CORPORATIONS - winding up in insolvency - liquidator sold assets of company - liquidator subsequently discovered company was trustee of discretionary trust - office of trustee vacated on filing of winding up application - powers of bare trustee - claim liquidator acted honestly and reasonably - whether liquidator ought fairly be excused for any breaches, failures or omissions - whether Court should make orders sought by liquidator - application not opposed - consideration of Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd - [2012] FCA 803 - FCA 2012 case summary

Federal Court of Australia|2012-07-31|Before: Ms AJ, Collier J

Pursuant to s 1318 of the Corporations Act 2001 (Cth) ("Corporations Act"), and further or alternatively, s 76 of the Trusts Act 1973 (Qld) ("Trusts Act"), the Court declares that William John Fletcher ("the liquidator") in his capacity as liquidator acted honestly, and ought fairly be excused for any breaches, failures or omissions relating to the administration of Starrit Pty Ltd ACN 113 093 977.
Pursuant to s 479(3) of the Corporations Act, sales by the Company under the control of the liquidator of assets held on trust for the Conquest Family Trust ("the Trust") be deemed to be sales within the power of the Company as Trustee of the Trust.
Pursuant to s 479(3) of the Corporations Act, the proceeds of sale of any Trust assets and realisation of all other assets held on Trust be dealt with by the liquidator as assets in the winding up of the Company and accounted for accordingly.
Pursuant to s 479(3) of the Corporations Act, the distribution of monies held on trust for the Conquest Family Trust ("the Trust") to priority unsecured creditors and secured creditors be deemed to be valid distributions by the liquidator in the winding up of the Company.
Pursuant to s 479(3) of the Corporations Act, the costs and expenses incurred by the Company and the liquidator in realising any Trust assets and otherwise dealing with the Trust be costs in the winding up.
Pursuant to s 479(3) of the Corporations Act, the costs of this proceeding be costs in the winding up. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF STARRIT PTY LTD (IN LIQUIDATION) ACN 113 093 977 BETWEEN: STARRIT PTY LTD (IN LIQUIDATION) (ACN 113 093 977)

WILLIAM JOHN FLETCHER (IN HIS CAPACITY AS LIQUIDATOR OF STARRIT PTY LTD (IN LIQUIDATION) (ACN 113 093 977)

JUDGE: COLLIER J DATE: 31 JULY 2012 PLACE: BRISBANE

REASONS FOR JUDGMENT 1 This proceeding arises from circumstances where Mr William Fletcher, the liquidator of Starrit Pty Ltd ("the company"), took steps in relation to the winding up of the company, including sale of assets, prior to discovering that the company in fact held all assets on trust for the Conquest Family Trust ("the Trust"). The liquidator therefore seeks a declaration that he has acted honestly and ought fairly be excused for any breaches, failures or omissions relating to the administration of Starrit Pty Ltd. 2 By an originating application filed 28 May 2012, the applicants (being the company and the liquidator) seek the following relief: 1. Pursuant to section 1318 of the Corporations Act 2001 (Cth) ("Corporations Act"), and further or alternatively, section 76 of the Trusts Act 1973 (Qld) ("Trusts Act"), the Court declares that William John Fletcher ("the Liquidator") in his capacity as liquidator acted honestly, and ought fairly to be excused for any breaches, failures or omissions relating to the administration of Starrit Pty Ltd ACN 113 093 977. 2. Pursuant to section 479(3) of the Corporations Act, the sale by the Company under the control of the Liquidator of assets held on trust for the Conquest Family Trust ("the Trust"), be deemed to be sales within the power of the Company as Trustee of the Trust. 3. Pursuant to section 479(3) of the Corporations Act, the proceeds of sale of any Trust assets and realisation of all other assets held on Trust be dealt with by the Liquidator as assets in the winding up of the Company and accounted for accordingly. 4. Pursuant to section 479(3) of the Corporations Act, the distribution of monies held on trust for the Conquest Family Trust ("the Trust") to priority unsecured creditors and secured creditors, be deemed to be valid distributions by the Liquidator in the winding up of the Company. 5. Pursuant to section 479(3) of the Corporations Act, the costs and expenses incurred by the Company and the Liquidator in realising any Trust assets and otherwise dealing with any Trust be costs in the winding up. 6. Pursuant to section 479(3) of the Corporations Act, the costs of this proceeding be costs in the winding up. 3 The solicitor for the applicants appeared at a directions hearing before me on 17 July 2012. At that time I made the following orders: 1. A copy of these orders be served by the applicants upon the secured creditors and appointors of the Conquest Family Trading Trust by Friday 20 July 2012. 2. The applicants file submissions in support of the application by 4.00 pm on Tuesday 24 July 2012. 3. Submissions from any contradictors be filed by 4.00 pm on Friday 27 July 2012. 4. The matter be listed for hearing for half a day at 10.15 am on Tuesday, 31 July 2012. 4 Material before the Court indicates that the applicants served copies of the orders of 17 July 2012 upon the secured creditors and appointors of the Conquest Family Trust (affidavit of Jessica Ann Lameree sworn 24 July 2012). 5 No submissions were filed by any contradictors in accordance with these directions. At the hearing this morning the application was not opposed.

