Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd

MARKOVIC J: 1 By further amended originating process dated 10 April 2018 (Further Amended Originating Process) the plaintiffs sought directions pursuant to s 511 of the Corporations Act 2001 (Cth) (Act). The first plaintiff, Michael Jones, is the liquidator of the second plaintiff, Maz Platinum Pty Ltd (in liq) (Maz Platinum). Maz Platinum was the trustee of the Maz Trust. 2 On 10 April 2018 I made orders, among others, in relation to the treatment of the assets and liabilities of Maz Platinum in the conduct of its business and the treatment of the fund to be received under a settlement agreement between, among others, Mr Jones in his capacity as liquidator of Maz Platinum (Liquidator), Maz Platinum and AAAK Group Pty Ltd (AAAK) as trustee for the Maz Trust. 3 These are my reasons for making those orders.

Background 4 Maz Platinum was incorporated on 15 June 2009. On the same date, by deed of settlement between Azeem Khan and Maz Platinum, the Maz Trust was established and Maz Platinum was appointed as trustee (Trust Deed). 5 Clause 13 of the Trust Deed relevantly provides that the office of trustee shall be ipso facto determined and vacated if the trustee, being a company, enters into compulsory or voluntary liquidation. 6 On 16 September 2013, by order of the Supreme Court of New South Wales, the Liquidator was appointed liquidator of Maz Platinum. By reason of the operation of cl 13 of the Trust Deed, the appointment of the Liquidator had the effect of vacating the office of trustee of the Maz Trust. 7 On 16 September 2013 Ahmad Masri, the sole director, secretary and shareholder of AAAK purported to appoint AAAK as the new trustee of the Maz Trust. On 29 January 2014 Mr Masri and AAAK entered into a deed pursuant to which Mr Masri appointed AAAK as the new trustee of the Maz Trust. 8 The Liquidator has undertaken investigations into the affairs of Maz Platinum. Based on those investigations he concluded that the sole purpose of Maz Platinum was to act as trustee for the Maz Trust. More particularly: Maz Platinum is the registered proprietor of two commercial properties, one in Liverpool (Liverpool Property) and one in Bankstown (Bankstown Property) (collectively, Properties). Maz Platinum held the Properties as trustee of the Maz Trust; Maz Platinum collected rent for the Properties which was deposited into the sole bank account held in the name of Maz Platinum (Account); Maz Platinum entered into leases of the Properties in its role as trustee of the Maz Trust; Maz Platinum did not undertake any independent business operations or carry on any activity other than as trustee of the Maz Trust; and all creditors of Maz Platinum are creditors of Maz Trust. 9 The Liquidator's investigations also revealed that: the Bankstown Property was subject to a registered mortgage granted to Ricardo Pty Limited (Ricardo); Assaf Financial Services Pty Ltd (Assaf) and Quest Business Advisors Pty Ltd (Quest) claimed an equitable charge against the Properties; and Wahib Masri, Wahibe Masri and Ali El Masri (Masri Family) claimed an equitable interest in the Properties and an equitable mortgage over the Bankstown Property. 10 On 15 September 2016 the Masri Family appointed Andrew Wily as receiver of the Properties. Mr Wily retired on 21 April 2017 without taking any apparent steps. 11 On 10 August 2017 the Liquidator and Maz Platinum commenced this proceeding by filing an originating process (Originating Process) seeking orders, among others, that the Liquidator be appointed as receiver and manager of the assets of the Maz Trust, including the Properties. 12 On 20 September 2017 and 19 October 2017 respectively, AAAK and the Masri Family filed notices of appearance in the proceeding, indicating their intention to oppose the application. They subsequently filed an interlocutory process relevantly seeking: a declaration as to the amount payable from the assets of the Maz Trust to Maz Platinum pursuant to its right of indemnity; an order that the Liquidator transfer the legal title in the Properties to AAAK as trustee for the Maz Trust; a declaration that the Masri Family has a valid charge over the Properties; and a declaration as to the amount owed to the Masri Family. 13 On 21 December 2017 various resolutions were passed at a creditors' meeting, including a determination that the Liquidator's remuneration be approved. The meeting was adjourned to 22 December 2017 at which time the creditors approved the Liquidator and Maz Platinum entering into a deed of settlement and releasing AAAK and the Masri Family (Deed of Settlement) on the terms disclosed in the report to creditors dated 5 December 2017. The Deed of Settlement relevantly provides that: AAAK will pay Maz Platinum $165,000 (Settlement Fund); upon receipt of payment of the Settlement Fund and of other outstanding levies owed to the Owners Strata Plan No 58378 (Liverpool Property) and the Owners Strata Plan No 71808 (Bankstown Property), Maz Platinum will transfer the Properties to AAAK; AAAK indemnifies Maz Platinum and the Liquidator in respect of, among other things, any liability for land tax in relation to the Properties; and all parties to the Deed of Settlement will release and discharge each other from all claims. 14 Following entry into of the Deed of Settlement, Maz Platinum's only asset will be the Settlement Fund.

