Combis, in the matter of Reehal Holdings Pty Ltd (in liq) (Trustee) v Reehal Holdings Pty Ltd

DERRINGTON J: 1 By an application to this Court filed on 1 June 2017, the liquidators of Reehal Holdings Pty Ltd (in liquidation) seek various orders in relation to the administration of the winding up. The liquidators are Mr Nick Combis and Ms Ashley Leslie, each of whom are well-known liquidators. 2 By the Originating Application, the orders sought are:

1. Pursuant to section 57 of the Federal Court of Australia Act 1976 (Cth), the Applicants be appointed as receivers, without security, over the property, assets and undertaking (Assets) of the Reehal Property Trust (Trust) constituted by the trust deed dated 27 November 2007 referred to in the affidavit of Nick Combis, sworn 30 May 2017 and filed in this proceeding (Affidavit);
2. The Applicants be appointed with the powers provided by s 420 of the Corporations Act 2001 (Cth) (Act) as if the reference therein to "the corporation" were to the Trust together with the powers that a liquidator has in respect of property of a company (in its role as legal owner and trustee) pursuant to s 477(2) of the Act.
3. The need for the receivers to file a guarantee under r 14.21 and r 14.22 of the Federal Court Rules (FCR) be dispensed with.
4. The costs, expenses and remuneration incurred by the Applicant in acting as: (a) liquidator of Reehal Holdings Pty Ltd (In Liquidation) (Company); and, (b) receiver and manager of the Trust, including the costs of this application, be paid from the Assets and if they be insufficient, from any assets of the Company.
5. Pursuant to r 14.24 FCR, the Applicants, in their capacities as receivers of the Trust, be entitled to be paid remuneration for their services, from time to time, calculated in accordance with the time actually spent and the rates set out in the Affidavit.
6. The parties and any person with a sufficient interest under the Trust be granted liberty to apply on 2 days' notice. 3 The essential matters in the application relate to the appointment of Mr Combis and Ms Leslie as receivers of the property held on trust by Reehal Holdings Pty Ltd, as well as the manner in which the costs, expenses and remuneration which have and will be incurred by the applicants might be paid. 4 The matter first came before this Court on 21 June 2017, but was, at the applicants' request, adjourned to today so that further material might be put before the court. Subsequent to that, a further affidavit has been filed which provides some additional evidence in relation to the manner in which the costs and remuneration of the liquidators has been charged. That is, the affidavit of Ms Ashley Leslie filed 27 June 2017. Helpfully, that affidavit also sets out in greater detail than existed in the initial affidavit in support of the application, the various work which has been or is being conducted. 5 The application is unusual in a number of respects. At the first hearing of this matter on 21 June, the Court was informed from the Bar Table that the orders sought were necessary to assist the liquidators to pursue the winding-up for the benefit of the unsecured creditors. Upon pressing Mr Symes, a solicitor who appeared for the liquidators, as to the state of the company's accounts, it became apparent that the unsecured creditors' claims totalled about $20,000. It also became apparent that it was entirely improbable that those unsecured creditors would receive anything from the winding-up and that, in reality, the secured creditors will receive the totality of any funds realised. That is particularly so if the costs, expenses and remuneration of the liquidator are taken from any of those sums, although whether or not that will occur is a matter as between the liquidator and the secured creditors. 6 After a brief adjournment on the first day this matter was heard, I was told that liquidators had been appointed by one of the secured creditors, being Ms Carolyn Montemayor. It appears that Ms Montemayor is a private lender to Reehal Holdings Pty Ltd, and that she has mortgage security over three parcels of land which Reehal Holdings Pty Ltd holds as trustee for the Reehal Property Trust. The material also shows that Suncorp-Metway holds a first registered mortgage over that land. Whilst the evidence on the affidavit material in relation to the security position is somewhat scant, I have been assisted on today's hearing by Mr Fitzgerald, who has been able to clarify a number of matters relating to that issue. 7 With respect to the application today, although the material shows that the liquidators were appointed by Ms Montemayor or on her application, her attitude to the present application is unknown. That is unfortunate; but it does not inhibit the making of orders today. Ms Montemayor has been informed of this application, and she has been given adequate time to respond if she so desired. 8 The brief facts of the matter are not greatly contentious. Reehal Holdings Pty Ltd, to which I will refer as "the Company", was at all material times the trustee of two trusts. One was the Balwinder Family Trust. The second was the Reehal Property Trust. It is apparent that the Company had no employees of its own and it did not trade in its own right. It, apparently, only traded in its right as a trustee of the Reehal Property Trust. From what can be discerned from the material before the court, the Balwinder Family Trust had little or no activity or assets. 