Background 6 On 12 November 2010, in QUD 407/10, DDR Belcher of this Court ordered that the company be wound up in insolvency and that William John Fletcher be appointed liquidator of the company pursuant to an application for winding up in insolvency presented by the Deputy Commissioner of Taxation filed 29 September 2010. 7 As at that date, the following creditors were recorded with ASIC as having a registered charge over the company's assets: Oxford Funding Pty Ltd - fixed and floating charge; National Australia Bank Limited - fixed charges; Bendigo and Adelaide Bank Limited - fixed charge; and Toyota Finance Australia Ltd - fixed charges. 8 Upon his appointment, the liquidator made enquiries and confirmed that the company: was trading as "Advantage Fencing"; and was the lessee of the premises at 264 South Pine Rd, Brendale, Qld ("the leased premises"). 9 The liquidator also requested that the director of the company, Mr Raymond Kenneth Conquest, provide a Report as to Affairs ("RATA") pursuant to s 475 of the Corporations Act. The director failed to comply with the request. However, on or about 23 November 2010, the former director of the company, Mr Paul Conquest, provided a completed RATA to the liquidator. 10 On 19 November 2010 the liquidator engaged Grays Online Asset Services ("Grays Online") to conduct a valuation of all personal property assets at the leased premises. Grays Online attended the leased premises and conducted a site inspection with the lessors of the premises, Mr Conquest and a representative of the liquidator present. The lessors informed the representative of the liquidator present during the site inspection that all assets were to be removed from the leased premises as soon as possible. 11 On 24 November 2010 Grays Online prepared a formal inventory and valuation report of the assets. A copy of this report is annexed to the affidavit of Mr Fletcher sworn 23 May 2012. 12 On or about 24 November 2010 the liquidator received a letter from Grasso Searles Romano Lawyers dated 23 November 2010, in which they confirmed that they acted for the lessors of the leased premises. The letter further advised that the lessors would re-enter the premises at the expiry of the notice period and required all of the company's goods and chattels to be removed prior to such time. Enclosed with the letter was a Form 7 Notice to Remedy Breach of Covenant pursuant to s 124 of the Property Law Act 1974 (Qld) advising that specified breaches were required to be remedied within seven days of service of the Notice. 13 On or about 26 November 2010 the liquidator instructed Grays Online to conduct an auction at the leased premises. The secured creditors, apart from Oxford Funding Pty Ltd, agreed to jointly engage Gray Online. Oxford Funding was a financier of the company and the debt giving rise to the charge by Oxford Funding was fully paid at the date of appointment of the liquidator. The costs of the auction and rent of the leased premises were shared pro rata with National Australia Bank. 14 On 7 December 2010 an auction was conducted at which the majority of assets of the company were sold; the remaining assets were sold at public auctions held on a weekly basis until February 2011. 15 In addition to the sale of assets and in the course of winding up the company, the liquidator also recovered debts owed to the company by various debtors, and a repayment of unfair preference payments earlier made by the company to the Australian Taxation Office. 16 The liquidator has made various payments from the company's funds, including to secured creditors, priority unsecured creditors, the liquidator himself (for remuneration and general expenses), and for various other costs and expenses incurred. As at 24 April 2012 $854,497.59 had been recovered by the liquidator, $695,479.82 had been paid by the liquidator, and $159,017.77 was held in the company's bank accounts.

