First Plaintiff v Second Plaintiff

TRUSTS - Whether liquidators entitled to treat trust assets as company assets - Commonwealth v Byrnes (in their capacity as joint and several receivers and managers of Amerind Pty Ltd (recs & mgrs apptd) (in liq)) (2018) 354 ALR 789 and Jones (in his capacity as liquidator of Killarnee Civil and Concrete Contractors Pty Ltd (in liq)) v Matrix Partners [2018] FCAFC 40 applied.

1 The first plaintiffs ('the Liquidators'), being the liquidators of the second plaintiff ('the Company'), apply for orders under the Corporations Act 2001 ('the Act') and/or the Trustee Act 1958 for the purpose of facilitating the realisation of assets of the second plaintiff, which it holds as trustee of the Forbes Family Trust ABN 15647430155 ('the Trust'). In particular, the Liquidators seek to realise a wholesale bakery business located in Hyde Street, Yarraville, trading as Cobbs Lane Bakery ('the wholesale business').

2 The Company was incorporated on 30 May 2012. Matthew Forbes is the sole director, secretary and shareholder of the Company.

3 The Company was appointed as trustee of the Trust pursuant to the Forbes Family Trust Discretionary Trust Deed dated 16 November 2012 ('the Trust Deed'). The specified beneficiaries under the deed are Matthew Forbes and Lara Forbes.

4 The first plaintiffs were appointed as joint and several liquidators of the Company following a voluntary winding up pursuant to s 491 of the Act. The resolution that the Company be wound up voluntarily was passed after the Liquidators were approached by Matthew Forbes and Lara Forbes with respect to the insolvency of the Company.

5 On 17 May 2018, Matthew Forbes completed a Form 509 'Presentation of summary of affairs of a company'. Richard Rohrt has deposed that, after initial investigation and review of the Company's books and records, the Liquidators expect there will be a deficiency in the Company's assets over liabilities of approximately $776,100.13 before the Liquidators' remuneration costs and expenses.

6 On 10 May 2018, the Liquidators sought expressions of interest for the purchase of the wholesale business and on 24 May 2018 they received a combined offer for the wholesale business and the plant and equipment in the retail bakery café. The Liquidators consider that it is in the best interests of the creditors that the offer be accepted.

7 The Liquidators have formed the view that the Company holds all of its assets and conducted the business as trustee of the Trust on the basis of matters deposed to by Rohrt in his affidavit of 28 May 2018. In summary, the fact that the Company was trading solely as a trustee for the Trust is apparent from:

(b) the financial reports for the years ended 30 June 2016 and 30 June 2017;

(d) contracts of employment were between employees and the Company, with the Australian Business Number applicable to the Trust;

(e) two bank accounts with the Commonwealth Bank of Australia;

(f) the Application for Monthly Commercial Credit Account with PFD Food Services Pty Ltd dated 29 December 2017 refers to of the Company as being the trustee of the Trust.

Further, I was informed by counsel that his instructing solicitor had telephoned Matthew Forbes who had confirmed that, since the execution of the Trust Deed, the Company had only held assets and traded as a trustee.

8 The Trust Deed provides that the appointment of a liquidator to a corporate trustee (among other things) terminates its appointment as a trustee. Clause 4.4(f) of the Trust Deed relevantly provides as follows:

The office of a Trustee will ipso facto be determined and vacated ... if the Trustee being a Corporation has a receiver appointed or enters into official management or has a petition for its winding up presented to the Court or passes a resolution for its winding up or enters into a scheme of arrangement (not being merely for the purpose of amalgamation or reconstruction).

9 Clause 4.2(b) of the Trust Deed provides that a trustee has a right of indemnity out of the assets of the Trust.

10 The Liquidators are concerned that, if leave is not granted by the Court, there is a risk that:

(a) the Liquidators do not have any power to realise and dispose of (to the extent necessary) the property held on trust by the Company and cannot comply with their statutory duties under the Act;

(b) the Liquidators are liable for breaches of trust in respect of the actions they have taken since their appointment;

(c) the Liquidators must cease trading the wholesale business;

(d) the Liquidators cannot proceed with the sale of the assets, fixtures and other goods if they were to form the view that such a sale is in the best interest of the Company and its creditors; and

(e) the potential returns to the Company' creditors (being creditors whose debts were properly incurred in conducting the business of the Trust) will be severely diminished.

