First Plaintiffs v Second Plaintiff

1 By originating process filed 5 April 2022, the first plaintiffs, Messrs Giasoumi and Deane (the 'Liquidators') who are the liquidators of the second plaintiff, Mystique Print Pty Ltd (in Liquidation) (ACN 007 392 743) ('Mystique') apply under s 90-15 of Schedule 2 - Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) ('Schedule 2'), s 1318 of the Corporations Act 2001 (Cth) ('Corporations Act'), s 63 of the Trustee Act 1958 (Vic) ('Trustee Act'), s 37 of the Supreme Court Act 1986 (Vic) ('Supreme Court Act') and rr 39.02 and 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) ('Rules') for orders that the Liquidators be appointed as receivers and managers of the assets of the Mystique Graphics Unit Trust (ABN 84 918 934 435) ('Trust') without being required to provide security together with other ancillary orders.

2 The Liquidators claim the following relief in the originating process:

1. An order pursuant to s 90-15 of Schedule 2 that the Liquidators are justified and acting reasonably in proceeding on the basis that:

(a) the Second Plaintiff carried on business solely in its capacity as trustee of the Trust;

(b) all assets and undertakings of the Second Plaintiff are properly characterised as property held by the Second Plaintiff in its capacity as trustee of the Trust; and

(c) all of the creditors of the Second Plaintiff are creditors of the Trust.

2. An order pursuant to s 37 of the Supreme Court Act, alternatively s 63 of the Trustee Act, that the Liquidators be appointed nunc pro tunc, without security, as the receivers and managers (Receivers) of all the property, business, assets and undertakings of the Trust (Assets).

3. An order that the Receivers have nunc pro tunc, in respect of the Assets of the Trust, all the powers prescribed by s 420 of the Corporations Act (other than those in ss 420(2)(s), (t), (u) and (w)) as if reference in that section to "the corporation" were a reference to the Trust, including, without limitation, the power to do all things necessary and convenient to:

(a) effect the sale and realisation of the Assets of the trust;

(b) pay the creditors of the Trust from the proceeds of the assets, pursuant to the priorities prescribed under the provisions of the Corporations Act;

(c) compromise any claim made against the Company its capacity as trustee of the Trust or against any of the Assets on any terms the Receiver sees fit;

(d) bring any claim against any party on behalf of the Trust; and

(e) execute any tax returns, financial statements or other documents relating to the Trust.

4. An order pursuant to s 90-15 of Schedule 2 that the Receivers are justified and otherwise acting reasonably in proceeding on the basis that they can deal with, hold, apply and/or distribute the Assets in accordance with Parts 5.5 and 5.6 of the Corporations Act.

5. An order pursuant to s 90-15 of Schedule 2, s 1318 of the Corporations Act and r 39.09 of the Rules that:

(a) the Liquidators are entitled to be paid their remuneration, costs and expenses incurred as Liquidators and/or Receivers from the proceeds of sale of the Assets;

(b) the Liquidators be indemnified out of, and have an equitable lien over, the Assets for all of the Liquidators' remuneration, costs and expenses attributable to the Trust and the Assets; and

(c) the remuneration, costs 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 s 556(1) of the Corporations Act.

6. An order pursuant to s 1318 of the Corporations Act, alternatively section 67 of the Trustee Act, that the Liquidators be relieved from any liability for dealing with the Assets of the Trust between the date of their appointment as liquidators and the date of the order.

3 The application is supported by affidavits of Shane Leslie Deane, one of the Liquidators, affirmed 1 April 2022 and 23 May 2022 together with an affidavit of service of Isabella Rose Stephenson affirmed 8 April 2022.