Existence of the Trust 17 In or around April 2011, the liquidator became aware that the company was trustee of the Conquest Family Trading Trust following receipt of a letter from the Australian Taxation Office addressed to the Trust, care of the liquidator. 18 On or about 30 March 2012 the liquidator obtained a copy of the Discretionary Trust Deed dated 23 February 2005 ("Trust Deed"). At this point the liquidator discovered that, pursuant to clause 31(c) of the Trust Deed, the office of trustee of the Trust is vacated if the trustee, being a company, has a petition for its winding up presented to the Court. It followed that, when the application for winding up of the company was filed on 29 September 2010, the office of trustee of the Trust was vacated. 19 The liquidator deposes to his belief that: no replacement Trustee has been appointed of the Trust, and that the appointors of the Trust do not intend to appoint a new trustee; the company acted only as trustee of the trust; all assets owned by the company were held by the company as trustee of the trust; and all liabilities incurred by the company were incurred by the company as trustee of the trust. 20 Further, it is now apparent that: all assets of the company have been realised; recovery of debts was being finalised at the date of the application; and the company is in a position to declare a first and final dividend to unsecured creditors. 21 Pursuant to clause 28 of the Trust Deed, the company has the right to be indemnified and exonerated in relation to any and all liabilities incurred by the company in its capacity as trustee of the trust. The creditors' rights of recourse against the assets of the trust remain unaffected despite the company's current capacity as bare trustee of the trust.

Distribution of proceeds in accordance with the Corporations Act 22 The liquidator submits that all assets of the trust have been sold in the ordinary course and that the proceeds of sale have been or are to be administered in accordance with the Corporations Act. 23 The liquidator submits that he has acted honestly and reasonably in relation to sale of assets and recovery of debts owed to the company as trustee, and at all times when dealing with the property of the company held on trust, and commissioned sale of the assets held on trust before the liquidator was aware of the existence of the trust. 24 Accordingly, the liquidator seeks orders that he be: excused for any perceived breach, failure or admission relating to the administration of the company; indemnified by the Trust in relation to the costs and expenses incurred by the company and liquidator in realising assets and the costs of this proceeding; and permitted to distribute the proceeds of sale in accordance with s 556 of the Corporations Act.

