2091/03 RONALD JOHN DEAN-WILLCOCKS V ACG ENGINEERING PTY LTD (IN LIQ)
JUDGMENT
1 HIS HONOUR: This case raises a novel point about the nature of funds in the hands of a deed administrator, collected for the purpose of a distribution to pre-deed creditors but not paid to them before the company goes into liquidation.
2 The plaintiff was appointed voluntary administrator of the company on 26 November 2001. The company continued to trade during the period of administration. On 24 December 2001 the company executed a deed of company arrangement ("the DCA"), which provided for the plaintiff to be the Deed Administrator. The following are the pertinent provisions of the DCA:
(1) By clause 1.1, "creditors" were defined to mean all unsecured creditors of the company whose claims arose prior to 26 November 2001, excluding the Deferred Creditors (the directors and their associated entity, who entered into a deed of deferral);
(2) By clause 4, the Deed Administrator was required to follow a procedure to invite proofs of debt to be submitted by Creditors (as defined), and to adjudicate on those claims so as to settle a list of Participating Creditors;
(3) By clause 5, the company and the directors were required to pay or procure the payment to the Deed Administrator of an amount of $112,730 on account of ordinary unsecured creditors other than the Deferred Creditors, and also to pay amounts to cover the Administrator's costs, unremitted tax instalment deductions, and amounts payable to Priority Creditors (those with claims having priority under s 556(1)(e)-(h) of the Corporations Act), and the Deed Administrator was required to receive the payment into his Administration Account and apply it to the Administration Fund, and (by clause 5.5) to distribute the Administration Fund (after attending to payment of unremitted tax instalment deductions, administration costs and the claims of Priority Creditors) pro rata amongst the Participating Creditors according to the amounts for which they had been admitted to proof;
(4) By clauses 6 and 7, payments out of the Administration Fund discharged the debts and claims of the Creditors and extinguished the company's debts and claims against it in respect of anything done before 26 November 2001;
(5) By clause 10, the control and stewardship of the company reverted to the directors upon the execution of the DCA, with the consequence that the company would continue to trade and incur new debts;
(6) By clause 9, the DCA would be terminated in certain circumstances, including (clause 9.2(b) where the directors resolved that the company was insolvent or likely to become insolvent, and in that event the company would be wound up under reg 5.3A.07 of the Corporations Regulations, and the Deed Administrator would become the liquidator of the company ipso facto;
(7) By clause 3 and Schedule 1, the DCA included various provisions of Schedule 8A to the Corporations Regulations, including the provision that the Deed Administrator was to be taken to act as agent for and on behalf of the company in exercising his powers and carrying out his duties under the DCA.
3 Clause 5 of the DCA made provisions with respect to the Administration Fund. The following subclause is important for present purposes:
"5.4 (a) The Administrator shall hold the Administration Fund in accordance with the terms of this Deed of Company Arrangement.
(b) The Company and the Directors agree that any monies paid to the Administrator by the Company or any third party on behalf of the Company shall not be refundable to the Company or third party …".
4 Upon the execution of the DCA the company was returned to its directors and continued to trade under their control, and the plaintiff took steps to implement the DCA. He invited proofs of debt pursuant to clause 4, and admitted and adjudicated on debts totalling $509,112.78. I shall describe the Participating Creditors and other Creditors entitled to claim under the DCA as "Deed Creditors". Deferred Creditors were identified in the sum of $767,358.
5 On 16 April 2002 the plaintiff received a sum in excess of $112,730, out of which he deposited the latter amount in the Administration Account for the purpose of application to the Administration Fund as required by clause 5. That amount was accordingly available to be distributed pro rata to the Deed Creditors. There was also a surplus of $37,723. On 23 April 2002 the plaintiff advertised, and circulated to Creditors, an announcement of his intention to pay a final dividend under the DCA on 21 June 2002.