4 As the Liquidators seek relief under s 90-20 of the Schedule 2, r 2.8 of the Supreme Court (Corporations) Rules 2013 (Vic) requires that the person making the application must serve on the Australian Securities and Investments Commission ('ASIC') at a reasonable time before the hearing of the application a copy of the originating process and supporting affidavits. This has been done,[1] and there has been no reaction from ASIC. In addition, the Liquidators have served the sole director and shareholder of Mystique, Darren Paul Greene.[2] Mr Greene and another entity were the original unit holders of the Trust and transferred their units to the Greene Family Trust, which is now the sole unit holder of the Trust. The trustee of the Greene Family Trust is Dazblu Pty Ltd ('Dazblu'). Mr Greene is the sole director, shareholder and the secretary of that company. In addition, the creditors have been informed of the making of the present application and the means by which they could gain access to the documentation relied on by the Liquidators in this application if they chose to do so.[3] There has been no appearance by Mr Greene, Dazblu or any of the creditors in this proceeding.

5 Mystique was incorporated on 18 April 1990 and Mr Greene was appointed as a director on that day. Mr Greene has been the sole director since 28 April 1999.

6 On 22 May 1990, Mystique was appointed trustee of the Trust by a trust deed of that date ('Trust Deed'). It operated a printing business from leased premises at Laser Drive, Rowville in Victoria (the 'premises').

7 On 16 July 2021, the landlord of the Premises, Salvesen Investments Pty Ltd (the 'Landlord'), served a notice to vacate on 30 September 2021 when the term of the lease expired.

8 On 16 November 2021, Mystique went into creditors' voluntary liquidation pursuant to s 499 of the Corporations Act and the Liquidators were appointed as joint and several liquidators. As at the date of the appointment of the Liquidators, the Trust was said to have had assets with an estimated value of $755,579.58, consisting of trade debtors of $299,889.58 and plant, equipment and motor vehicles valued at $455,690.00.

9 Mr Deane states that on 8 December 2021 he received a copy of the Trust Deed from Mystique's former accountants Douglas & Harrison Chartered Accountants (the 'Accountants').

10 Mr Deane states that shortly prior to the appointment of the Liquidators and as a result of the Liquidators' preliminary investigations, they formed the view that it was likely that Mystique was operating the business as trustee of a trading trust, namely the Trust. Their basis for taking this view was primarily based on advice, information and copies of financial statements provided by the Accountants, and because the ABN used by the business was registered in the name of the Trust and not Mystique. Mr Deane states that although the Liquidators had formed that view, they decided that it was in the interest of creditors to urgently sell the plant and equipment onsite at the premises, and without first making this application to the Court. The reason for this was that Mystique would shortly have to quit the premises. Substantial costs would have been incurred in overholding rent, or alternatively, transport and storage costs of relocating the substantial printing plant and equipment to an alternative location until the outcome of this application was known. Mr Deane states that those costs would ultimately have reduced the pool of funds available to the distribution of creditors significantly.

11 Mr Greene had responded to an enquiry in regard to the capacity in which Mystique held property in its name in his Report on Company Activities and Property ('ROCAP') that Mystique did not hold any property on trust; the Liquidators only received confirmation from Mr Greene that the answer he gave in the ROCAP in this regard was not correct on 20 December 2021.

12 Mr Deane deposes that advice was obtained from an auctioneer and valuer, Jason Gollant of Gollant Auctioneers & Valuers Pty Ltd, as to the most appropriate and commercial method to realise the assets. After their appointment, the Liquidators reached an agreement with the Landlord for a brief period of overholding. With the consent of the Landlord, the Liquidators engaged Mr Gollant to conduct an onsite online auction at the premises on 9 December 2021. At the conclusion of the overholding period on 23 December 2021 the premises were vacated.

13 The Trust Deed contains what has become known as an ipso facto clause, described by Mr Deane in his evidence as the 'Disqualification Clause'. Clause 40(b)(ii) provides that:

A Trustee shall be disqualified from holding office if: ... being a company it goes into liquidation or if a receiver manager or official manager of any of its assets or undertakings is appointed.

