Deputy Commissioner of Taxation, in the matter of D&S Johns Investments Pty Ltd v D&S Johns Investments Pty Ltd

Liam Bailey of O'Brien Palmer, Level 14, 9 Hunter Street, Sydney NSW 2000, accountant and insolvency practitioner, be appointed without security as receiver and manager (Receiver) of the assets and undertaking of the Johns Family Trust until further order.
The Receiver have the powers in the Schedule of Powers annexed to these orders together with the powers that a liquidator has in respect of property of a company pursuant to s 477(2) of the Corporations Act 2001 (Cth).
Upon completion of the realisation of property and payment of costs and expenses and creditors, the Receiver is to deliver to the Court a statement of receipts and payments in relation to the realisation of property and payments made by the Receiver.
The applicants' costs of this proceeding be costs and expenses in the winding up of the second applicant.
The Receiver have liberty to apply for the approval of his remuneration upon the realisation of the property of the Johns Family Trust.
Liberty to apply on 3 days' notice, any such notice to specify the relief to be sought. THE COURT NOTES THAT:
The object of the appointment in Order 1 is to: (a) enable the first applicant as Receiver to realise trust assets to enforce the second applicant's indemnity and apply the proceeds to discharge the liabilities of the second applicant (all of which were incurred by it in its capacity as trustee); and (b) enable the first applicant to recover the costs of the receivership and, because the second applicant's sole function was to act as trustee of the Johns Family Trust, the general costs of the liquidation. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. Schedule of Powers
Power to do all things necessary or convenient to be done for or in connection with or as incidental to the attainment of the objective noted above.
Power to discontinue, terminate or wind up any such business, enterprise or venture in whole or in part.

MARKOVIC J: 1 On 9 June 2017 D&S Johns Investments Pty Ltd (Company) was wound up by order of this Court. Liam Bailey was appointed as liquidator (Liquidator). 2 The Liquidator and the Company, as first and second applicants respectively, now bring an application for an order that the Liquidator be appointed as receiver and manager of the assets and undertaking of the Johns Family Trust and for consequential orders flowing from that appointment. 3 The background to the application is set out in two affidavits sworn by the Liquidator on 27 June 2017 and 17 July 2017. 4 Upon the Liquidator's appointment he, together with his staff, conducted inquiries in relation to the Company's business, including corresponding with the Company's director, Christopher Brown, and employees of the Company. As a result of those inquiries, the Liquidator ascertained that the Company's sole purpose was to act as the trustee of the Johns Family Trust. 5 A copy of the trust deed establishing the Johns Family Trust (Trust Deed) provides, at cl 8.8, that the office of trustee will be determined and vacated if the trustee, among other things, "being a company, enters into liquidation, whether compulsory or voluntarily". Accordingly, upon the order for the winding up of the Company being made by the Court, the Company ceased to be the trustee of the Johns Family Trust. No further trustee has been appointed. 6 The Johns Family Trust operates the business known as the Blaxland Tavern, which is a hotel at Blaxland in the Blue Mountains. Since his appointment the Liquidator has continued to trade the business of the trust. As a result of the Liquidator's inquiries he has ascertained that the assets of "the business", by which, I assume, the Liquidator means the assets of the Company, are all trust assets. It appears that the principal valuable assets held by the Company are the sublease of the premises from which the business is operated as well as the goodwill of the business. 7 The Liquidator wishes to be able to continue to trade the business until such time as he is able to sell it for the benefit of the creditors. As at 27 June 2017 he had identified creditors of the Company with claims totalling approximately $235,000. Although the Liquidator continues to trade the business, the identified creditors do not seem to include any amount owing to employees. Based on the evidence before me there is at least one secured creditor, Australian Liquor Marketers Pty Ltd, which has an outstanding debt that is included in the total amount of creditors' claims set out above. 8 A copy of the interlocutory application and the affidavits in support were served on the solicitors for Dennis Johns. The Trust Deed provides that Mr Johns and Sandra Patricia Johns are beneficiaries of the trust, as are their children nominated in the Trust Deed. From the bar table I was informed that the Liquidator is unaware of the whereabouts of Mrs Johns and that she may be deceased. The solicitors for Mr Johns informed the Liquidator's solicitors that Mr Johns did not intend to be represented at the hearing of this application and does not oppose the orders sought. I was also informed from the bar table by the solicitor appearing for the Liquidator that Mr Johns claims to be a secured creditor of the Company, an issue that the Liquidator will need to investigate further. 9 While a liquidator has authority to sell assets of a company pursuant to s 477 of the Corporations Act 2001 (Cth) (Corporations Act), issues have arisen as to the rights of an insolvent trustee to deal with trust assets. In the matter of Combis, in the matter of Reehal Holdings Pty Ltd (in liq) (Trustee) v Reehal Holdings Pty Ltd (in liq) (Trustee) [2017] FCA 793 (Reehal Holdings), Derrington J said the following at [18]-[19]: 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… 10 In Reehal Holdings there was uncertainty about whether the company in liquidation remained as trustee of the trust upon its winding up or whether it had been automatically retired. However, Derrington J was satisfied that it was appropriate to appoint the liquidators as receivers over the property of the trust in question, giving them a power to deal with the assets. 11 In the case before me it is clear that the Company is no longer trustee of the trust, although it continues to hold the assets of the trust as bare trustee upon the termination of its appointment. Because of that, and because of the uncertainty about the power of a liquidator of a corporate trustee in those circumstances to deal with the trust assets, I am satisfied that it is appropriate for me to make the orders sought by the applicants, such that the Liquidator can be appointed as a receiver and manager of the assets of the Johns Family Trust and can deal with those assets and realise them for the benefit of the creditors. In the circumstances, I propose to make the orders sought by the applicants in their interlocutory application filed on 29 June 2017 subject to the amendments that I raised with the solicitor for the applicants in relation to the order sought as to the report to be provided by the receiver and manager and an aspect of the notation included in the orders sought. 12 As to the latter matter, the applicants have included in their proposed orders a notation by the Court which sets out the object of the appointment of the receiver and manager. That notation included the basis upon which the liabilities of the Company would be discharged by the receiver. Given the limited evidence before me on this application (a matter about which I am not critical as the evidence before me was aimed at and sufficient to establish the applicant's entitlement to the principal relief sought) and the current state of the authorities as to whether the priority regime set out in the Corporations Act applies to trust assets upon the liquidation of a trustee company, I do not propose to include that aspect of the notation in the orders to be made. 13 Subject to those matters, I will make orders in accordance with the orders sought by the applicants in their interlocutory application. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.

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