9 The Company was ordered to be wound up on 9 November 2016. At the time of its winding up, its asset position in relation to the three parcels of land was unclear. However, after some considerable work by the liquidators, it has been ascertained that three parcels of land are, in fact, owned by the Company as trustee of the Reehal Property Trust. Those parcels of land are, I am told, three commercial units at Ashmore on the Gold Coast. It appears that the Company has no other assets, either of its own or as trustee. 10 In his affidavit Mr Combis deposes that the three parcels of land were, on his appointment, irregularly registered in that they may have been taken as having been held by the Company as trustee of the Balwinder Family Trust rather than as trustee of the Reehal Property Trust. He has undertaken not insubstantial work in ensuring that the Register of Titles has been rectified to ensure that the title to the property is correctly registered. He identified at paragraph 30 of his affidavit, that the irregularity in the registration of the title occurred because the trust deed for the Balwinder Family Trust was lodged with the Land Titles Office with respect to the registration of the land in the Company's name rather than that of the Reehal Property Trust. Nevertheless, it appears that that has now been corrected. 11 As I have mentioned, each parcel of land is subject to two mortgages, one to Suncorp-Metway, a financial institution, and secondly to the second mortgagee, Ms Montemayor. On the material before the Court, it is most unlikely that the proceeds of the sale of the land will satisfy the indebtedness of the secured creditors. On the first occasion on which this matter was before the Court, it was suggested that the value of the land was $240,000 at its highest, and that is supported by some kerbside valuations. On the other hand, the total amount of the secured creditors' claims exceed $371,000. It follows that it is most unlikely that the unsecured creditors will receive anything from the winding up. Nevertheless, Ms Montemayor was entitled, as a creditor, to make the application for winding up, and, no doubt, from what I have been told as to the state of the Company's indebtedness, her claims will be unsecured to a not insignificant degree. 12 In these circumstances, the first order which the liquidator seeks is that they be appointed as receivers of the property of Reehal Holdings so as to put them into a position whereby they are able to efficiently transfer title of the land so as to be able to sell it at the best possible price. It was submitted in the initial written submissions that this was necessary because the Company ceased to be the trustee of the Reehal Property Trust on the making of the winding up order. There is some merit in that argument. Clause 14.4 of the Reehal Property Trust trust deed provides: 14.4 Office vacated The office of a Trustee shall ipso facto be determined and vacated if such Trustee, being an individual, shall be found to be of unsound mind or whose personal estate is liable to be dealt with in any way under the law relating to mental health or if he shall become bankrupt or make any arrangement or composition with his creditors generally or if such Trustee being a company shall have a receiver appointed or enter into official management or have a petition for its winding up presented to a Court having appropriate jurisdiction or passes a resolution of its members for its winding up or enters into a scheme or arrangement (not being merely for the purpose of amalgamation or reconstruction). 13 Clause 14.5 of the Reehal Property Trust trust deed provides, as follows: 14.5 Simultaneous Notwithstanding anything herein contained in this Trust Deed, if the removal of a Trustee would leave the Trust without a Trustee, then that removal shall only be effective and operate simultaneously with the appointment of a new Trustee. 14 The question which arises in relation to these two clauses is whether the company ceased to be trustee on the making of the winding up order or continued until another trustee was appointed in its stead? Mr Combis, at paragraph 15 of his affidavit, seems to suggest that the company remained the trustee. He deposes that: My investigations reveal that at the date of my appointment, the company remained appointed as trustee of the trust. My investigations have not identified any other party having been appointed at any time as trustee of the trust. No party has identified itself as being a replacement trustee. 15 The exact position of the Company as trustee is uncertain. On one view, it might be thought that the Company remained not only as trustee, but in possession of all trust assets until the new trustee was appointed. Even if the company ceased to be trustee, it nevertheless retained possession of the trust assets and, given that its liabilities were incurred in the course of the administration of the trust, it had a lien in respect of those liabilities over all of the trust assets. 