11 The Originating Process has been served on the following persons:

(a) The Australian Securities and Investment Commission.

Further, the creditors have been notified of the Liquidators' application by a circular dated 28 May 2018.

12 I will deal in turn with each of the orders sought by the Liquidators. The first order sought is:

Pursuant to section 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) the first plaintiffs ('the Liquidators') are justified and acting reasonably in proceeding on the basis that:

(a) the second plaintiff ('the Company') carried on business in its capacity as trustee of The Forbes Family Trust ABN 15 647 430 155 ('the Trust'); and

(b) all assets of the Company are properly characterised as property held by the Company in its capacity as trustee of the Trust ('Trust Property').

13 Section 90-15 of Schedule 2 of the Act relevantly provides as follows:

Court may make orders

(1) The Court may make such orders as it thinks fit in relation to the external administration of a company.

...

Examples of orders that may be made

(3) Without limiting subsection (1), those orders may include any one or more of the following:

(a) an order determining any question arising in the external administration of the company;

(b) an order that a person cease to be the external administrator of the company;

(c) an order that another registered liquidator be appointed as the external administrator of the company;

(d) an order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company;

(e) an order in relation to any loss that the company has sustained because of a breach of duty by the external administrator;

(f) an order in relation to remuneration, including an order requiring a person to repay to a company, or the creditors of a company, remuneration paid to the person as external administrator of the company.

Matters that may be taken into account

(4) Without limiting the matters which the Court may take into account when making orders, the Court may take into account:

(a) whether the liquidator has faithfully performed, or is faithfully performing, the liquidator's duties; and

(b) whether an action or failure to act by the liquidator is in compliance with this Act and the Insolvency Practice Rules; and

(c) whether an action or failure to act by the liquidator is in compliance with an order of the Court; and

(d) whether the company or any other person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and

(e) the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group.

14 Having regard to the enquiries made by the liquidators and the potentially serious financial consequences, if the proposed sale of the assets of the Company is not effected promptly, I consider it appropriate that I give the direction as sought.

An order pursuant to section 63 of the Trustee Act that the Second Plaintiff, in its capacity as trustee of the Trust, shall have the following powers at its absolute discretion:

(a) to carry on the business of the Trust;

(b) to employ any person in connection with the business of the Trust;

(c) sell or otherwise dispose of, in any manner, all or any part of the Trust Property in its capacity as trustee of the Trust;

(d) to compromise any claim made against the Second Plaintiff in its capacity as trustee of the Trust or against any of the Trust Property on any terms the Second Plaintiff sees fit;

(e) to bring any claim against any party on behalf of the Trust.

16 Section 63 of the Trustee Act 1958 provides as follows:

Power of Court to authorize dealings with trust property

(1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, 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 thinks fit and may direct in what manner any money authorized to be expended, and the costs of any transaction are to be paid or borne as between capital and income.

17 Although the appointment of the Company as trustee has been terminated, consequent on the appointment of the liquidators, it still holds the legal title to the trust assets. It has no active duties to perform, and its duties and powers are limited to protecting the trust assets.[1] It is arguable that the protection of the goodwill of the Company would entitle the Company, even as a bare trustee, to maintain the employment of staff and the business premises; and generally carry on the business. However, the power of liquidators, under s 477(2)(c) of the Act, to sell the property of the Company does not extend to selling property held on trust.[2]

18 In my opinion, it is appropriate, for the avoidance of doubt, to authorise the Company to carry on the business. Further, it is in the interests of the Trust and its creditors that the Company, under the control of the Liquidators, have the power to complete the sale of the assets of the Trust for the purpose of maximising the return to creditors. It does not appear necessary to empower the Company to compromise claims against the Trust, but the Company should be empowered to collect any debts or other amounts due to the Trust. I am prepared to make orders, substantially in the form sought, under s 63 of the Trustee Act 1958.

