Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth

Background 1 The first plaintiffs are the joint and several liquidators of the second plaintiff, Willco Breads Pty Ltd. They have ascertained that all property of Willco was held by it as trustee under a written trust deed, but its insolvency disqualifies it from continuing to hold that position. Accordingly the liquidators seek certain powers and relief from the Court to enable the trust property to be realised. 2 The liquidators were appointed on 6 August 2019 by a special resolution of the members to wind up the Company under s 491 of the Corporations Act 2001 (Cth). 3 The evidence on this application was provided by one of the liquidators, Jerome Mohen. Mr Mohen says that Willco was the trustee of the JR & AM Aldus Family Trust, established by a Trust Deed dated 24 November 2008. The law of the jurisdiction governing the Trust Deed is stated to be that of Victoria. 4 Mr Mohen says that having reviewed Willco's books and records, including Australian Taxation Office records, he has determined that Willco acted solely as trustee of the Trust. There is no evidence that Willco has owned any assets in its own right. All liabilities have also been incurred as trustee of the Trust. 5 Under cl 45 of the Trust Deed, the appointment of a trustee terminates automatically if the trustee enters into compulsory or voluntary liquidation. 6 Under cl 36 of the Trust Deed, the trustee is entitled to an indemnity out of assets of the Trust in respect of any liability incurred in connection with acting as trustee of the Trust, unless the liability arose from fraud, gross negligence or breach of trust. 7 Mr Mohen says that he is not aware of any evidence that a replacement trustee has been appointed to the Trust prior to or after his appointment. 8 Prior to its liquidation, Willco in its capacity as trustee operated a bakery business in Cowaramup, Western Australia, known as the Cowaramup Bakery. At the time of liquidation, it employed some 15 casual employees. It leased the bakery premises. It owned various assets including plant and equipment situated at the bakery premises, a number of vehicles including a 2007 Holden Rodeo, cash and receivables. It has liabilities to its secured creditor, being the National Australia Bank, and other liabilities under PPSR finance facilities and to priority creditors. There are also unsecured creditors.

The reasons for this application 9 Two matters have precipitated this application. 10 First, on 15 August 2019 the liquidators obtained a desktop valuation of the Holden Rodeo from Pickles Valuations. They were informed by Pickles that the Holden Rodeo was valued at approximately $2,000. 11 On 22 August 2019, Mr Mohen received an offer from the director of Willco, Mr Jason Aldus, to purchase the Holden Rodeo for $1,500. On 27 August 2019, the liquidators entered into an agreement on behalf of Willco to transfer the Holden Rodeo to Mr Aldus for $1,500 including GST. 12 Mr Mohen deposes that in deciding to sell the Holden Rodeo to Mr Aldus for $1,500 he took into account the following factors: (a) he was informed by Pickles that transport costs to deliver the Holden Rodeo to Pickles for auction would be approximately $500; (b) the insurance policy for the Holden Rodeo expired on 6 September 2019 and if a sale was effected prior to that date, further insurance costs could be minimised; and (c) the direct sale to Mr Aldus avoided incurring an auctioneer's commission and costs. 13 Accordingly, Mr Mohen considered that an auction was likely to be uncommercial and that a quick sale to Mr Aldus was in all the circumstances likely to be most beneficial to Willco and its creditors. The sale proceeds have been remitted to Willco's bank account. 14 It is now apparent that at the time of the sale, Willco must have held the Holden Rodeo only as bare trustee due to the operation of cl 45 of the Trust Deed. A bare trustee, without more, has no power of sale. Mr Mohen says he did not know about the effect of the Trust Deed at the time, a matter to which I return below. 15 Second, the liquidators are attempting to sell the plant and equipment for the benefit of creditors. On about 6 August 2019 Mr Mohen instructed Pickles to undertake a valuation of the vehicles, plant and equipment situated at the bakery premises and have received a valuation which is the subject of a separate confidential affidavit. I accept it is appropriate that the valuation remain confidential pending completion of any sale process. 16 Mr Mohen has received certain offers from third parties for the purchase of the bakery's plant and equipment and has entered into an in-principle agreement with one of those parties to sell the plant and equipment for $82,500. It is a condition precedent of the sale agreement that, relevantly, the liquidators of Willco are appointed receivers of the Trust assets on or before 1 October 2019 and that the leases over the company premises are assigned to the buyers. 17 Mr Mohen also says that he intends to realise another vehicle and disclaim a Hyundai iLoad vehicle which is subject to security for a debt that exceeds its forced liquidation valuation. Mr Mohen has deposed to that valuation and the sum secured over the Hyundai iLoad. 18 By this application the liquidators seek to ensure they have appropriate powers to effect the various sales, disclaimer and distribution of proceeds.