14 By its operation, Mystique was automatically disqualified and ceased to be trustee of the Trust on the date of the Liquidators' appointment. It thereby became the bare trustee of the Trust's assets, and no longer had the power to deal with the Trust's property or the right to be indemnified out of the Trust's assets without order of the Court or by appointment of a receiver over the Trust assets.[4] Accordingly, Mystique is presently not able to realise the Trust assets or rely on its right to indemnification, recoupment or exoneration from the Trust assets under clause 35 of the Trust Deed.

15 Mr Deane deposes that the sale price achieved at auction for the plant, equipment and motor vehicles exceeded their estimated value at the appointment date. The Trust's current assets comprise residual debtors of $27,480.25 and cash of $759,008.10 which is held by the Liquidators in bank accounts. As against this, the Trust has liabilities of $947,249.27, comprising employee creditors of $173,526.87 and unsecured creditors of $773,722.40.

16 Mr Deane deposes that on the basis of his investigations into the affairs of Mystique he believes that Mystique:

(a) traded the business exclusively in its capacity as trustee of the Trust;

(b) only acted, traded and held property in its capacity as trustee of the Trust; and

(c) did not hold property, act or engage in trading activities in its own name or under its own ABN.

17 He also deposes that a replacement trustee has not been appointed as trustee of the Trust.

18 Mr Deane bases his beliefs in this regard on the following matters:

(a) the Trust was established on 22 May 1990, shortly after Mystique was incorporated on 18 April 1990;

(b) Mystique does not have its own ABN;

(c) the Trust has had its own ABN since 10 April 2000 and has been registered for goods and services tax ('GST') since 1 July 2000;

(d) Mystique issued invoices to its clients which refer to the Trust and contained the Trust's ABN on the invoice;

(e) the most recent financial accounts and taxation return for the Trust are for the 2018 financial year and were prepared by the Accountants on 6 December 2019. Both the accounts and the Trust tax return refer to Mystique as the trustee of the Trust. In addition, Mr Greene, in his capacity as director of Mystique, signed a director's declaration and resolution dated 6 December 2019 on behalf of Mystique in its capacity as trustee of the Trust;

(f) on 20 December Mr Deane's assistant, Mr Warry spoke with Mr Greene by telephone and was informed by Mr Greene that:

(i) Mystique only ever acted or traded in its capacity as trustee of the Trust; and

(ii) the statement in the ROCAP relating to Mystique not holding property on trust made by Mr Greene was not correct.

19 Mr Deane states that he and Mr Giasoumi considered it appropriate that orders be made that they be appointed as receivers of the Trust's assets. In this regard, he states first that under the Disqualification Clause, Mystique is disqualified as trustee of the Trust and cannot deal with the Trust's assets and liabilities. Secondly, such orders if granted would permit the Liquidators to complete the winding up of Mystique and exercise Mystique's right of indemnity, rather than allow Mystique's liabilities to remain on foot for the indefinite future. Thirdly, Mr Deane states that Mystique's liabilities should be discharged as soon as possible for the benefit of all creditors of the Trust and the creditors cannot be paid other than by way of dividend in the liquidation of Mystique from the sale of the Trust's assets.

20 Applications of the type brought by the Liquidators in this proceeding have become common in the Corporations Lists of state Supreme Courts and in the Federal Court. The principles are settled and are collected and considered by Moshinsky J in Re Cremin, Brimson Pty Ltd (in liq).[5] In brief terms, a company that is the trustee of a trading trust has a right of indemnity to resort to the trust assets to vindicate its right to be exonerated from a liability that it has incurred in the course of carrying out trust business. Where that company goes into liquidation its right of indemnity and its accompanying equitable lien over the assets survives, notwithstanding that the company has been removed as trustee of the trust, for example by operation of an ipso facto clause such as the Disqualification Clause in this case. However it only holds the trust assets as bare trustee.[6] The rationale for this is that, on a proper understanding, the Trust assets are not "property of the company" but are rather trust property in which the corporate trustee has a proprietary interest by way of lien or charge to secure its right of exoneration.[7]