16 How the Company might deal with the assets, however, is another vexed question. On the one hand, clause 14.5 of the Deed may have operated to prevent the Company's removal as trustee. It would seem that this clause seeks to prevent the trust from being left without a trustee to the extent possible. If that is so, the Company could then deal with the assets in the usual way. On the other hand, it may have been that the Company was left possessed of the assets of the trust as a mere "bare trustee" in which case its ability to use the assets would be more limited. 17 Whatever the case, substantial uncertainty remains and it is appropriate that the liquidators be given some clarity as to their position so that they might carry forward the administration without any further delay. 18 The issue of the rights of an insolvent trustee to deal with trust assets has arisen in a number of authorities and recently in Aced Kang Investments Pty Ltd [2017] FCA 476, a decision of Moshinsky J in this Court. There his Honour said at [12]-[13]: In circumstances where a company that is the trustee of a trust goes into liquidation, and thereupon ceases to be the trustee of the trust, does the liquidator's power of sale of the property of the company in s 477(2)(c) of the Corporations Act 2001 (Cth) extend to trust assets that remain registered in the company's name? The answer is uncertain on the present state of the authorities. There is no issue that, in such cases, the company holds the real property registered in its name as a bare trustee. Nor is there any issue that the company, as a former trustee, has a right of indemnity from the trust assets, secured by an equitable charge over those assets. However, a difference of opinion has emerged as to whether the power of sale of the property of the company in s 477(2)(c) extends to trust assets in such circumstances (at [12]): see Apostolou (as trustee of the Vasiliou Family Trust) v VA Corporation of Australia Pty Ltd (2010) 77 ACSR 84 at [48]-[50] per Finkelstein J; Re South West Kitchens (WA) Pty Ltd (2014) 224 FCR 408 at [30]-[31] per McKerracher J; Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17; 103 ACSR 401 at [28]-[30] per Brereton J. Given the state of the authorities, in a number of cases in the category described above liquidators have applied for appointment as receiver and manager of the trust property: see, eg, Kite v Mooney, in the matter of Mooney's Contractors Pty Ltd (in liq) [2016] FCA 886. 19 The issue has also arisen and been dealt with in a similar way in Reborn Enterprises Pty Ltd [2016] FCA 1197 [6]-[10] and by Austin J in Bastion v Gideon Investments Pty Ltd (in liquidation) [2000] 35 ACSR 466. It was also dealt with by Brereton J in Stansfield DIY Wealth (in liquidation) (2014) 291 FLR 17 [10] where his Honour said: Where the trustee is removed and replaced, the outgoing trustee retains a right of indemnity from the trust assets, secured by an equitable charge over them, for its liabilities incurred by reason of acting as trustee [Re Exhall Coal Co Ltd (1866) 55 ER 970; Octavo Investments, 370; Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226, 246; Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477, [20]; Lemery Holdings [21]; Apostolou, [49]; Caterpillar Financial Australia, [18]; Finplas, [23(e)]]. However, the equitable lien securing the trustee's right of indemnity and exoneration does not of itself give the former trustee a power of sale; rather, it is a security which is enforceable by the trustee only by judicial sale or appointment of a receiver with a power of sale: Hewett v Court (1983) 149 CLR 639; 7 ACLR 909, 663, 924; Apostolou, [39]; Finplas, [23(g)]. If the company has ceased, or ceases, to be trustee of the trust, then the powers of sale given to the trustee under the trust deed (or otherwise given, for example by statute, to a trustee) are no longer available to it. His Honour subsequently concluding at [31]: That does not leave the liquidator of a corporate trustee which is removed and replaced without a remedy. One established course of action available to a liquidator in those circumstances is to seek appointment as a receiver of the trust assets, by way of enforcement of the lien over those assets of the company as former trustee for liabilities incurred by it in that capacity… 20 In this case, the entitlement of the liquidators to transfer title is uncertain and, for that reason, it is appropriate to grant the relief to appoint them as receivers over the property of the Reehal Property Trust. That is not to say that the liquidator's rights as receivers will take priority to those of the secured creditors, but it merely affords them the power to deal with the assets subject, of course, to the rights of those secured creditors. In that respect, the liquidators also seek orders which will have the effect of providing them with sufficient powers to act for the purposes of realising the property. They ask that orders be made providing them with the powers that a liquidator would have under s 420 of the Corporations Act, and it is appropriate to make the orders as sought. 21 They also seek an order that a filing of a guarantee be dispensed with and in the circumstances of this case, that would seem to be appropriate. That said, very little attention was given as to the reasons as to why this order was necessary in the circumstances of this case. 22 The next major question relates to the costs, expenses and remunerations incurred by the applicant as liquidators of the Company and as receiver and manager of the trust. The liquidators seek relief to the effect that the cost, expenses and remuneration be paid from the assets of the trust and if they be insufficient, from any assets of the company. 