6 On 15 May 2002 the director of the company passed a resolution that the company was insolvent or likely to become insolvent, thereby causing the DCA to be automatically terminated, the company to be wound up, and the plaintiff to become the liquidator of the company. The plaintiff ascertained that at that time there were assets available to meet the claims of creditors capable of realising the amount of $226,137.21 (excluding the Administration Fund). There were additional creditors ("Post-Deed Creditors") whose claims arose after 26 November 2001 in the sum of $149,071.05. I should note that there is also a disputed claim by employees for redundancy payments, which is excluded from the plaintiff's figures.
7 Acting on legal advice, the plaintiff has not made the distribution foreshadowed on 23 April 2002. On 16 May 2002 he sent a short letter to creditors informing them that the DCA had been terminated by resolution of the director and consequently he had become liquidator of the company. This was followed up, on 2 October 2002, by a longer report. In that report the plaintiff explained that he had realised certain assets of the company and paid the proceeds into his liquidation account, and he had also transferred the surplus of $37,723 into that account. However, he noted that he still held the sum of $112,730 in the Administration Fund. He explained that there was some legal uncertainty as to the proper distribution of the Administration Fund, and he provided Creditors with a table that showed three "Estimated Distribution Scenarios".
8 Although the report refers to three distribution scenarios, I prefer to think in terms of two alternatives. The first alternative arises if the Court takes the view that the Administration Fund is available only for the Deed Creditors and is not an asset of the company to be distributed in its liquidation. In that event, the plaintiff's "Scenario 1" provides calculations showing that the pro rata distribution of the Administration Fund of $112,730 to the Deed Creditors would give them 22 cents in the dollar. The plaintiff's "Scenario 2" then shows that the distribution of the liquidation fund (excluding the Administration Fund, on the same hypothesis as Scenario 1 - namely, that it is not an asset in the liquidation) to the Post-Deed Creditors (including the Deferred Creditors) would produce a distribution of 12 cents in the dollar. The plaintiff's "Scenario 3", which is my second alternative, consolidates the Administration Fund into the liquidation fund on the assumption that the Deed Creditors have no special rights to it and it is available for distribution to all creditors (including Deferred Creditors) in the liquidation, and shows a distribution of 16 cents in the dollar. If the disputed claim to redundancy payments were taken into account, then in Scenario 2 the distribution to Post-Deed Creditors would be reduced from 12 cents to 1 cent in the dollar, and in Scenario 3 the distribution would be reduced from 16 cents to 9 cents in the dollar.
9 The report concluded by indicating that the plaintiff would approach the Court for directions, as he now has, and invited any creditor who wished to be heard to provide a written submission. Two written submissions were received, each from Deed Creditors contending that the first alternative should be preferred. After the application and the plaintiff's supporting affidavits were filed, and the matter was fixed for hearing on 28 April 2003, the plaintiff wrote to creditors again, by letter dated 31 March 2003, enclosing a copy of the application and the affidavits and informing them of the hearing date, and inviting them to make any further submission in writing by 24 April. No further written submissions were received, and no creditor appeared when the matter was called at the hearing yesterday.
10 The originating process, filed on 27 March 2003, seeks as principal relief either directions pursuant to s 447D(2) and/or s 511 of the Corporations Act, or else declaratory relief. The declaratory relief sought by the plaintiff is as follows:
"A declaration that, pursuant to section 447D(2) and/or section 511(2) of the Corporations Act, it is just and beneficial for the plaintiff, as liquidator of the defendant, to make rateable distributions to creditors of the defendant from Funds available in the winding up of the defendant, in accordance with the schedule attached and marked 'A'."
11 The schedule to the originating process is as follows:
"SCHEDULE 'A'
"The monies paid to the defendant as the Deed Fund pursuant to the Deed of Company Arrangement dated 24 December 2001, be distributed by the liquidator, on the basis that those Deed Funds are held in constructive trust for Participating Creditors entitled to prove under the Deed of Company Arrangement, as defined therein.
"Creditors of the defendant not entitled to prove in the Deed of Company Arrangement have their respective debts adjudicated on in respect of any separately available assets of the defendant.
"The estimated distributions to unsecured creditors on that basis [are]:
Deed Creditors $0.22 in the dollar
Post-Deed Creditors - liquidation $0.12 in the dollar."
12 The reference to the "Deed Fund" is a reference to the Administration Fund as defined in the DCA. The text of the proposed declaratory order seems to me to conflate the idea underlying a direction, namely the idea that the liquidator would be justified in taking specified steps, with the notion of a declaration of right. This is a case where the parties whose rights might be affected by the determination, namely the Deed Creditors and the Post-Deed Creditors, have been notified of the application, and in terms the application seeks declaratory relief. They have been given the opportunity to contest the application for that declaratory relief, and they have chosen not to do so. In those circumstances, it seems to me appropriate to make a declaratory order with respect to the rights of creditors, rather than merely to give the liquidator directions constituting judicial advice: see Re GB Nathan Pty Ltd (in liq) (1991) 24 NSWLR 674.
13 The central question for determination is whether the Administration Fund is an asset of the company, so that it is available for distribution in the liquidation of the company, or an asset held by the Deed Administrator for the benefit of the Deed Creditors and not for the benefit of the company.
14 In my opinion the terms of the DCA make it plain that the Administration Fund is not an asset of the company. Clause 5 of the DCA requires the company and the directors to pay certain monies to the Deed Administrator, to be held by the Deed Administrator under the terms of the DCA. Those monies include the sum of $112,730 now held in the Administration Fund. Clause 5.4 makes it expressly clear that the money so paid is not refundable to the company or any other payer. The Deed Administrator is required under clause 5 to pay the money into the Administration Account and apply it to the Administration Fund. Clause 5.4(a) says that the Administration Fund is to be held by the Deed Administrator in accordance with the terms of the DCA, and clause 5.5(d) requires a distribution, ultimately, amongst the Participating Creditors pro rata according to the amounts for which they have been admitted to proof.
15 As a matter of the plain and natural meaning of the DCA, these words seem to me to create a trust of the amount of the Administration Fund held in the Administration Account for the benefit of, inter alios, the Participating Creditors identified in clause 5.5 (d). The trust arises because clause 5.4(a) imposes on the Deed Administrator an obligation to "hold" the Administration Fund in accordance with the terms of the DCA, and clause 5.5(d) requires that the balance after certain deductions be distributed pro rata to the Participating Creditors. Where property is vested in a person subject to a legally enforceable obligation to "hold" that property so as to make a distribution to someone else, the natural conclusion, under our law, is that a trust of that property has been created.
16 As I have said, I regard the conclusion that there is a trust as a conclusion flowing from the wording of the DCA. There is very little in the Corporations Act to assist in the construction. Section 444D says that a deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed (in this case, 26 November 2001). Section 444G says that a deed of company arrangement also binds the company and the deed's administrator, as well as officers and members. This establishes that provisions of the present DCA, including the provision obliging the Deed Administrator to hold the Administration Fund in accordance with the terms of the DCA, are binding on all relevant parties. That an obligation is binding by statute does not necessarily mean, of course, that the obligation is a trust obligation. Indeed, in some circumstances a statutory obligation might be taken to be incompatible with a trust: see, generally, Tito v Waddell (No 2) [1977] 3 All ER 129. In the present case, however, the obligation in clause 5.4(a), rendered binding upon the Deed Administrator by s 444G, is an obligation to "hold" a defined fund in accordance with terms of the DCA which require that the Fund be distributed ultimately to the Participating Creditors, and it seems to me that such an obligation attaching to particular property gives rise to a trust.
17 It appears that there is no case directly in point, but the plaintiff referred me to Santow J's decision in Re Spargold Enterprises Pty Ltd; ex parte McDonald [1999] NSWSC 63. That was an application by deed administrators to terminate a deed of company arrangement. The applicants were concerned that the company, which was hopelessly insolvent, had incurred significant additional indebtedness after the commencement of the deed, and they wished to terminate the deed because if there were a distribution under the deed, there would be nothing left to be applied towards the substantial debts owed to the post-deed creditors. Santow J held, applying an analogy with a voluntary liquidator, that an administrator under a deed of company arrangement has a fiduciary responsibility to act impartially as between classes of creditors of the company. He observed in passing that the administrator's position was "concededly not as a trustee" (at [5] and [7]). He held that distribution under the deed of company arrangement would unfairly prejudice post-deed creditors, and in these circumstances orders should be made for the termination of the deed.