21 Moshinsky J observed that courts are generally willing to make orders permitting the liquidator to sell trust assets in these circumstances. Where the property of the trust will be exhausted following its sale and subsequent distribution to creditors it may be appropriate to only give the liquidator a power of sale. However, Moshinsky J observes the more common course is for the liquidator of the insolvent former corporate trustee to apply to be appointed receiver for the purpose of selling the trust assets and distributing the proceeds among trust creditors. He observes that orders appointing the liquidator as a receiver for this purpose may be made now for then to authorise the sale of trust assets that have already occurred, as is the case in these circumstances.[8]

22 The proceeds from the exercise of a corporate trustee's right of exoneration may only be applied in satisfaction of the liabilities of the trust to which that right relates and the liquidator of a former corporate trustee may only apply the proceeds of sale of trust assets to satisfy assets owed to trust creditors and not those owing to general creditors. This would include the costs of the liquidation including the liquidator's remuneration as such costs constitute debts incurred by the company in discharging the duties imposed by the trust. Where, as is apparently the case here, a company has only ever acted as trustee of one trust and that has been the totality of its affairs, no issue arises as to the application of trust assets to general creditors because all the company's creditors are trust creditors. Where this is the case, the proceeds from the exercise of the right of exoneration are to be distributed to the trust creditors in accordance with the priorities prescribed by the Corporations Act.[9]

23 I have considered the written submissions of Mr Tennant of counsel for the liquidators in support of this application. Those submissions helpfully survey the relevant legal principles to be applied in this application and are persuasive in support of the relief which the Liquidators seek.

24 I am satisfied on the basis of the matters referred to by Mr Deane in his affidavit that Mystique carried on business solely in its capacity as trustee of the Trust and that all of its assets are properly characterised as property held by Mystique as trustee of the Trust and that all of its creditors are Trust creditors. As such, I am persuaded that the order sought in paragraph 1 of the originating process is appropriate to be made. I am also persuaded that because of the application of the ipso facto clause in the Trust Deed, that Mystique no longer has the power to realise or deal with the Trust assets, or to rely upon its right of indemnification and that orders are required to be made to enable the Liquidators to deal with the Trust assets. As Moshinsky J observes in Re Brimson, the "well established" and "more common course" for a court to adopt is to appoint the liquidators as receivers and managers of the trust's assets without being required to provide security.

25 I also consider that it is appropriate in this case to make such order now for then to authorise the Liquidators' sale of the Trust's plant, equipment and motor vehicles in December 2021. Such a course was justified in the circumstances to avoid the additional costs of the nature mentioned which would attend the awaiting the outcome of this application.

26 As is submitted by Mr Tennant, by urgently selling the Trust's plant, equipment and motor vehicles from the premises in reliance on professional advice from an experienced auctioneer and valuer at a time when they suspected that such assets might be Trust property, the Liquidators nonetheless achieved realisations significantly in excess of the expert's valuation. Further, they also minimised the cost and expenses associated with the storage of the assets pending sale and thereby maximised the pool of funds available for the Trust's creditors. Although there is no evidence of a threat of action being taken alleging that the Liquidators acted in breach of Trust in proceeding to sell without that power, I consider that the Liquidators acted honestly and reasonably to advance the interests of creditors and should be protected from any potential liability for the sale of the Trust assets pursuant to s 1318 of the Corporations Act.

27 I will also order that the Liquidators, in their capacity as receivers and managers have the powers prescribed by s 420(2) of the Corporations Act (other than those in ss 420(2)(s),(t),(u) and (w) which are not appropriate in the current context) as if reference in that section to the "corporation" were a reference to the Trust. For clarity, those powers include without limitation the power to do all things necessary and convenient to: (a) effect the sale and realisation of the assets of the Trust; and (b) pay the creditors of the Trust from the proceeds of the assets pursuant to the priorities prescribed under the provisions of the Corporations Act and the other powers mentioned in sub-paragraphs 3(c), (d) and (e) of the originating process.