23 Mr Fitzgerald today correctly identified that the orders sought should relate to the entitlement of the liquidators to their costs, expenses and remuneration from the trustee's right of exoneration out of the trust assets, rather than from the trust assets themselves. He accepted that it is well established that the trust assets do not fall under the control of the liquidator, other than by reason of an insolvent company's right to exoneration or indemnity out of those assets. The manner in which the costs, expenses and remuneration of the liquidator of a corporate trustee ought to be paid out of trust assets is a vexed one and there are numerous conflicting decisions as to the appropriate method by which orders can be made. It is unfortunate that in neither their written nor their oral submissions did the applicants seek to assist the Court with any proper analysis of these authorities. 24 Certainly, some of the authorities which I have ascertained have followed Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99, which adopted a broad and pragmatic approach to the effect that the costs, expenses and remuneration of a liquidator of a corporate trustee incurred in winding up of the affairs of a trustee can be recovered from the right of exoneration which a trustee has as against trust assets, so long as the costs, expenses and remuneration relate to the performance of the trust duties. Those cases include Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677 [17]-[18]; Garra Water Investments Pty Ltd (in liquidation) v Ourback Yard Nursery Pty Ltd [2012] SASC 44 [31], [38] and [43] and Woodgate, in the matter of Bell Hire Services Pty Ltd (in liquidation) [2016] FCA 1583 [33]- [34], just to name a few. 25 The difficulty with the approach adopted by those authorities is that the court is effectively "regarding", to use the expression of King CJ in Suco Gold, the costs, expenses and remuneration as debts of the trust owed to the trustee and thereby, "trust debts" which were incurred in carrying out the trust. If that is correct, it must necessary follow that the liquidator's claims would rank equally with other trust creditors and that would necessarily have the consequence that the liquidator would participate pari passu with those creditors. That is, in fact, not how the orders of various courts have applied and indeed, it would appear that in a number of those cases, including Suco Gold, the liquidators have been afforded priority over other trust creditors in relation to their costs, expenses and remuneration. 26 Mr Fitzgerald briefly referred to the decision of Robson J in Re Amerind Pty Ltd (in liquidation) [2017] VSC 127, a decision which is currently under appeal to the Court of Appeal in Victoria. As I understood the submission it was suggested that Re Amerind has the effect that the liquidator must rank pari passu for costs, expenses and remuneration. I cannot ascertain that from Robson J's decision even if he did determine that the trust assets should be distributed pari passu among the trust creditors (see [372]). 27 It is apparent that the diverse state of the authorities has the consequence that clear principles concerning the ability of a liquidator to apply trust assets or a trustee's right of exoneration to meet the claims of liquidators of the trustee company have not yet crystallised. Nor does it seem that there is any authority which is necessarily binding on this Court, although that may be open to debate. 28 Nevertheless, the position appears to be that as between the rights of a liquidator of a trustee company and the claims of trust creditors, the trust creditors will seek to retain an advantage by reason of their rights of subrogation to the equitable right of indemnity held by a trustee. In order to prosecute that claim and obtain that advantage, the trust creditors are obliged to rely upon equity for assistance as, outside of equity, their claims lie only against the trustee in its personal capacity. That being so, in seeking equity the trust creditors would be required to "do equity". For the purposes of any liquidation of a corporate trustee, it is necessary for liquidators to ascertain the nature and scope of the liabilities of the trustee company, to ascertain the assets of the trustee company from which the right of indemnity or exoneration might be utilised and, in doing that, undertake substantial administration of the trust. That work results in a pool of funds within the trust which are capable of being used via the right of exoneration to meet the claims of trust creditors. The generally parallel principles in Re Universal Distributing Co (in liquidation) (1933) 48 CLR 171, 174 - 175 and in Re Berkeley Applegate Investment Consultants Ltd (in liquidation) [1989] Ch 32, provide a justification for permitting the liquidator of the insolvent trustee to recover its costs, expenses and remuneration incurred in the administration of the insolvent trustee company as identified in priority to the claims of the trust creditors. Regardless of how the matter is considered, the expense of having the trust creditors identified, the trust assets identified and realised and a fund of money created for distribution would necessarily fall upon the trust creditors if they pursued recovery action themselves. Without that work the trust creditors would not ever be paid. That being so, it is appropriate that the costs, expenses and remuneration incurred by the applicants in acting as a liquidator of Reehal Holdings Pty Ltd be paid out of the trustee's right of indemnity from the trust assets to the extent that they relate to the administration of the trust and, if that be insufficient, from any assets of the company. 