Creditors 15 In an affidavit filed 10 August 2017 the Liquidator identified the following creditors of Maz Platinum, all of which the Liquidator considered to be creditors of the Maz Trust: the Owners Strata Plan No 58378 (Liverpool Property); the Owners Strata Plan No 71808 (Bankstown Property); Office of Sate Revenue (OSR); Deputy Commissioner of Taxation (DCT); Assaf Financial; Quest; AAAK; Ricardo; and the Masri Family. 16 As at 6 April 2018 the Liquidator provided the following update in relation to the status of some of the creditors identified in the preceding paragraph: the Owners Strata Plan No 58378 (Liverpool Property) and the Owners Strata Plan No 71808 (Bankstown Property) were to be paid in accordance with the terms of the Deed of Settlement; the Masri Family's claim was to be released in accordance with the terms of the Deed of Settlement; and the loan from Ricardo had been repaid in full.

Notice to interested parties 17 The evidence before me established that: (1) The Originating Process and the Liquidator's affidavit sworn on 10 August 2017, among other things, were served on the each of the following: (a) the Owners Strata Plan No 71808 (Bankstown Property); (b) Ricardo; (c) AAAK; (d) Assaf; (e) the Masri Family; (f) OSR; (g) Quest; and (h) the Commissioner of Taxation; (2) the amended originating process filed on 4 April 2018 was served on each of the following: (a) AAAK; (b) the Masri Family; (c) the Owners Strata Plan No 71808 (Bankstown Property); (d) Quest; (e) Assaf; and (f) Australian Taxation Office. 18 No creditor or interested party who was given notice of the proceeding appeared at the hearing.

Legal Principles 19 The Originating Process was filed prior to the commencement day of the Insolvency Practice Schedule (Corporations) being Sch 2 to the Act, on 1 September 2017. Accordingly, the former provisions of the Act continue to apply and the Liquidator's application was brought under s 511 of the Act: see Parker v Dengi Pty Limited (in liq) [2018] FCA 444 (Dengi) at [21]-[23]. 20 Section 511 of the Act relevantly provides that a liquidator may apply to the Court to determine any question arising in the winding up of a company or to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court. 21 In Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486 (Walley) at [35] Gleeson J summarised the principles relating to applications under s 479(3) and s 511 of the Act as follows: 35 In Re Ansett Australia Ltd and Korda [2002] FCA 90; 115 FCR 409, concerning s 479(3) in which Goldberg J explained at [44] that: When liquidators and administrators seek directions from the Court in relation to any decision they have made, or propose to make, or in relation to any conduct they have undertaken, or propose to undertake, they are not seeking to determine rights and liabilities arising out of particular transactions, but are rather seeking protection against claims that they have acted unreasonably or inappropriately or in breach of their duty in making the decision or undertaking the conduct. They can obtain that protection if they make full and fair disclosure of all relevant facts and circumstances to the Court. In Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674, McLelland J said at 679-680: The historical antecedents of s 479(3) …, the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitrary form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction. ... Modern Australian authority confirms the view that s 479(3) 'does not enable the court to make binding orders in the nature of judgments' and that the function of a liquidator's application for directions 'is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation': [cases cited omitted]. 22 At [38] Gleeson J cited extensive case law supporting the proposition that, generally speaking, applications under s 511 are treated in the same manner as applications for directions in a Court ordered winding up under s 479(3) of the Act. At [39]-[40] her Honour said: 39 Under s 511(2), the power under s 511 was only to be exercised if the determination of the relevant question or the exercise of power sought "will be just and beneficial": Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ASCR 18 at [46]. The Court could exercise the discretion where the relief sought by the liquidator is "of advantage to the liquidation": Re Purchas at [34], citing Soluble Solution Hydroponics at 212 and S & D International at [7]. 40 In Soluble Solution Hydroponics at 213, Young J saw no reason why, in a proper case, the Court could not exercise its powers under s 511 on an ex parte application.

Treatment of the Assets and Liabilities of Maz Platinum 23 The first and second directions sought by the Plaintiffs in the Further Amended Originating Process were that the Liquidator was justified in treating: the assets and liabilities incurred by Maz Platinum in the conduct of its business as the assets and liabilities of the Maz Trust; and the Settlement Fund as being the proceeds of the exercise of Maz Platinum's right of exoneration from the assets of the Maz Trust. 24 As noted at [6] above, upon the appointment of the Liquidator to Maz Platinum, it ceased to be the trustee of the Maz Trust. From that time, Maz Platinum held the assets of the Maz Trust as bare trustee for the beneficiaries. Its duties, rights and powers were limited to the protection of those assets. As bare trustee, Maz Platinum also retained the rights of indemnity and exoneration over the assets of the Maz Trust and an equitable lien to secure those rights over the assets of the Maz Trust: see Dengi at [30] citing Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 at [13]-[26]. 25 Based on his investigations, the Liquidator was of the opinion that Maz Platinum did not conduct any trading activities other than in its capacity as trustee of the Maz Trust. That conclusion was supported by the evidence that was before me, namely the deposits into the Account related solely to Maz Platinum carrying on business as trustee of the Maz Trust; the only assets owned by Maz Platinum (prior to entering into the Deed of Settlement) were the Properties which the Liquidator believes, and I accept, were held by Maz Platinum as trustee of the Maz Trust; and Maz Platinum collected rent in respect of the Properties which was deposited into the Account and paid outgoings. No interested party contended that Maz Platinum acted in any other capacity. 26 It follows that prima facie the assets held by Maz Platinum are assets of the Maz Trust; Maz Platinum's liabilities were incurred by it in its capacity as trustee of the Maz Trust; and Maz Platinum is entitled to be indemnified out of trust assets in respect of those liabilities: see Dengi at [32] citing Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) (2016) 305 FLR 222; [2016] NSWSC 106 at [19]. 27 As a result of the Deed of Settlement: (1) Maz Platinum's assets will pass to AAAK, the new trustee: see Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550; [2008] NSWSC 1344 (Lemery) at [22]-[50] and Ronori Pty Ltd v ACN 101 071 998 Pty Ltd [2008] NSWSC 246 (Ronori); (2) the only remaining creditors of Maz Platinum will be the OSR, DCT, Assaf and Quest; and (3) Maz Platinum will receive the Settlement Fund from AAAK in consideration for, among other things, releasing Maz Platinum's right of exoneration over the assets of the Maz Trust. The available fund is thus produced from Maz Platinum's exercise of its right of exoneration. 28 The plaintiffs submitted that it follows that the Liquidator would be justified in treating the Settlement Fund as being the fund produced from the exercise of Maz Platinum's right of exoneration. I accept that submission. 29 It is well-established that, even after a trustee's removal as trustee of a trust and the appointment of a new trustee, the former trustee remains liable for liabilities properly incurred in the execution of the trust but has an indemnity and equitable lien over trust assets in respect of those liabilities: see Lemery at [14]-[22]. 30 Accordingly, Maz Platinum holds an equitable lien over the assets of the Maz Trust, including the Properties, pursuant to its right of exoneration to secure the payment of the debts properly incurred by Maz Platinum acting as trustee of the Maz Trust. In those circumstances, the Liquidator would be justified in treating the Settlement Fund as a fund produced in the exercise of Maz Platinum's right of exoneration. 31 For those reasons I made the first and second directions sought by the Liquidator.