Pursuant to section 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) the Liquidators are justified and otherwise acting reasonably in proceeding on the basis that their possession, realisation and distribution (if any) of the Trust Property of the Trust is governed by Parts 5.5 and 5.6 of the Corporations Act 2001 (Cth).

20 In my opinion, it is appropriate to give the Liquidators the comfort of the order sought to allow them to deal with the trust property on the basis that it is governed by Parts 5.5 and 5.6 of the Act. The Court of Appeal in Commonwealth v Byrnes (in their capacity as joint and several receivers and managers of Amerind Pty Ltd (recs & mgrs apptd) (in liq))[3] and the Full Federal Court in Jones (in his capacity as liquidator of Killarnee Civil and Concrete Contractors Pty Ltd (in liq)) v Matrix Partners[4] has each held that a corporate trustee's right of indemnity out of the trust assets is property of the corporation and that the priority regime in the Act applies to the distribution of trust property in the winding up of the corporate trustee.[5]

Pursuant to section 1318 of the Corporations Act 2001 (Cth) and further or alternatively section 67 of the Trustee Act 1958 (Vic) the Liquidators are relieved from any liability for dealing with the Trust Property of the Trust between the date of their appointment and the date of this order.

22 Section 67 of the Trustee Act provides:

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 he committed such breach, then the Court may relieve him either wholly or partly from personal liability for the same.

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.

24 The purpose of s 1318 is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are business persons who act in the environment involving risk in commercial decision-making.[6]

(a) treating the assets of the Company as assets held in its capacity as trustee of the Trust; and

(b) carrying on the business of the Company for the purpose of realising the sale of the business,

the Liquidators have acted honestly, reasonably and in the best interests of the Company and the Trust. Accordingly, I am prepared to make an order relieving them from any liability for dealing with the trust property, limited to those respects, between the date of their appointment and the date of this order.

Pursuant to section 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) the Liquidators are justified and otherwise acting reasonably in proceeding on the basis that:

(a) the Liquidators are entitled to be paid their remuneration (as approved pursuant to section 60-10 of Schedule 2 to the Corporations Act 2001 (Cth)) costs and expenses from the property of the Trust ('Remuneration and Expenses'); and

(b) the Liquidators are entitled to be indemnified out of, and have an equitable lien over, the Trust Property for all of their Remuneration and Expenses.

27 A bare trustee is not generally entitled to remuneration for the time and trouble in the execution of the trust.[7] However, a liquidator may be entitled to recover expenses and remuneration on the 'salvage principle' established by Re Universal Distributing Co Ltd (in liq).[8] Dixon J explained the principle as being that a person who works for the exclusive purpose of realising, caring for or preserving property to create a fund or pool of assets is entitled to a lien or charge against the fund or pool of assets for the expenses and remuneration incurred in such work.[9] This lien arises as a matter of law and does not require an order of the court.[10]

28 The application of the salvage principle has been held to entitle a liquidator acting reasonably to be indemnified out of trust assets for its costs and expenses in:

(a) identifying or attempting to identify trust assets;

(b) recovering or attempting to recover trust assets;

(c) realising or attempting to realise trust assets;

(d) protecting or attempting to protect trust assets; and

(e) distributing trust assets to the persons beneficially entitled to them.[11]

29 It is unclear whether the salvage principle gives rise to a different entitlement to that under s 556(1)(a) of the Act, which provides:

Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:

(a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business; ...

30 Although the Liquidator is entitled to a lien under the salvage principle, it is now clear that s 556 of the Act regulates a Liquidator's entitlement in the current circumstances. Accordingly, I consider the order with respect to the Liquidator's entitlement should reflect the words of the section. It is not necessary to make any order as to a lien or otherwise as to priority because the Liquidators' priority is provided by the section. Further, the determination of the remuneration will be in accordance with Subdivision B of Schedule 2 of the Act.

