Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth

JACKSON J: 1 The plaintiffs, Matthew James Donnelly and Sean Holmes, are joint and several liquidators of Dunjey Property Pty Ltd (In Liquidation) (ACN 168 364 654) (the Company). The Company is, or was, the trustee of the following Trusts: (a) Dunjey Property Trust (Trust 1); (b) Dunjey Property Trust No. 2 (Trust 2); (c) Dunjey Property Trust No. 3 (Trust 3); and (d) Dunjey Property Trust No. 4 (Trust 4). 2 The plaintiffs seek orders to deal with, distribute, sell or manage the assets of each of the Trusts. Specifically, the plaintiffs apply under s 90-15 and s 90-20 of the Insolvency Practice Schedule (Corporations) (IPS) (being Schedule 2 of the Corporations Act 2001 (Cth)) and s 57 of the Federal Court of Australia Act 1976 (Cth) for orders that: (a) they are justified and acting reasonably in proceeding on the basis that the Company carried on business solely in its capacity as trustee of the Trusts; and (b) they are appointed as joint and several receivers and managers over the property, assets and undertakings of the Trusts. Ancillary orders are also sought. 3 Initially, the plaintiffs relied on the affidavit of Mr Donnelly affirmed on 5 September 2023 and the affidavit of Luke Jarrad Bone sworn on 14 September 2023 in support of their application. At a hearing on 20 September 2023 the question of the adequacy of the evidence as to the capacity in which the Company traded (whether as trustee or not) was raised. I made orders for further affidavit evidence to be filed, after which the plaintiffs filed the affidavit of Mr Holmes affirmed on 11 October 2023 (as well as a further affidavit of Mr Bone sworn on 11 October 2023, establishing proper notice of the outcome of the hearing to creditors and the Australian Securities and Investments Commission (ASIC)). Mr Holmes's affidavit contained evidence permitting the matter to be determined without the need for further hearing. 4 For the following reasons, I will make orders largely in the terms the plaintiffs seek.

Background 5 The Company was incorporated on 4 March 2014. Michael Dunjey was the sole director and secretary of the Company until 21 June 2022 when John Shanahan was appointed as Mr Dunjey's trustee in bankruptcy. The Company's shares are jointly and beneficially held by Mr Dunjey and his wife, Aimee Dunjey. 6 On 28 July 2022, controllers were appointed by Westpac over certain property held by the Company in its capacity as trustee of the Trusts. On 24 May 2023, the plaintiffs were appointed as joint and several liquidators of the Company pursuant to a resolution of shareholders. 7 The trust deeds for each of the Trusts are in substantially the same terms. Clause 7.6(2) of the trust deeds provides that the office of trustee will be determined and vacated: if the Trustee, being a company, enters into liquidation, whether compulsory or voluntarily (not being a voluntary liquidation for the purposes of amalgamation or reconstruction) or has a receiver, receiver and manager or administrator appointed or makes or enters into any composition or scheme of arrangement with its creditors or is deregistered. 8 Therefore, on the appointment of the plaintiffs as liquidators, the Company was removed as trustee of each of the Trusts. The plaintiffs are not aware that any replacement trustee has been appointed. The appointor under each of the trust deeds is Mr Dunjey. There is no evidence that he has taken any action to procure a replacement trustee or trustees, and there is no one holding that office to whom the Company could transfer the assets. The assets impressed with each of the Trusts remain vested in the Company, but the determination of its office as trustee under the trust deeds means that it holds those assets as a bare trustee: Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 at [26] (Gordon J). 9 Each of the Trusts is a discretionary trust. The expressly named beneficiaries of each are Mr Dunjey, Ms Dunjey and two of their children who appear to be under the age of 18. The following companies and trusts are related to those beneficiaries and so are likely also beneficiaries of each of the Trusts: (a) the Company; (b) Ascent Investment and Coaching Pty Ltd (In Liquidation); (c) the Ascent Trust; (d) Dunjey SMSF Pty Ltd; (e) DMBS Strategies Pty Ltd; (f) Ascent Foundation Ltd; (g) Ascentic Pty Ltd; (h) Seven Generations Self-Managed Superannuation Fund (Dunjey SMSF Pty Ltd appears to be the trustee of this trust); and (i) each of the other Trusts (that is, each of the Trusts is likely a beneficiary of the other Trusts). 10 From a table of assets and liabilities annexed to Mr Donnelly's affidavit, it appears that as at June 2021 the Company may have had total assets of $10,491,981 and liabilities of up to $13,266,218 (though proofs of debt are not in evidence). These figures are drawn from financial statements produced for each of the Trusts. 11 Therefore, it appears that as at June 2021, at least, the Company's total debts exceed its total assets. On the figures provided, that is reflected in a deficit of assets over liabilities for each of the Trusts. There is nothing in the evidence to suggest that this position has materially changed since then, and in the circumstances of the liquidation of the Company it can be inferred that it has not. 12 The plaintiffs have made this application in order that they may deal with and realise the assets of the Trusts, so as to discharge liabilities of the Company that it incurred in its capacity as trustee, and to recover their remuneration, costs and expenses in relation to the administration of the Trusts. They say that without the orders being granted, the creditors of the Company and the Trusts will be prejudiced because of the plaintiffs' inability to deal with and realise the assets of the Trusts, which will in turn impede their ability to complete the liquidation in a timely manner. 13 The application is not opposed. The plaintiffs notified the following individuals and entities of the application and the 20 September hearing listing and, after that hearing, provided them with a summary of the hearing and the orders made: (a) ASIC; (b) all persons the plaintiffs know are (or may be) creditors of the Company or claim to be creditors of the Company; (c) the known beneficiaries of the Trusts; (d) the trustee in bankruptcy for Mr Dunjey; and (e) the Westpac appointed controllers.

