Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd

introduction 1 The first plaintiffs, Messrs Lawrence, Vouris and Albarran (Liquidators), are the liquidators of the second plaintiff, LXNDR Group Pty Ltd (in liquidation) (Company). The Liquidators seek orders under the Corporations Act 2001 (Cth) (Act) and/or the Trustee Act 1958 (Vic) (Trustee Act) for the purpose of facilitating their dealing with, and distribution of, assets of the Company, including to enable the winding up of the Company to be completed. 2 On 8 October 2021, I made the orders sought by the Liquidators. These are my reasons for doing so. 3 The application is made in circumstances where the Company is presently the bare trustee of the LXNDR Group Investments Trust (Trust). One consequence of the appointment of the Liquidators (in their then capacity as voluntary administrators of the Company) was that the Company ceased to be the trustee of the Trust. 4 The situation reflects what has been described as a "standard context where orders have been made for the purpose of selling trust assets and distributing the proceeds among trust creditors by conferring on the liquidators of a corporate trustee of a bare trust the power to either deal with assets of the trust or to have the liquidators appointed as receivers": Rathner (liquidator), in the matter of Garrows Close Pty Ltd (in liq) [2021] FCA 505 (Rathner). 5 The Liquidators seek relief in terms equivalent to the orders granted in cases such as Deppeler, in the matter of Old Port Road Pty Ltd (in liq) [2021] FCA 980 (Old Port Road), Re Asten Holdings Pty Ltd (in liq) [2020] FCA 1107 (Asten), Jess, in the matter of Westside Group Pty Ltd (in liq) [2020] FCA 1586 (Jess), Re Matthew Forbes Pty Ltd (in liq) [2018] VSC 331 (Matthew Forbes) and In the matter of St George's Development Company Pty Ltd (in liq) [2018] VSC 595 (St George's).

background 6 The background to the proceeding is set out in the affidavit of Mr Lawrence sworn on 29 September 2021 (First Lawrence Affidavit). The Liquidators were initially appointed to the Company (and a related entity) on 28 April 2021 as its voluntary administrators. 7 Trading as "Coffee Group Australia", the Company rented and serviced coffee machines and supplied related coffee and café products. The Liquidators' assessment is that the Company operated exclusively as trustee of the Trust and is not the beneficial owner of any property or assets in its own right. That assessment is based upon a review of corporate records (including financial statements, tax returns and bank statement) as well as a Discretionary Trust Deed dated 1 July 2015 (Trust Deed). 8 Pursuant to cl 36 of the Trust Deed, the trustee of the Trust is entitled to be indemnified out of the assets of the Trust "in respect of any liability incurred in connection with acting as trustee of the trust" (save for liability arising from fraud, gross negligence or breach of trust). 9 Upon appointment, the assets of the Trust comprised cash, debtors, motor vehicles, inventory (primarily coffee machines and coffee roasters), warehouse equipment and computer and office equipment. 10 The Trust Deed also provides, at cl 48, for the automatic termination of a trustee if: the trustee enters into compulsory or voluntary liquidation (except for the purposes of amalgamation or reconstruction), or has an administrator, receiver, official manager, or receiver and manager appointed to any part of its assets. 11 As noted above, the Liquidators were appointed to the Company as administrators on 28 April 2021. No replacement trustee has been appointed to the Trust. 12 As a consequence of the operation of cl 48 of the Trust Deed, the Company appears to have been a bare trustee of the Trust since 28 April 2021. As the authorities considered below serve to confirm, in the absence of a Court order, the ability of a bare trustee (or its liquidator) to deal with trust assets, including to satisfy claims of trust creditors, is limited. 13 In the period since 28 April 2021: (a) The Liquidators (in their capacity as administrators of the Company) decided to "trade on" the business conducted by the Trust, on the basis that ongoing trading of the business would preserve the value of the Trust's assets and maximise the return for creditors. (b) On 18 June 2021, the Company executed a Deed of Company Arrangement (DOCA) which provided for the day-to-day management and control of the Company to return to its then director. (c) On 20 July 2021, the DOCA was terminated and the Company was placed into liquidation. (d) Since 20 July 2021, the Liquidators have conducted the winding up of the Company, including by negotiating and entering into an asset sale agreement (Asset Sale Agreement), collecting debtors and selling a motor vehicle. 14 The sole potential beneficiary of the Trust identified by name is Michael Alexander. At the time of the Liquidators' appointment, Mr Alexander was the sole director and shareholder of the Company. Mr Alexander is now bankrupt. Both Mr Alexander and the trustee of his bankrupt estate (Mr Mark Roufeil) have been provided with notice of the relief sought by the Liquidators. Mr Alexander has informed the Liquidators' lawyers that he consents to the Liquidators' application. 15 The Liquidators have advised creditors of the Company that an application would be made to obtain orders enabling them to deal with assets of the Trust. No objection has been received from any creditor.