Consideration 25 The legislation upon which the applicants rely provides the Court with broad discretionary powers to grant relief to trustees (pursuant to s 76 Trusts Act) and liquidators (pursuant to s 1318 Corporations Act) in circumstances where such persons could otherwise be personally liable. The relevant legislation provides as follows: Trusts Act 76 Power of court to relieve trustee from personal liability If it appears to the court that a trustee, whether appointed by the court or otherwise, is, or may be, personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach, then the court may relieve the trustee either wholly or partly from personal liability for that breach. Corporations Act Power to grant relief (1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit. (2) Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought. (3) … (4) This section applies to a person who is: …. (d) a receiver, receiver and manager, liquidator or other person appointed or directed by the Court to carry out any duty under this Act in relation to a corporation. … 26 The applicants also rely on s 94 of the Trusts Act which empowers the Court to make orders to aid parties where a transaction would be inexpedient, difficult or impracticable without the Court's assistance. Specifically, s 94 provides: 94 Court's jurisdiction to make other orders (1) Where in the opinion of the court any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, retention, expenditure or other transaction is expedient in the management or administration of any property vested in a trustee, or would be in the best interests of the persons, or the majority of the persons, beneficially interested under the trust, but it is inexpedient or difficult or impracticable to effect the disposition or transaction without the assistance of the court, or it or they can not be effected by reason of the absence of any power for that purpose vested in the trustee by the trust instrument (if any) or by law, the court may by order confer upon the trustee, 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 may think fit, and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne, and as to the incidence thereof between capital and income. (2) …. (3) An application to the court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust. 27 Finally, s 479(3) of the Corporations Act empowers a liquidator to apply to the Court for directions in relation to any particular matter arising under the winding up. This section is expressed in very wide terms - Re Tietyens Investments Pty Ltd [1999] FCA 206 at [67]; Coats v Southern Cross Airlines Holdings Ltd (in liq) (1998) 16 ACLC 1393 at 1400. 28 In seeking relief, the applicants rely on the decision of Gordon J in Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677. There are clearly strong similarities between the facts before her Honour in that case and the facts before me. In Caterpillar the background was described as follows: 2. On 10 February 2011, the Company was wound up by Court order and the Liquidator was appointed. The Company is recorded as trustee of the Trust constituted by a deed of trust dated 25 November 2002 (the Trust Deed). 3. The Liquidator's investigations into the affairs of the Company revealed that the Company acted only as trustee of the Trust and in no other capacity and that all assets owned by the Company are held by it as trustee of the Trust and all liabilities incurred by the Company were incurred by it in its capacity as trustee of the Trust. 4. The principal asset of the Company consists of real property at 109 Panorama Drive, Doonan in the State of Queensland (the Queensland Property) which property is held by the Company as trustee of the Trust. Westpac Banking Corporation (the secured lender) (Westpac) holds a first registered mortgage over the Queensland Property. 5. In addition to Westpac as a secured creditor, the Liquidator's investigations have identified other general unsecured creditors. These other general unsecured creditors have a claim against the Company which, in turn, has a right of indemnity out of the Trust Assets. 6. Clause 7.5 (b)(i) of the Trust Deed provides that the trustee will cease to be the trustee immediately if an official liquidator is appointed. Clause 7.2 of the Trust Deed provides that the appointor of the Trust may, by registered deed at any time, appoint a new trustee in the place of any trustee who resigns or ceases to be a trustee by operation of law. The evidence disclosed that Donna Anne Mottek (Ms Mottek), as appointor of the Trust, has not since the winding up of the Company exercised the power to appoint a replacement trustee under cl 7.2 of the Trust Deed and has no intention to exercise that power in the future. 7. As a result, the Company is currently a bare trustee and holds the assets of the Trust (including the Queensland Property) for the beneficiaries of the Trust. 8. As bare trustee, the Company has limited powers to deal with the assets of the Trust. The rights of exoneration and indemnity are not otherwise affected and the creditors' rights of recourse against the assets of the Trust remain unaffected. 9. The Liquidator formed the view that the appropriate course is for the Liquidator on behalf of the Company as bare trustee to be given powers necessary to deal with the assets of the Company the subject of the Trust so as to realise those assets and otherwise account for those assets in the ordinary course of the winding up of the Company as corporate trustee. 29 The only distinction of note between the facts in Caterpillar and those before me is that in this proceeding the liquidator has sold all of the assets of the company, compared with the circumstances in Caterpillar where a number of assets remained unsold at the time of the relevant application. While notable, I do not consider this distinction material in the circumstances of this case. 30 Like the case before me, the liquidator in Caterpillar applied to the Court for relief: pursuant to s 479 and s 1318 of the Corporations Act; pursuant to s 67 of the Trustee Act 1958 (Vic) which is in substantially identical terms to s 76 of the Trusts Act; and pursuant to s 63 of the Trustee Act 1958 (Vic) which is in substantially identical terms to s 94 of the Trusts Act. 31 In considering the application before the Court in Caterpillar, Gordon J said as follows: 26. There is no present likelihood of a new trustee being appointed. The appointor will not act and she is the only beneficiary of the Trust. No creditor has moved for appointment of a new trustee. The Company is and will remain a bare trustee. It may still hold the assets of the Trust. Its duties, powers and rights are limited to protecting the Trust assets: see, by way of example, Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) [2008] FCAFC 184 at [79]; Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) [2010] FCA 978 at [52] and Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at 281. However, the bare trustee retains its right of indemnity or exoneration and its lien over the assets of the Trust. 