the Liquidator's Remuneration 32 The third and fourth directions sought by the Liquidator were that he would be justified in: distributing the assets of the Maz Trust in accordance with the priorities set out in s 556(1) of the Act; and applying the Settlement Fund first in relation to the Liquidator's remuneration, costs and expenses as priority creditors under s 556(1)(dd) and (de) of the Act. 33 Section 556 of the Act sets out a priority regime for payments to be made in a winding up to certain unsecured creditors. Relevantly, it affords some priority to "any other expenses (except deferred expenses) properly incurred by a relevant authority" which relevantly includes a liquidator of a company and "deferred expenses" which are expenses incurred by a relevant authority. Deferred expenses include remuneration or fees for services payable to the relevant authority, or expenses incurred in respect of supply of services to the relevant authority by various specified parties, or expenses incurred by the relevant authority in respect of the supply to it of certain services: see s 556(1)(dd), (de) and subs (2). 34 The Liquidator submitted that his remuneration and expenses can be paid out of the Settlement Fund, being the "property of the company", ahead of the claims of any unsecured creditors: because they were approved by creditors on 21 December 2017 under s 60-10(1)(a) of Sch 2 to the Act which permits a determination to be made by resolution of creditors specifying remuneration that an external administrator of a company is entitled to receive for necessary work properly performed in the external administration. The evidence establishes that at the creditors' meeting held on 21 December 2017, resolutions were passed approving the Liquidator's remuneration for work done totalling $120,000 and his internal disbursements necessarily incurred in the sum of $2,500; and as this case involves a former trustee company which acted solely as the trustee of a trust, s 556 of the Act directs the distribution of property without further consideration. 35 The Liquidator sought directions because of what he described as the uncertainty resulting from the decisions in Commonwealth v Byrnes (2018) 354 ALR 789; [2018] VSCA 41 (Re Amerind) and Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Pty Ltd (in liq) (Re Killarnee) (2018) 354 ALR 436; [2018] FCAFC 40. He submitted that the following propositions can be distilled from those authorities: the right of indemnity by way of exoneration is "property of the company" for the purposes of the Act; the provisions of the Act, in particular, s 555 and s 556 must therefore apply; the distinction between Re Enhill Pty Ltd [1983] 1 VR 561 (Re Enhill) and Re Suco Gold Pty Ltd (in liq) (1983) 7 ACLR 873; (1983) 33 SASR 99 (Re Suco Gold) does not arise when the insolvent trustee company has only ever acted as trustee of the trust; and in the above limited case, the "property of the company" is to be applied in respect of priority creditor claims as directed by s 556 of the Act. 36 In light of the decisions in Re Amerind and Re Killarnee I was satisfied that the third and fourth directions sought by the Liquidator should be made. Relevantly, Maz Platinum's sole capacity was to act as trustee of the Maz Trust and there were no other priority creditors ranking ahead of the Liquidator. 37 In Re Amerind the Full Court of the Victorian Court of Appeal found at [124] that: … the trustee's right of indemnity, both in relation to recoupment and exoneration, constitutes a proprietary interest in the trust assets which is, in the corporate insolvency context, 'property of the company'. … 38 The Court at [260] discussed Re Enhill and Re Suco Gold, noting that in both cases the trustee's right of indemnity, not excluding the right of exoneration, was characterised as "property of the company". The Court noted that the fundamental disagreement between the two cases was whether the proceeds of the right of exoneration is divisible on insolvency only among trust creditors, as held by Re Suco Gold, or among creditors of the trustee in liquidation generally, as held in Re Enhill. 39 At [276] and [281] of Re Amerind the Court noted that Re Suco Gold and Re Enhill were correct in their findings that once it is accepted that the right of indemnity is property of the insolvent, the insolvency legislation applies which is relevantly, s 555 and s 556 of the Act. 40 In Re Amerind the Court did not need to decide the question of whether distribution, if otherwise governed by the Act, is confined to trust creditors as opposed to creditors generally because all of the company's creditors were trust creditors: see [282]. 41 In Re Killarnee Allsop CJ at [79] and Farrell J at [210]-[211] held that the right of exoneration and the lien in support is "property" of the company for the purposes of s 9 of the Act. On the other hand, Siopis J at [191] considered that on a proper construction of the Act the words "property of the company" in s 501 and s 555 are not addressed to a trustee company's right of indemnity. 42 At [102]-[104] Allsop CJ noted that each provision of s 556 of the Act has its own underlying legal policy and its own terminology but where, as is the case here, the company in question has only ever acted as corporate trustee for one trust, the property of the company that includes its right of exoneration and the funds obtained from its exercise is to be distributed in accordance with s 501 and s 556. His Honour noted that complications may arise where the company has administered more than one trust or has conducted affairs in its own right. In those circumstances, his Honour considered that each paragraph of s 556 of the Act should be considered individually for its meaning. 