c) provide the Members with the power to require the Trustee to wind up the Trust by passing an extraordinary resolution. Fourthly, cl 10.3(d) provides that the Trustee must wind up the Trust if a court makes an order to that effect. Finally, cll 10.4 to 10.7 contain provisions directing the Trustee on various aspects of the winding up process.
40 On the latter, cl 10.6 bears noting. That clause requires the Trustee to ensure that all Members' funds are redeemed and returned "less any expenses of the Trust payable by the Member". This subclause, together with other clauses of the Trust Deed such as cl 4.13 (see at [11(h)] above), appear to treat "each Mortgage Investment" separately. If that is so, it may result in various Members having different rights of redemption and different obligations to the Trustee depending on the "Mortgage Investment" in which they made their investment.
41 There is also a further important matter that needs to be considered in the winding up of the Trust. It stems in part from the Members' submissions, in part from the concession made by the Liquidators at [28(b)] above and in part from the following observations of Colvin J in Carrello (at [22]):
If such a course [of appointing a receiver of the trust under s 57 of the FCA] is followed then, on the application for appointment as a receiver, the Court can scrutinise whether there are indeed interests of the beneficiaries of the trust that might need to be provided for, such as in cases where the power to resort to trust assets for exoneration of creditors has been compromised by the actions of the trustee or where the trust includes the benefit of rights (such as causes of action) that might be exercised by a trustee in the interests of the beneficiaries (but not by a receiver acting in the interests of realising assets pursuant to the trustee's right of indemnity) that need to be provided for in the making of such orders. Otherwise, such matters are left until after the event when the Court is asked to scrutinise whether particular actions were undertaken in the due administration of the trust in order to approve remuneration of the liquidator and the manner of distribution of proceeds recovered by the sale of trust assets.
(Emphasis added)
42 Both of these concerns appear to emerge in this matter. On the first, as Ms Yang's affidavit demonstrates (see at [10] above), two of the creditors whose debts the Liquidators are seeking to recover are directly linked to the directors of the company. More significantly, those directors are presently respondents in the two proceedings in this Court described earlier, which include allegations that they caused the company to act in breach of trust. Among other things, this situation raises an issue whether those debts fall within the terms of cl 7 of the Trust Deed (see at [11(j)] above). This, in turn, raises the question whether the debts of those two creditors should be dealt with differently from the debts of the other seven.
43 Relatedly, and as to the second concern above, if the debts of those two creditors were to be quarantined, for the time being at least, the debts of the remaining seven creditors total approximately $150,000. This reduced creditors' figure would then compound the disparity mentioned above (at [35]) between the amount being sought by the Liquidators under the Trustee's right of exoneration, compared with the Members' interests in the remaining assets of the Trust.
44 Regrettably, there is little before me to indicate that the parties have turned their minds to any of these matters. On the Liquidators part, there is nothing in their submissions to indicate that they have given any thought to the discretion contained in cl 10.2. As well, the orders they have sought are narrowly focused on exercising the Trustee's right of exoneration and do not appear to have regard to the interests of the Members in the winding up of this Trust. Similarly, on the Members' part, there is nothing in their submissions to indicate that they have given any thought to the provisions of cl 10.3(b) or (c), or, for that matter, the power contained in cl 9.2 to remove the company as Trustee (see at [11(k)] above). The Liquidators have at least turned their mind to that prospect (see at [28(a)] above).
45 Finally, neither of the parties appears to have given any thought to cl 10.3(d) which provides for a court order to wind up the Trust. On this aspect, given the Governing Law provisions of cl 16 of the Trust Deed (see at [11(m)] above), consideration would also need to be given to the terms of any applicable New South Wales legislation such as the Trustee Act.
46 In my view, all of these matters need to be considered in developing a process to ensure that this Trust is duly wound up in accordance with the provisions of the Trust Deed and that the interests of the Trust's creditors and its Members are fairly accommodated. That includes any differing rights and obligations that may exist within those two groups as alluded to above. Until such time as this occurs, it would be premature, in my view, to appoint a receiver to the Trust.
47 This is, of course, far from a satisfactory outcome, particularly given the costs that are likely to have been expended on this application to date. To attempt to avoid exacerbating that state of affairs, rather than dismissing the Liquidators' application, I propose to adjourn it to a case management hearing to be held at a time to be fixed on 19 November 2020 to hear further from the parties once they have had an opportunity to consider these reasons.
I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Reeves.