32 Later in the judgment her Honour continued: 35. As is apparent, there are two questions. First, is it appropriate despite the absence of any power vested in the Company to sell assets of the Trust, for the Court to confer upon the Company the power of sale of the assets of the Trust (s 63 of the Trustee Act) and, if so, is it appropriate for the Court to excuse the Liquidator from selling the BMW when the Company did not have that power of sale. 36. The answer to the first question is yes. The Company became a bare trustee of the assets of the Trust immediately upon the winding up of the Company and the appointment of the Liquidator: see [26] above. Next, the Company acted only as trustee of the Trust and in no other capacity and all assets owned by the Company are held by it as trustee of the Trust and all liabilities incurred by the Company were incurred by it in its capacity as trustee of the Trust: see [3] above. Thirdly, where, as has occurred here, the appointor is unwilling for whatever reason to appoint a new trustee, it is appropriate for the Court to confer upon the Company the power of sale of the assets of the Trust pursuant to s 63 of the Trustee Act subject, of course, to the duties prescribed by that Act. 37. The next question concerns the fact that the BMW was sold when there was no power of sale conferred. No explanation was proffered by the Liquidator as to why or how that occurred. As a result, the Liquidator was called to give viva voce evidence at the hearing of the application. 38. The explanation is important because the duties and obligations differ depending on whether the Liquidator acted at a time when he knew or had reason to know that the Company was a bare trustee. If he did not know and did not have reason to know, the duties of a trustee cannot be imposed. The Liquidator is, however, compelled in equity to return the trust property and must pay compensation if this is not done. If, on the other hand, he did know or have reason to know, then the trustee must safeguard the property and account for it: Ford HAJ and Lee WA, The Law of Trusts, 4th ed, 2010, Thomson Legal & Regulatory Group Limited. 39. The Court referred the Liquidator to s 67 of the Trustee Act. In any event, s 67 will not assist a trustee which has failed to adduce evidence of honesty and reasonableness. In dealing with an equivalent provision in the United Kingdom, the Privy Council in National Trustees Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 (PC) at 381 stated that: Unless both [honesty and reasonableness] are proved the Court cannot help the trustees; but if both are made out, there is then a case for the Court to consider whether the trustee ought fairly to be excused for the breach, looking at all the circumstances. See also Re Stuart [1897] 2 Ch 583 at 592 and Wilkie v McCalla (No 3) [1905] VicLawRp 45; [1905] VLR 278 at 286, 293. 40. However, in Kerferd v Perpetual Executors and Trustees Association of Australasia Ltd [1893] VicLawRp 104; (1893) 19 VLR 700 at 706, Holroyd J stated that if a trustee's conduct would have been authorised by the Court had the trustee sought its directions, the trustee may expect to be excused. 41. As noted earlier, the Liquidator was called to give evidence and the Court was able to ask questions about the circumstances in which the BMW was sold. In general terms, the Liquidator's evidence was that the BMW was a motor vehicle leased from BMW Finance, which was sold at public auction by Grays Auctioneers for a price not less than the value placed on the vehicle by the auctioneers. The BMW was sold with the approval of BMW Finance. The Liquidator has accounted to BMW Finance for the payout under the lease agreement and retains the balance (approximately $15,000) in his capacity as Liquidator. The Liquidator's evidence, which I accept, was that the BMW was sold before the Liquidator was aware of the issues concerning the Trust Deed. The BMW was not sold at an undervalue. His conduct was both honest and reasonable. 42. In those circumstances, I consider that it is appropriate to grant the Liquidator a declaration pursuant to s 1318 of the Corporations Act and further or alternatively s 67 of the Trustee Act that in his capacity as liquidator he acted honestly, and ought fairly to be excused, for any breaches, failures or omissions, relating to the administration of the Company in relation to the sale of the BMW. 33 In my view the reasoning of her Honour is equally applicable to the facts before me. 34 Similarly to circumstances in Caterpillar, it appears that since the application for winding up of the company was filed, the company has been a bare trustee of the Trust. As the learned judge observed in Caterpillar, a bare trustee does not have a power of sale: Caterpillar at [26]; cf ISPT Nominees Pty Ltd v Chief Commissioner of State Revenue (2003) NSWLR 196 at [248], [278]; Joyce v Cam [2004] NSWSC 621 at [35]. However the material before the Court in this proceeding supports a finding that the liquidator sold the assets of the company in the reasonable and honest belief that he was entitled to do so pursuant to his rights and duties as the liquidator of the company, and in the absence of information from persons directly connected with the company as to the existence of the Trust. The liquidator was clearly also under some pressure from the lessor of the premises at which the assets were located to remove them, and in light of both the risk of the company being forcibly removed from the leased premises and the high cost of rent to continue to store the assets at the leased premises (para 13 of the affidavit of William John Fletcher sworn 23 May 2012). 35 There are no submissions before the Court supporting a finding that the liquidator acted otherwise than honestly and reasonably at all times. The application before the Court is not opposed. 36 In the circumstances I consider it appropriate to make the orders sought by the applicants. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.

Corporations Act 2001(Cth)ss 475, 479, 556, 1318

Trusts Act 1973(Qld)ss 76, 94

Trustee Act 1958(Vic)s 63, 67

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