orders sought 16 This application raises legal issues about the powers of the Company and the Liquidators to deal with assets of the Trust. Given the popularity of trading trusts, the present scenario is a common one. An analogous situation arose in Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677 (Caterpillar Financial), in which Gordon J at [26] summarised the rights and powers of a bare trustee (that had been removed as trustee by virtue of an equivalent disqualification clause in a trust deed) and its liquidator. Amongst the principles stated by her Honour is that while a bare trustee may still hold trust assets, its "duties, powers and rights are limited to protecting the Trust assets". 17 As was observed recently in Old Port Road at [16]: applications of this kind are necessary when, by virtue of an "ipso facto" clause in the relevant deed of trust, a trustee company is automatically removed from office on the occurrence of a particular event, such as the appointment of a liquidator. 18 As was observed in Cremin, in the matter of Brimson Pty Ltd (in liq) [2019] FCA 1023 at [49]-[50]; 136 ACSR 649 (Cremin): 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…"

Orders 1-2 in the Originating Process: confirming ability of the Liquidators to deal with Trust assets 19 The Liquidators seek orders, in equivalent form to those made in cases such as Asten, Old Port Road and Jess, confirming that they are justified and acting reasonably in proceeding on the basis that: (a) the Company carried on business in its capacity as trustee of the Trust; and (b) all of the Company's assets are properly characterised as property held by the Company in its capacity as trustee of the Trust. 20 The relief sought can be granted pursuant to s 90-20 of the Insolvency Practice Schedule (Corporations) of the Act (Practice Schedule), which enables a liquidator to apply to the Court for orders under s 90-15 in relation to the external administration of a company: Rathner at [6]; Old Port Road at [14]. The Court's power to make orders under s 90-15 is broad. Having regard to the enquiries made by the Liquidators, and where there is no evidence that the Company traded or held assets other than in its capacity as trustee of the Trust, I am satisfied that it is appropriate to give a direction in the form sought at paragraph 1 of the Originating Process, which is: 1. An order pursuant to section 90-15 of Schedule 2 of the Corporations Act that the Liquidators are justified and acting reasonably in proceeding on the basis that: (a) LXNDR carried on business in its capacity as trustee of the LXNDR Group Investments Trust (Trust); and (b) all assets and undertakings of LXNDR are properly characterised as property held by LXNDR in its capacity as trustee of the Trust (Trust Property). 21 I am also satisfied that it is appropriate to authorise the Company to act as trustee of the Trust. Section 63(1) of the Trustee Act provides: 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. 22 In Caterpillar Financial, Gordon J set out at [30] the above provision and observed: As a result, the Federal Court has the power to authorise the Company as a bare trustee to deal with trust assets and apply trust assets to meet claims under s 556 of the Act in the course of the winding up of the Company. 23 No replacement trustee has been appointed to the Trust. I am satisfied that the order sought will enable the affairs of the Trust to be "finalized prospectively and efficiently without the need to return to Court": St George's at [28].