29 It should be added that, as this is a relatively small liquidation of a company which only acted as the trustee of a small business undertaking, the time, effort and cost of differentiating between the tasks for which costs, expenses and remuneration can be met out of the right of indemnity and those which cannot, if any, would render that task not only inutile but the administration more expensive than it already is. In the present circumstances, it is possible to conclude that all the costs of the liquidation fall within the scope of the Universal Distributing principles or the Berkeley Applegate principles. It is difficult to think that any of the work done would not have fallen within work described as being for the administration of the trust. 30 The liquidators have produced evidence to the Court of the value of the work which they have undertaken. In paragraph 42 of the affidavit of Mr Combis it is said that between the dates of 9 November 2016 and 15 May 2017 his staff and he had incurred professional fees in the sum of $62,254.90 exclusive of GST and disbursements in the sum of $830.46 exclusive of GST. To the extent that the evidence can be understood, the notes used by the Applicants appear to be reasonable. 31 Mr Combis deposes, that given the company's role as trustee of the Reehal Property Trust and that all of the creditors relate to the trust, the fees were incurred almost solely and exclusively in relation to the company's trusteeship of the trusts. He annexes some documents which support his assertion as to the work done albeit the form of the document produced is difficult to read or to understand. 32 Since the decision of Sanderson as liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr (2017) NSWCA 38 it is incumbent upon liquidators who seek approval for their fees, costs and remuneration to identify why the amounts sought are reasonable in the circumstances of the liquidation. That decision of the New South Wales Court of Appeal (which was constituted by a Bench of five) is binding on this court given that it dealt with the provisions of the Corporations Act (see Farrah Constructions Pty Ltd v Say-dee Pty Ltd (2007) 230 CLR 89). 33 Nevertheless, and although this is a relatively small liquidation, it does appear that not an insignificant amount of work was required to be done in relation to discovering the assets in respect of which the company was a trustee, identifying which trusts the assets were held on and then, finally, causing those assets to be correctly registered in the name of the company. In these circumstances, it can be seen that the amount claimed is not unreasonable even if it be the case that the evidence is somewhat slight. 34 The liquidators have also sought approval in relation to a further amount of $30,000 to be incurred in advancing the administration of the liquidation. Again, because this is a relatively small amount, it would seem to be not inappropriate. The amount relates to the costs relating to the utilisation of the rights of exoneration held by the company which will occur by the selling of the pieces of real property and applying the proceeds to the payment of the trust debts. That necessitates attending to various agents involved in the selling process and, indeed, to the ultimate settlement. No doubt that will include negotiations with secured creditors in relation to their rights. 35 Given that this is a relatively small liquidation, the court ought to be astute not to impose unnecessary costs on liquidators by necessitating their constant return to the Court for approval of their costs, expenses and remuneration. In the circumstances I am prepared to make orders relating to the costs, expenses and remuneration incurred by the applicants as set out in the affidavit of Mr Combis. For present purposes I expect that the amount allowed should cover all of their costs, expenses and remuneration and that no additional costs will be incurred by reason of them acting as receivers. Whatever future action is necessary, it will be undertaken by Mr Combis and Ms Leslie in their dual capacities as liquidators and receivers. The orders appointing the liquidators as receivers are facultative only and made to enable them to more efficiently undertake their tasks. It will not require them to do any additional work which they could not otherwise have done. In the result, I am prepared to make orders generally in the form of those sought in the originating application and I would ask that the solicitors for the liquidators deliver short minutes in accordance with these reasons for approval by the Court. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington.