WHITE J:
1 I am dealing with an application by a liquidator for directions and other orders with respect to the distribution of the property of a trading trust of which the company in liquidation was the trustee.
2 On 28 April 2017, the Court ordered the winding up of Darwin Joinery Pty Ltd (the Company) and appointed Mr Hart of Ferrier Hodgson as its liquidator. The Company was the trustee of the Darwin Joinery Unit Trust (the Trust) and, in that capacity, carried on a design, cabinet making and joinery business under the name "Darwin Joinery". It did not engage in any activities other than as trustee of the Darwin Joinery business. In the conduct of the business, the Company acquired assets and incurred liabilities.
3 In the performance of his functions as liquidator, Mr Hart caused Darwin Joinery to cease trading, obtained a valuation of the assets of the Trust, advertised the business and associated assets for sale and liaised with the creditors. He deposes, and I accept, that he obtained the consent of the single unit holder of the Trust, and of the Trust's first ranking secured creditor (being the ANZ Banking Group Ltd (ANZ)), to deal with the property and assets of the Trust by taking possession and control of them and, in turn, selling them. The unit holder and ANZ had also approved payment of his fees and out of pocket expenses from the proceeds of sale and realisation of the property and assets of the Trust before any distribution to the Trust's creditors.
4 The end result of the realisations is that Mr Hart now holds an amount of $287,190 by way of assets of the Trust, while the Company has liabilities to employees and under the Fair Entitlements Guarantee Act 2010 (Cth) totalling $1.13 million, liabilities to secured creditors in excess of $2 million and liabilities to unsecured creditors of $1.49 million. It is obvious that the property of the Trust is insufficient to pay all of the liabilities incurred by the Company in carrying on the business of the Trust and, in particular, to pay the secured debt to the ANZ.
5 On 28 August 2017, a meeting of creditors approved payment of the remuneration to Mr Hart and his staff.
6 Given authorities indicating that property held by corporate trustees in their capacity as a trustee is not "property of the Company" for the purposes of the provisions in the Corporations Act 2001 (Cth) and, in particular, s 477(2)(c), Mr Hart applied on 21 September 2017 for a number of directions. Amongst other things, he sought a direction that he would be justified in not paying any amount out of the assets of the Trust in accordance with the priority for which ss 556(1), 560 and 561 of the Corporations Act provide.
7 That application first came on for hearing on 19 October 2017. At that time, both the Court of Appeal in Victoria and the Full Court of this Court had reserved on judgments concerning, amongst other things, whether a liquidator's power of sale of the property of a company conferred by s 477(2) of the Corporations Act extends to the property of a trust of which the company in liquidation had been trustee and whether the statutory priority regime was applicable. Accordingly, I considered it appropriate to defer consideration of the directions sought by Mr Hart until judgment in those matters had been delivered. That has now occurred: Commonwealth v Byrnes & Hewitt [2018] VSCA 41 (Amerind) (on 28 February 2018) and Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 (Killarnee) (delivered on 21 March 2018).
8 Those judgments confirmed a number of matters which are of present relevance. First, a trustee's right of exoneration in respect of liabilities incurred by the trustee in the execution of its duties and powers on behalf of the trust is a proprietary interest of the trustee held in priority to interests of the beneficiaries of the trust. It is property of the company. The trust assets themselves are not property of the company, but the trustee's right of exoneration supported by a lien in the character of a proprietary interest is property of the company: Killarnee at [69]; Amerind at [269]-[273].
9 Further, the power to sell the property of the company vested in liquidators by s 477(2)(c) of the Corporations Act does not extend to the sale or disposition of property which is not the property of the company, but which is trust property in which the trustee has a proprietary interest by way of lien to secure its right of exoneration: Killarnee at [89].
10 At the hearing today, Mr Hart did not pursue applications for all the directions contained in the interlocutory process filed on the 21 September 2017. Accordingly, it is necessary to address only those parts of the interlocutory process which he did pursue.
11 The first two orders sought can be considered conveniently together. Mr Hart seeks a declaration that the property and assets of the Trust are subject to any charge or lien that the Company has over the assets of the Trust to secure the payment of any debts properly incurred by the Company as trustee and, further, a declaration that the Company has a right of indemnity from the assets of the Trust for debts incurred in its capacity as trustee. Orders in those terms reflect the current law and I will give directions in the form sought.
12 As I noted earlier, Mr Hart's initial application was for a direction that he would be justified in not paying any amount out of the assets of the Trust in accordance with the statutory priority regime and that he would be justified in not paying any priority amount to any employee or any third party pursuant to ss 556(1), 560, and 561. In light of the decisions in Amerind and Killarnee, Mr Hart did not seek directions in those terms. Instead, he sought a direction that he would be justified in paying any amount out of the assets of the Trust in accordance with ss 556(1), 560 and 561 of the Corporations Act, together with a supplemental direction to the effect that he will be justified in paying any priority amount to any employees or to any third party, including the Department of Employment on account of any employee entitlements pursuant to ss 556(1), 560 or 561 of the Act.
13 It is appropriate in this respect to refer to the second question which was referred for consideration by the Full Court in Killarnee. That question was:
Are either or both the proceeds of realisation of the Trust Assets and the Unfair Preference Proceeds to be applied by the Plaintiff in accordance with the priority regime established by ss 555, 556, 560 and 561 of the Corporations Act?
The "Unfair Preference Proceeds" referred to in that question are not material for present purposes, and the Full Court's answer to that part of the question need not be considered. The "Trust Assets" referred to in the question were the assets of the trust in question in that case which seemed to be of a conventional kind, and included the proceeds of the sale of those assets.
14 The Chief Justice and Farrell J answered Question 2 in the affirmative in relation to the Trust assets, albeit for different reasons. The Chief Justice, whose reasons on this issue are at [95]-[102], endorsed the reasoning of King CJ in In re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99. The reasons of Farrell J are at [203]-[223]. Her Honour regarded herself as bound to follow the decision in Amerind but considered that Equity should, in any event, follow the statute in the order of payment of liabilities to trust creditors in the exercise of the right of exoneration.
15 The proposed direction that Mr Hart would be justified in paying any amount out of the assets of the Trust in accordance with ss 556(1), 560 and 561 of the Corporations Act is consistent with the conclusion of the Chief Justice and of Farrell J in Killarnee and it is appropriate that it be made.
16 The sixth order sought is that Mr Hart would be justified in recovering the costs and expenses incurred by the Company and him in realising the Trust assets and otherwise dealing with the Trust assets from the Trust assets. In Killarnee, the Chief Justice agreed at [105]-[108] with the approach of King CJ in In re Suco Gold, who had held that a liquidator's costs were payable out of the trustee's right of indemnity. Accordingly, I am satisfied that a direction to the effect sought by Mr Hart is appropriate.
17 The last two directions sought by Mr Hart related to the existence of liens. He sought a direction that he is entitled to a lien over the assets of the Trust in respect of fees he has incurred as liquidator in conducting the winding up of the Company, and that he has a lien over the assets of the Trust for the costs of the application. For the reasons given by Markovic J in Kite v Mooney (No 2) [2017] FCA 653 at [44]-[152], I am satisfied that a direction to this effect would be appropriate. In addition, the costs of Mr Hart's application to this Court can be regarded as an incident of the discharge him of his duties as liquidator, so that the lien may extend to these costs.
18 I will make directions to give effect to these reasons.
I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.