28 I also consider that it is appropriate to make an order pursuant to s 90-15 of Schedule 2 for the Liquidators' remuneration, costs and expenses and the other matters mentioned in paragraph 5 of the originating process.

29 I consider it is appropriate to also give liberty to apply to any person or creditor who can demonstrate sufficient interest to modify or discharge these orders on not less than 48 hours' written notice to the first plaintiffs.

1. Pursuant to s 90-15 of Schedule 2 - Insolvency Practice Schedule (Corporations) ('Schedule 2') to the Corporations Act 2001 (Cth) ('Corporations Act') the First Plaintiffs are justified and acting reasonably in proceeding on the basis that:

1. the Second Plaintiff carried on business solely in its capacity as trustee of the Mystique Graphics Unit Trust (ABN 84 918 934 435) ('Trust');
2. all assets and undertakings of the Second Plaintiff are properly characterised as property held by the Second Plaintiff in its capacity as trustee of the Trust; and
3. all of the creditors of the Second Plaintiff are creditors of the Trust.

2. Pursuant to s 37 of the Supreme Court Act 1986 (Vic) and s 63 of the Trustee Act 1958 (Vic) ('Trustee Act') the First Plaintiffs be appointed nunc pro tunc, without security, as the receivers and managers ('Receivers') of all the property, business, assets and undertakings of the Trust ('Assets').

3. The Receivers have nunc pro tunc, in respect of the Assets of the Trust, all the powers prescribed by s 420 of the Corporations Act (other than those in ss 420(2)(s), (t), (u) and (w)) as if reference in that section to "the corporation" were a reference to the Trust, including, without limitation, the power to do all things necessary and convenient to:

1. effect the sale and realisation of the Assets of the trust;
2. pay the creditors of the Trust from the proceeds of the assets, pursuant to the priorities prescribed under the provisions of the Corporations Act;
3. compromise any claim made against the Company its capacity as trustee of the Trust or against any of the Assets on any terms the Receiver sees fit;
4. bring any claim against any party on behalf of the Trust; and
5. execute any tax returns, financial statements or other documents relating to the Trust.

4. Pursuant to s 90-15 of Schedule 2, the Receivers are justified and otherwise acting reasonably in proceeding on the basis that they can deal with, hold, apply and/or distribute the Assets in accordance with Parts 5.5 and 5.6 of the Corporations Act.

5. Pursuant to s 90-15 of Schedule 2, s 1318 of the Corporations Act and r 39.09 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) that:

1. the First Plaintiffs are entitled to be paid their remuneration, costs and expenses incurred as Liquidators and/or Receivers from the proceeds of sale of the Assets;
2. the First Plaintiffs be indemnified out of, and have an equitable lien over, the Assets for all of the First Plaintiffs' remuneration, costs and expenses attributable to the Trust and the Assets; and
3. the remuneration, costs 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 s 556(1) of the Corporations Act.

6. Pursuant to s 1318 of the Corporations Act and s 67 of the Trustee Act the First Plaintiffs be relieved from any liability for dealing with the Assets of the Trust between the date of their appointment as liquidators of the Second Plaintiff and the date of this order.

7. Liberty to apply to any person or creditor who can demonstrate sufficient interest to modify or discharge orders 1 to 6 above on not less than 48 hours' written notice to the First Plaintiffs.

[1] See affidavit of Isabella Stephenson, affirmed 8 April 2022.

[3] See affidavit of Shane Leslie Deane, affirmed 23 May 2022.

[4] See Jones (Liquidator) v Matrix Partners Pty Ltd; Re Killarnee Civil and Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 260 FCR 310 ('Jones v Matrix') [44] (Allsop CJ with Farrell J agreeing [196]).

[5] [2019] FCA 1023; (2019) 136 ACSR 649 ('Re Brimson') [48]-[51].