43 In relation to liquidator's costs, Allsop CJ at [105] cited with approval the statement in Re Suco Gold at 110 where King CJ concluded that they were payable out of the trustee's right of indemnity because, in effect, as the company's obligations as trustee to pay debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it is reasonable to regard the expenses incurred by the liquidator in paying out those debts as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity. Further, the liquidator is entitled to have recourse to the property of each trust for the purpose of meeting the costs and expenses of the winding up, the petitioner's expenses and the liquidator's remuneration insofar as they were incurred in relation to each trust. At [106]-[108] Allsop CJ said that: [106] If I may respectfully say so, there is not only practical wisdom in this approach, but also a sufficient grounding in the terms of the statute. Whilst one cannot take too much from the legal context of the jurisprudence (especially given its lively currency), by the time of the passing of the Corporations Act in 2001 Re Suco Gold had been decided for over 17 years. The position was broadly that Re Suco Gold was both well-regarded and followed (though by no means universally) including in relation to priorities and liquidator's costs. As to priorities and liquidator's costs: Re ADM Franchise Pty Ltd (1983) 7 ACLR 987 (McLelland J); Re Indopal Pty Ltd (1987) 12 ACLR 54 (McLelland J); Re GB Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674; 5 ACSR 673 (McLelland J); Sjoquist v Rock Eisteddfod Productions Pty Ltd (1996) 19 ACSR 339 (McLelland J); and 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144 (Finkelstein J). It should be noted, however, that some leading texts and commentators do not favour the order of priority solution in Re Suco Gold, though the rejection of Re Enhill is almost universal, except in Victoria: see Meagher RP and Gummow WMC, Jacobs' Law of Trusts in Australia (5th ed, Butterworths, 1986) at 594-5; Heydon JD and Leeming MJ, Jacobs' Law of Trusts in Australia (8th ed) at 522-3; McPherson BH, "The Insolvent Trading Trust" in Finn PD (ed), Essays in Equity (Lawbook Co, 1985) at 153-4. [107] I do not see equitable principle or any of the provisions of the Corporations Act as preventing the approach identified by King CJ, based as it is upon the limited nature of the proprietary interest of the insolvent trustee - to exonerate itself for a purpose out of trust property. Indeed, I see the legislation being given full effect, but harmoniously with fundamental equitable principle that otherwise governs and dictates the fair and proper administration of trusts, and into the framework and operation of which the statute was placed. [108] Turning, for instance, to s 556(1)(e), (f), (g) and (h), in the present factual and historical circumstances of the Company there is no reason why the words of the provision should not be applied. These provisions reflect, as do the balance of s 556, important public policy considerations of the legislature. The carrying on of business by trusts has been well known for many years before 2001. The Report of the Australian Law Reform Commission (No 45) on General Insolvency recommended express clarification of the statute that was broadly conformable with the approach of King CJ in Re Suco Gold. (See Report 45 Vol 1 at [265] and Ch 6, generally, and Vol 2 Appendix A Section D, being draft legislation on Corporate Trading Trusts.) The Parliament has not seen fit to make any particular clarification of the position of insolvent corporations that acted as trustees of trading trusts. That circumstance does not, however, reflect a Parliamentary rejection of Re Suco Gold; nor does it undermine the application of the words of the statute to property of the company, albeit of a particular character, to the extent conformable with principle. Where the corporation has only ever acted as a 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 the order of priorities should not be followed. Complexities may arise in circumstances of multiple trusts or of trusts and activity on the corporation's own account. Considerations of, or akin to, marshalling or hotchpot may be relevant as to the payment of debts dealt with in the statutory order. But these complexities will be resolved by application of principle and the text of the legislation, in a manner reflected by the approach of King CJ in Re Suco Gold. 44 Justice Farrell accepted that the decision in Re Amerind was binding (as the Full Court of this Court was not exercising appellate jurisdiction) and that it generally supported the conclusions of Allsop CJ at [101]-[102]. Her Honour noted at [200]-[201] that while she would not have taken the same path, she would have concluded that in this case, a court of equity would authorise the distribution of trust assets in paying the reasonable remuneration and costs of the liquidator in the priority provided by s 556(1) of the Act and employee related expenses in the order set out in s 556(1)(e), (f), (g) and (h) of the Act. At [222] her Honour also relevantly noted that where a company in liquidation had been formed to operate as a trustee of a trading trust to conduct a business which equally plausibly could have been conducted by the company in its own right, it was difficult to see why the same order of priority as prescribed in the priority regime under the Act should not be accorded to liquidators and employees under equitable principles.

Conclusion 45 For those reasons, I made the directions sought by the plaintiffs. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.