1. Pursuant to section 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) the first plaintiffs ('the Liquidators') are justified and acting reasonably in proceeding on the basis that:

(a) the second plaintiff ('the Company') carried on business in its capacity as trustee of The Forbes Family Trust ABN 15 647 430 155 ('the Trust'); and

(b) all assets of the Company are properly characterised as property held by the Company in its capacity as trustee of the Trust ('Trust Property').

1. Pursuant to section 63 of the Trustee Act 1958 the Company, in its capacity as trustee of the Trust, shall have at its absolute discretion, the power to:

(b) employ any person in connection with the business of the Trust;

(c) sell or otherwise dispose of, in any manner, all or any part of the Trust Property in its capacity as trustee of the Trust; and

(d) to bring and/or to compromise any claim against any party on behalf of the Trust.

1. Pursuant to section 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) the Liquidators are justified and otherwise acting reasonably in proceeding on the basis that their possession, realisation and distribution (if any) of the Trust Property is governed by Parts 5.5 and 5.6 of the Corporations Act 2001 (Cth).
2. Pursuant to section 1318 of the Corporations Act 2001 (Cth) and further or alternatively section 67 of the Trustee Act 1958 the Liquidators are relieved from any liability for proceeding, in the period between the date of their appointment and the date of this order:

(a) on the basis stated in paragraph 1 above; and/or

(b) as if the Company had the power to carry on the business of the Trust and employ any person in connection with the business of the Trust.

1. Pursuant to section 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) the Liquidators are justified and otherwise acting reasonably in proceeding on the basis that:

(a) the Liquidators are entitled to be paid their remuneration, costs and expenses properly incurred in preserving, realising or getting in Trust Property, or in carrying on the business of the Trust from the Trust Property ('Remuneration and Expenses'); and

(b) the Remuneration and Expenses include the remuneration, costs and expenses of and incidental to this application and are to be paid in accordance with the priority specified in section 556(1) of the Corporations Act 2001 (Cth).

32 There is liberty to apply for the plaintiffs and any person who can demonstrate a sufficient interest to modify these directions and orders, on not less than 48 hours' notice to the plaintiffs.

1. [1] CGU Insurance Ltd v One.Tel Ltd (in liq) [2010] HCA 26; (2010) 242 CLR 174, 182 [36] (French CJ, Heydon, Crennan, Kiefel and Bell JJ); FCT v Bruton Holdings Pty Ltd (in liq) [2008] FCAFC 184; (2008) 173 FCR 472, 498 [79] (Ryan, Mansfield and Dowsett JJ).

[2] Jones (in his capacity as liquidator of Killarnee Civil and Concrete Contractors Pty Ltd (in liq)) v Matrix Partners [2018] FCAFC 40; 124 ACSR 568, 589 [89] (Allsop CJ, Siopis and Farrell JJ).

[3] [2018] VSCA 41; (2018) 354 ALR 789; 124 ACSR 246 (Ferguson CJ, Whelan, Kyrou, McLeish and Dodds-Streeton JJA) ('Byrnes').

[4] [2018] FCAFC 40; 124 ACSR 568 (Allsop CJ, Siopis and Farrell JJ) ('Killarnee').

[5] Byrnes 297-299 [269]-[281]; Killarnee 585 [69] and 592 [101]-[102] (Allsop CJ) 608-613 [200]-[223] (Farrell J).

[6] Daniels v Anderson (1995) 37 NSWLR 438, 525 (Clarke and Sheller JJA).

[7] Re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297, 299-300 [11] (Campbell J).

[8] [1933] HCA 2; (1933) 48 CLR 171.

1. [10] Thackray v Gunns Plantations Ltd [2011] VSC 380; (2011) 85 ACSR 144, 160 [54] (Davies J). For discussion about the nature of the lien and the circumstances in which it arises in Australia see Brad Strahorn, 'The Nature of Corporate Insolvency Practitioner Liens' (2013) 21 Insolvency Law Journal 37.
2. [11] 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377, 385 (Finkelstein J). For examples of the application of the principle see Thackray v Gunns Ltd [2011] VSC 380; (2011) 85 ACSR 144, 158 [49] (Davies J).