18 In my opinion Spargold does not assist in the circumstances of the present case. While a deed administrator has a duty of impartiality as between creditors and classes of creditors, if he or she is obliged under the terms of the deed to hold funds in trust for one class of creditors to the exclusion of another class, then impartiality is not the issue, and the Deed Administrator must act consistently with the rights of the beneficiary class. The terms of the deed under consideration in Spargold are not set out in the judgment, but one can be confident that there was no provision constituting a fund in the hands of the deed administrator for the benefit of the deed creditors to the exclusion of the post-deed creditors, as there is in the present case. The question whether the deed administrator might have been a trustee of any specific property was obviously not argued before his Honour, and therefore his observation that a deed administrator is not a trustee should be taken to mean only that a deed administrator is not necessarily a trustee by virtue of his or her function and duties. The judgment should not be taken to exclude the possibility that an express trust might be created by the terms of the deed.
19 The plaintiff referred in submissions to Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, Re Australian Elizabethan Theatre Trust (1999) 30 FCR 491 and Carreras Rothmans Ltd v Freeman Matthew Treasure Ltd (in liq) [1995] 1 All ER 155 (to which one would now add Twinsectra Ltd v Yardley [2002] 2 All ER 377), contending that the DCA created a "specific purpose trust" and that the provider of the Administration Fund and the creditors each had an equitable right to an order for the carrying out of the trust. It seems to me that under the terms of the DCA, the position is more straightforward. There is simply an express trust of the Administration Fund for the benefit, inter alios, of the Participating Creditors as beneficiaries.
20 In his thoughtful submissions, the solicitor for the plaintiff raised a number of general issues. He drew attention to the fact that according to the DCA, the plaintiff as Deed Administrator was an agent of the company, expressing some concern as to whether that provision prevented the Deed Administrator from being a trustee. In my opinion, there is no difficulty in saying that the Deed Administrator under this DCA is an agent of the company for the purpose of carrying out various duties and exercising various powers, but he is a trustee for beneficiaries other than the company as far as the Administration Fund is concerned. The DCA expressly provides that he is to hold that Fund on its terms, and that the company is not entitled to a refund out of the Administration Fund. It cannot therefore be said that the Deed Administrator holds the Administration Fund as agent for and on behalf of the company.
21 Another issue raised in submissions was whether the present decision would affect deeds of company arrangement where the deed provides that the administrator may take a charge over the assets of the company to secure payments under the deed. It seems to me that the question whether a trust of any fund has arisen under the terms of a deed of company arrangement depends, principally, on the construction of the particular deed in question. There is no charging provision in the present deed, so the question does not arise. In other deeds, the position may be that there is a charge but no trust, or a charge vested in the deed administrator as chargee to provide security to support obligations in the deed, including perhaps trust obligations. In yet other cases the relevant fund might, on a proper construction of the deed, be the property of the company, that would become available for the creditors generally in the company's liquidation if it has not been distributed pursuant to the Deed before liquidation intervenes.
22 My conclusion is that under the terms of the DCA, the plaintiff as Deed Administrator held the Administration Fund, as from receipt of payments into the Fund on 16 April 2002, in trust under the terms of the DCA, for beneficiaries including the Participating Creditors as specified in clause 5.5(d). Although the DCA has been terminated and the plaintiff is now the liquidator of the company, the trust remains. In the events that have happened, the money in the Administration Fund is held by the plaintiff in trust for the Participating Creditors specified in clause 5.5(d).
23 These conclusions should be reflected in a declaratory order, supplemented by appropriate directions. One direction should cover the plaintiff's position as liquidator, and another (best made under s 63 of the Trustee Act 1925 (NSW)) his position as trustee.
24 In the circumstances I agree with the plaintiff's submission that the costs of the application be paid out of the assets of the Administration Fund. I shall grant liberty to apply in case any difficulties arise out of the distribution or the liquidation.