Principles 14 The need for orders appointing the plaintiffs as receivers relates to the right of indemnity out of trust assets which the Company has when it incurs liabilities in its capacity as trustee. One aspect of that right of indemnity is the right of exoneration, being the ability of the trustee to apply trust assets to satisfy trust liabilities without having to pay those liabilities out of its own pocket. That right is protected by an equitable lien over trust property, but the trustee needs an order of the Court before it may sell that property in fulfilment of the right. See generally Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 260 FCR 310 at [35]-[36], [44] (Allsop CJ, Farrell J agreeing). 15 The principles applicable in those circumstances were helpfully summarised by Moshinsky J in Cremin, in the matter of Brimson Pty Ltd (in liq) [2019] FCA 1023 (citations removed): [48] A company that is the trustee of a trading trust has a right of indemnity to resort to the trust assets to vindicate its right to be exonerated from a liability that it has incurred in the course of carrying out trust business. In circumstances where such a company goes into liquidation, its right of indemnity and accompanying equitable lien over the trust assets endures, notwithstanding that the company has been removed as trustee of the trust and only holds the trust assets as a bare trustee. [49] There has, until recently, been a difference of opinion as to whether, in such circumstances, the liquidator's power to sell the 'property of the company' in s 477(2)(c) of the Corporations Act permits him or her to sell trust assets. 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. 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. 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). [50] 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. 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. Orders appointing a liquidator as a receiver for this purpose may be made nunc pro tunc to authorise sales of trust assets that have already occurred. [51] The proceeds from an exercise of a corporate trustee's right of exoneration may only be applied in satisfaction of the trust liabilities to which that right relates. Thus, the liquidator of a (former) corporate trustee may only apply the proceeds of a sale of trust assets to satisfy debts owed to trust creditors (as opposed to general creditors). This includes the costs of the liquidation (including the liquidator's remuneration) because such costs constitute debts incurred by the company in discharging the duties imposed by the trust. 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. In this situation, the proceeds from the exercise of the right of exoneration are to be distributed to the trust creditors in accordance with the order of priority prescribed by the Corporations Act. 16 In short, a trustee company that is being wound up, as bare trustee, retains its right of exoneration out of trust assets for liabilities incurred in its capacity as trustee, and the accompanying equitable lien over the assets of the trust. But neither the company nor its liquidators have the power to sell the assets of the trusts without an order of the Court. Therefore the Court may be willing to make orders appointing the liquidators of the company as receivers of assets it holds in its capacity as trustee, as a convenient way to exercise the company's right of exoneration, that is, to realise trust assets in order to pay trust creditors. 17 The Court needs to be satisfied, though, that the appointment of receivers or the exercise of a power of sale for that purpose will not deprive persons who are not creditors of the trusts of their right to enforce liabilities against company assets. The right of exoneration only permits the Company to realise assets of a given trust to satisfy debts owed to creditors of that trust, and not to any other creditors: Jones at [49], [51]. In practice, as reflected in Cremin, the Court is usually satisfied of that by evidence indicating that the Company did not carry on business in any capacity other than as trustee.