Order 3 in the Originating Process: confirming operation of winding up provisions of the Act 24 I am satisfied that a direction should be made (pursuant to s 90-15 of the Practice Schedule) that the Liquidators are justified and otherwise acting reasonably in proceeding on the basis that their possession, realisation and distribution of property of the Trust is governed by Parts 5.5 and 5.6 of the Act. 25 Such a direction accords with the conclusion of the Full Court in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40, 124 ACSR 586 (Jones & Matrix), where Allsop CJ at [102] and [108] made the following observations regarding the situation that arises in this case (namely, "where the company has only acted…as corporate trustee for one trust"): … 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.

Order 4 in the Originating Process: relieving Liquidator from potential liability for past conduct 26 The Liquidators (in their capacity as administrators) continued to trade the business of the Trust, a course that necessarily entailed dealing with property of the Trust. Mr Lawrence's evidence is that, in trading the business, he and his staff were "required to deal with the assets of the Trust, in particular the coffee machines, stock and funds which were utilized to pay creditors". The Liquidators' dealings with the assets of the Trust are described, by reference to the different phases of the Company's external administration since 28 April 2021, at [43]-[53] of the First Lawrence Affidavit. The conduct has relevantly entailed the realisation of assets (such as pre-appointment debtors and a motor vehicle) and the application of the proceeds to meet trading costs (such as wages and tax liabilities). 27 On 13 August 2021, the Liquidators entered into the Asset Sale Agreement, which included a "pre-condition" requiring the Liquidators to obtain the orders sought via this proceeding to deal with the subject assets. Mr Lawrence's evidence is that the Asset Sale Agreement was entered into prior to obtaining the orders sought via this proceeding on account of concerns that the Liquidators "would not get the same or better offer … at a later date". The purchase price payable under the Asset Sale Agreement is being held on trust pending the Liquidators obtaining the relief now sought from the Court. 28 In light of those dealings with trust property (at a point in time when, it is now apparent, the Company has ceased to hold office as trustee), the Liquidators seek an order pursuant to s 1318 of the Act and/or s 67 of the Trustee Act that the Liquidators be relieved from any potential liability arising from their dealings with trust property. The purpose of s 1318 is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are business persons who act in the environment involving risk in commercial decision-making: Matthew Forbes at [24]; see also: Re Mackie Group Pty Ltd (in liq) [2017] VSC 477 at [72]-[75]. Referring to s 67 of the Trustee Act, Gordon J stated in Caterpillar Financial that the section "empowers the Court to excuse a breach of trust by a trustee who has acted honestly and reasonably": Caterpillar Financial at [33]. 29 Where the Liquidators' conduct has been both honest and reasonable (and explicable by reference to priority being afforded to the interests of the Company's creditors), I am satisfied that it is appropriate to make an equivalent order to that made in cases such as Caterpillar Financial, Cremin, Matthew Forbes and Asten: see, for instance, Cremin at [55], Asten at [31].

Order 5 in the Originating Process: payment of the Liquidators' remuneration and expenses from trust property 30 The First Lawrence Affidavit contains details of the tasks undertaken and being performed by the Liquidators. An order is sought to confirm the Liquidators' entitlement to be indemnified out of the trust assets in respect of the costs and expenses that they have incurred. The sole activities of the Company were as trustee of the Trust. Save for its right of exoneration and the supporting lien, the Company has no assets of its own. In these circumstances, I am satisfied that it is appropriate that the Liquidators' remuneration and expenses be paid out of trust assets. As was stated in: In the matter of JML Property Services Pty Ltd (in liquidation) [2018] NSWSC 1069 at [10]: …the case law establishes that a liquidator of a trustee company is entitled to be paid his or her remuneration, whether for administering the trust assets or for general liquidation work, out of trust assets where that company has no assets other than its rights against the trust assets. 31 I am also satisfied that it is appropriate that the costs of this application be met from the property held on trust.

disposition 32 I will make the orders provided for in the Originating Process filed on 30 September 2021. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anderson.