Consideration 19 The ability of Willco to sell assets by its liquidators has been circumscribed by the operation of cl 45 of the Trust Deed. It is established that where upon the appointment of a liquidator or administrator a company becomes a bare trustee, if a sale is necessary the liquidator or administrator must obtain a court order to sell or an order for the appointment of a receiver: Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 at [44] (Allsop CJ). 20 As the Holden Rodeo has already purportedly been sold, the first plaintiffs seek a declaration under s 1318 of the Corporations Act that they acted honestly and ought fairly to be excused for any breaches, failures or omissions in dealing with the Holden Rodeo. 21 Further, the liquidators seek to be appointed receivers by this Court under s 57(1) of the Federal Court of Australia Act 1976 (Cth) over all assets but with effect nunc pro tunc insofar as the Holden Rodeo is concerned. Section 57(1) empowers the Court at any stage of a proceeding and on such terms and conditions as it thinks fit to appoint a receiver by interlocutory order in any case in which it appears to be just or convenient to do so. There are many recent examples where the Court has appointed receivers under s 57(1) where the appointment of an administrator or liquidator has led to the termination of the ability of a trustee to continue to hold that position under a trust deed: see for example Amirbeaggi, in the matter of Simpkiss Pty Ltd (in liq) [2018] FCA 2121 at [27]-[28] (Markovic J); and Cremin, in the matter of Brimson Pty Ltd (in liq) [2019] FCA 1023 at [48]-[51] (Moshinsky J). I respectfully acknowledge that in both of those cases the principles are usefully collected and summarised. I do not need to repeat the principles in these reasons. 22 In circumstances where a company has only ever acted as a trustee of one trust and that has been the totality of its affairs, no issue arises as to the application of trust assets to general creditors because all of the company's creditors are trust creditors. Accordingly, it is appropriate that the proceeds from the exercise of the trustee's right of indemnity (exoneration) be distributed to the Trust creditors in accordance with the order of priority prescribed by the Corporations Act: Jones v Matrix at [100]-[108] (Allsop CJ); Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20 at [93]-[96] (Bell, Gageler and Nettle JJ), [111], [156]-[158] (Gordon J); and see also Cremin at [51]. 23 Therefore, I consider it appropriate to make an order appointing the liquidators as receivers and managers of the assets and undertaking of the Trust. I consider it appropriate to make an order to the effect that the receivers have in respect of the business and assets of the Trust the powers that a receiver has in respect of the business and property of a company under s 420 of the Corporations Act (other than s 420(2)(s), (t), (u) and (w)), as if the reference in that section to 'the corporation' were a reference to the Trust. They should also have the power to disclaim the Hyundai iLoad under s 568(1) as if the references to a liquidator were references to the liquidators as receivers appointed by these orders. 24 It is also appropriate to deal with the sale of the Holden Rodeo by way of an order appointing the liquidators as receivers nunc pro tunc: Jones v Matrix at [91], [152], [198]. An alternative mechanism employed in some of the cases is that there be retrospective orders made under applicable trust legislation conferring upon a bare trustee a power of sale: see Amirbeaggi at [37]-[38]. Such a course also provides to the Court a wide discretion to confer upon a trustee a power of sale. Whilst in my view not strictly necessary in this case in light of the proposed order that the receivers' powers operate nunc pro tunc, I will make an order as proposed by the first plaintiffs that in any event validates the sale of the Holden Rodeo. 25 The liquidators also seek the personal benefit of a declaration under s 1318 relieving them from potential liability with respect to the sale of the Holden Rodeo at a time when Willco held the vehicle only as bare trustee. 26 The relevant principles with respect to s 1318 in such circumstances are summarised by Markovic J and applied in Amirbeaggi (at [45]-[51]). It is unnecessary to add to her Honour's summary, save to note that the meaning of acting 'honestly' in the context of s 1318 is discussed by Palmer J in Hall v Poolman [2007] NSWSC 1330 at [325]: In my view, when considering whether a person has acted honestly for the purposes of a defence under CA s 1317S(2)(b)(i) or s 1318, the Court should be concerned only with the question whether the person has acted honestly in the ordinary meaning of that term, i.e. whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law. A failure to consider the interests of the company as a whole, or more particularly the interests of creditors, may be such a high degree as to demonstrate failure to act honestly in this sense. However, if failure to consider the interests of the company as a whole, including the interests of its creditors, does not rise to such a high degree but is the result of error of judgment, no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the Court must have regard under CA s 1317S(2)(b)(ii) and s 1318. See also ICandy Interactive Limited, in the matter of ICandy Interactive Limited [2018] FCA 533 at [55]-[57]. 27 Mr Mohen in his original supporting affidavit provided reasons for his decision to sell the vehicle, as set out above. However, Mr Mohen did not disclose when he read the Trust Deed nor disclose anything about the circumstances by which he ascertained there was a difficulty with respect to cl 45 of the Trust Deed. Following a communication from my chambers the day before the hearing, a supplementary affidavit was filed which (in part) addressed those matters. It is still not entirely clear when Mr Mohen received or read the Trust Deed, but he discloses that he first sought advice about it on 28 August 2019, and provided a copy of it to his solicitors on 29 August 2019. Mr Mohen says that prior to that time he had not had the opportunity to contemplate or seek advice as to whether Willco had been removed as trustee and so was not aware that as liquidator he did not at that time have a power of sale. 28 Provisions in trust deeds such as cl 45 are not unusual, as indicated by the many cases that have dealt with applications by liquidators to be appointed as receivers. It is surprising that it is a matter to which it seems the liquidators did not turn their minds before purporting to sell assets of Willco. It is even more surprising that the question was not addressed having regard to the high profile case law over the last few years addressing the position of insolvency of trustee companies that culminated in decisions including Jones v Matrix and Carter Holt Harvey Woodproducts. 29 In the circumstances of this case, whilst the liquidators should have been alive to the issue created by cl 45 earlier, there is no suggestion that they have acted dishonestly. They at most overlooked the importance of reading the Trust Deed and checking its significance, but moved quickly to remedy the position once they received appropriate advice from their solicitors. Their conduct was not so careless as to suggest a lack of regard to their obligations: one can understand that in the day to day need to take control of an insolvent company's assets and undertaking for the benefit of creditors, certain matters may get overlooked. It is imperative, however, that parties move quickly to remedy the position when such circumstances arise and that there be full and frank disclosure to the court. 30 Objectively, it would seem unlikely that there is any real prospect of a claim being made against the liquidators in the circumstances of the sale of the Holden Rodeo, taking into account in particular its low valuation and likely realisation costs. However, that does not mean that at no time in the future a person might seek to pursue a claim against the liquidators. In those circumstances I am satisfied that there is an objective basis for concluding that a claim might be made against the liquidators such that it is appropriate that a declaration pursuant to s 1318(2) of the Corporations Act be made. 31 I am satisfied that in all the circumstances the liquidators should be granted the relief from liability that they seek under s 1318. 32 Finally, I also take into account the ex parte nature of this application. Although Mr Aldus has been provided with a copy of the proposed orders and has indicated that he consents to them, it seems that no other party has notice of the application. The Australian Securities and Investments Commission has not been informed of the application. In the circumstances, I will also make an order that there be liberty to apply to any person who can demonstrate sufficient interest to modify or discharge these orders on not less than two business days written notice to the plaintiffs. 33 There will also be general liberty to apply. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.