Consideration 18 The plaintiffs point to the following evidence in support of their claim that the Company only ever traded in its capacity as trustee of the Trusts and that it did not own any assets in its own right, owe liabilities in its own right, or conduct any business in its own right: (1) It appears that, to the extent that financial statements of the Company have been prepared, they are financial statements for each of the Trusts. When asked for all books and records of the Company in their possession, the Company's former accountants only provided financial statements for the Trusts. It can be inferred that there are no financial statements prepared for the Company in its own right. (2) Bank statements show that all bank accounts held by the Company are in the name of the Company in its capacity as trustee of each of the Trusts. (3) The assets detailed in the financial statements and the Report on Company Activities and Property (ROCAP) are identified as assets of one or other of the Trusts. This includes real property held (and formerly held) by the Company in its capacity as trustee. Each of these assets is also identified in the financial statements as an asset of one of the Trusts. (4) There is no evidence of assets held by the Company other than those listed in the Company's financial statements and the ROCAP. (5) The plaintiffs made inquiries about an asset listed in the financial statements of Trust 1, namely two shares in a company called Prestige Ivanhoe Pty Ltd (ACN 608 107 339). Prestige Ivanhoe has supplied a declaration of trust to the plaintiffs which confirms that the shares in it are held by the Company in its capacity as trustee of Trust 1. (6) The Company does not have its own Tax File Number (TFN) or Australian Business Number (ABN) but each of the Trusts have their own TFN and ABN. (7) As to known creditors of the company, the evidence suggests that the debts owed to creditors of the Company are owed in the Company's capacity as trustee of one or other of the Trusts. In the case of some creditors, this appears from the financial statements and the ROCAP. For example, in relation to the Australian Taxation Office, it can be inferred from the matters set out in (6) above. For another creditor, Chris-Stien Pty Ltd, the liquidators have obtained a copy of a loan deed indicating that the debt owed to it was incurred in the Company's capacity as trustee of Trust 3. (8) There are liabilities to Mr Dunjey identified in the financial statements for each of the Trusts. In the cases of Trust 1, Trust 2 and Trust 4, these liabilities appear to have arisen in connection with Mr Dunjey's status as a beneficiary of the Trust. In the case of Trust 3, the liability may have had a different origin. On the plaintiffs' understanding the liabilities connected with Mr Dunjey's status as beneficiary are likely to represent an alleged unpaid present entitlement owed to him in that capacity. 19 I infer on the basis of the above evidence that the Company only carried on business as trustee of the Trusts, and not in its own capacity. There is no evidence of an ABN, a tax return, a bank account or a financial statement for any business carried on by the Company in its own name. 20 As a result, on the basis of the principles set out in Cremin, it is appropriate to appoint the liquidators to act as receivers of the assets of each of the Trusts. Otherwise, there will be no other trustee or other entity with power to realise assets to pay creditors of the Company which it incurred in its capacity as trustee of one of the Trusts. 21 There is a feature of this case, however, which was not present in cases like Cremin and Deppeler, in the matter of Old Port Road Pty Ltd (in liq) [2021] FCA 980 (O'Bryan J). It is that, while the Company only carried on business as trustee, it did so as trustee of four distinct Trusts, rather than as trustee of one Trust alone. Just as the proceeds of the right of exoneration out of the assets of a given trust are available only to be applied in payment of trust creditors, and not for payment of company creditors generally (if the company carried on business in its own right as well as in a capacity as trustee), so too the proceeds are not available for creditors incurred in the capacity as trustee of a different trust: see Jones at [30]-[52], especially [30] and [51]. 22 It is not apparent that this feature will cause difficulties and complications in this case. It appears from the evidence summarised above that the Company's assets are generally comprised of real property, or the proceeds of the sale of such property, where the particular trust attached to each property is sufficiently identifiable. Similarly, liabilities appear to have been identified by the plaintiffs as having been incurred in the capacity as trustee of one or another of the particular Trusts here. The plaintiffs, acting as officers of the Court on an ex parte application, have not identified that there is any need to disentangle assets and liabilities of the different trusts. 23 Nevertheless, I consider it appropriate to amend the orders sought so as to make it clear that the assets of a given Trust may only be realised for the purposes of paying creditors attributable to that Trust. The existence of multiple Trusts also means in my view, that it is not appropriate to make an order that is sometimes made in other cases, to expressly apply the statutory priorities for payments of debts. 24 It is appropriate to make related orders sought: (a) that the plaintiffs are justified and will be acting reasonably in proceeding on the basis that the Company carried on business in its capacity as trustee of the Trusts and that all assets of the Company are properly characterised as Trust property; and (b) authorising the liquidators to pay the costs of the application out of the assets of the Trusts. See Deppeler at [20], [23]. 25 In relation to the costs order, it follows from the principles above that, in circumstances where there are no non-trust assets or liabilities of the Company, the costs of the application are attributable to one or other of the Trusts. That is consistent with the approach in Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 110, which was approved in Jones by Allsop CJ at [105] (Farrell J agreeing at [201]). There is no need or basis upon which to differentiate the Trusts in terms of allocation of costs. So, the costs of this application are payable in equal amounts (a quarter) out of the trust assets of each of the Trusts. 26 Whether these changes to the orders sought will create any difficulty on the facts of this case, or as a matter of the application of relevant statutory provisions (e.g. s 556 of the Corporations Act; and see generally Jones at [102]-[104], [108]; and Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20; (2019) 268 CLR 524 at [97]), has not been the subject of evidence or submissions. If the Company's status as the trustee of multiple trusts does give rise to such questions, it may be necessary for the plaintiffs to come back to the Court for further directions. There will be general liberty to apply in case any of the amendments to the orders sought give rise to unforeseen difficulties. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson.