Francis (Trustee), in the matter of Fotios (Bankrupt) v Helios Corporation Pty Ltd

Federal Court of Australia|2022-03-09|Before: Colvin J

National Practice Area: Commercial and Corporations

Sub-area: General and Personal Insolvency

ORDERS WAD 143 of 2020 IN THE MATTER OF THE BANKRUPT ESTATE OF MICHAEL GEORGE FOTIOS BETWEEN: IAN CHARLES FRANCIS AND JOANNE EMILY DUNN AS JOINT AND SEVERAL TRUSTEES OF THE BANKRUPT ESTATE OF MICHAEL GEORGE FOTIOS Applicant

ROBERT MICHAEL KIRMAN AND ROBERT CONRY BRAUER AS JOINT AND SEVERAL RECEIVERS OF THE MICHAEL FOTIOS FAMILY TRUST Receivers

order made by: COLVIN J DATE OF ORDER: 9 March 2022

On or before 16 March 2022, the parties, or each of them, do provide a minute of proposed orders to give effect to these reasons.
The application for judicial advice by the receivers appointed to the Michael Fotios Family Trust by order of the Court made on 6 September 2021 be listed for further hearing on a date to be fixed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

COLVIN J: 1 The Michael Fotios Family Trust (Trust) was created by a written deed dated 29 October 1986. For some time, Mr Michael Fotios was the trustee of the Trust. He was made bankrupt and, as a result, ceased to be the trustee. After an hiatus when there was no trustee, Helios Corporation Pty Ltd (Helios) was appointed by deed expressed to take effect from the date of bankruptcy of Mr Fotios. Helios is now in voluntary administration. It appears also that the Trust assets are insufficient to meet Trust liabilities although uncertainties as to the financial affairs of the Trust do not enable the elimination of the possibility that its assets may be sufficient to meet all liabilities. Nevertheless, on the basis of analysis undertaken by joint experts appointed by the Court to provide an opinion as to the financial circumstances of the Trust (Experts), a deficiency in assets over liabilities of the Trust appears highly likely. 2 The trustees of the bankrupt estate of Mr Fotios (Trustees in Bankruptcy) have commenced proceedings in this Court in which they claim that the creditors of his bankrupt estate have claims against Mr Fotios in his capacity as the former trustee of the Trust. They say that the creditors of the estate are subrogated to the right of Mr Fotios to seek exoneration from the assets of the Trust (and can pursue his associated right of indemnity). The proceedings were commenced against Helios on the basis that it was, at the time of their commencement, the trustee of the Trust. As has been noted, Helios is now in administration. However, it is not in liquidation. The ipso facto clause in the deed recording the terms of the Trust only takes effect upon liquidation. Therefore, at least at present, Helios remains as trustee of the Trust. However, in the circumstances, it appears likely that creditors of Helios will also make claims to be subrogated to the rights of Helios as trustee to seek indemnity from the assets of the Trust. 3 On 6 September 2021, orders were made by consent of the Trustees in Bankruptcy and the administrators of Helios (Administrators). Those orders gave leave pursuant to s 440D of the Corporations Act 2001 (Cth) to the Trustees in Bankruptcy to proceed against Helios and also appointed Mr Robert Kirman and Mr Robert Brauer as joint and several receivers of the property of the Trust (Receivers). I note that Mr Kirman and Mr Brauer are also the Administrators in respect of Helios. 4 The orders made on 6 September 2021 also provided that the costs, expenses and remuneration of Mr Kirman and Mr Brauer in respect of work undertaken as Receivers as well as their work as Administrators up to a total maximum of $300,000 may, subject to necessary approvals, be paid in priority to claims by Mr Fotios, the Trustees in Bankruptcy and Helios over the assets of the Trust. 5 By further consent order on 24 September 2021, the Court conferred powers upon the Receivers that extended beyond taking control of and preserving the property of the Trust. The orders included power to realise the property of the Trust, to apply to the Court for directions and to enter into and give effect to any agreement for the resolution of the proceedings insofar as it affects the assets and liabilities of the Trust. The orders provided that the Receivers were not to distribute any proceeds from the realisation of the assets of the Trust without an order from the Court approving the proposed distribution. 6 The Receivers now seek orders and directions by way of judicial advice concerning the priority of entitlement to the assets of the Trust. The orders are sought in order to enable the Receivers to participate with some certainty in attempts to resolve the claims to the property of the Trust by agreement. As any such agreement could not be carried into effect without the Court approving distributions from the Trust in the terms agreed so there will need to be a further approval to enable the Receivers to give effect to any such agreement. 7 Some orders have been made by way of judicial advice that deal, amongst other things, with the subrogation of creditors to the rights of exoneration of each of Mr Fotios and Helios and their rights of reimbursement by way of recoupment for expenditure they have made to satisfy Trust liabilities as well as the right in priority to the payment of remuneration to the Experts and the Receivers and also to the Trustees in Bankruptcy (in the latter case only to the extent that their actions have assisted in the care, preservation and realisation of the property of the Trust) from the assets of the Trust. 8 The orders that have been made will facilitate the resolution of claims against the Trust that arise from the administration of the bankrupt estate of Mr Fotios and the administration of the affairs of Helios. In that regard, it may be noted that loss of office by the trustee does not result in the loss of the right to the indemnity: Coates v McInerney (1992) 7 WAR 537. Further, proceeds from the exercise of the trustee's rights to exoneration when received by Mr Fotios or Helios as the case may be are to be administered by the Trustees in Bankruptcy and any administrator in insolvency of Helios for the benefit of trust creditors according to the statutory priorities in the relevant statutory insolvency frameworks: Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20; (2019) 268 CLR 524 at [93]-[96] (Bell, Gageler and Nettle JJ), [153]-[154] (Gordon J); Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 260 FCR 310; and Commissioner of Taxation v Lane [2020] FCAFC 184; (2020) 283 FCR 448. The consequence is that when it comes to exoneration it is only creditors in respect of trust liabilities who are entitled to share in the trust property recovered by an insolvency administrator on the basis of being subrogated to the trustee's power to exonerate those liabilities from the property of the trust. 9 The orders already made also recognise the priority of claims against the assets of the Trust arising from the time when Mr Fotios was trustee over claims against those assets arising from the time when Helios was trustee on the basis of the principle that the former trustee's rights have priority over a new trustee in the absence of some vitiating factor: see Re Application by Hughes; Richardson v Aileen Pty Ltd [2007] VSC 104. 10 Finally, the orders made recognise the right of indemnity supported by an equitable lien that is enjoyed by a Court appointed receiver in respect of the property being administered according to the orders of the Court: see the review of the authorities by Buss JA (Wheeler and Pullin JJA agreeing) in Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 40 WAR 53 at [46]ff. 11 Further orders to the following effect are also sought by way of judicial advice: (1) The Receivers are justified in dealing with claims made to assets of the Trust based on alleged unpaid past distributions to beneficiaries of the Trust (such claims being identified in the report of the Experts as unpaid present entitlements) on the basis that they are claims by creditors to be subrogated to the rights of Mr Fotios or Helios as the case may be to be exonerated from the assets of the Trust which claims, where established, give rise to an entitlement to be indemnified directly out of the assets of the Trust. (2) The Receivers are justified in dealing with claims made to assets of the Trust by Ms Renee Fotios (Ms Fotios) based upon her dealings in respect of a property at 12 Kathleen Street, Trigg in Western Australia (Trigg Property) as a claim by Ms Fotios as a creditor to be subrogated to the rights of the Bank of Queensland against Mr Fotios to be exonerated from the assets of the Trust which gives rise to an entitlement to be indemnified in respect of the debt directly out of the assets of the Trust. (3) Where entitlements to claims against the assets of the Trust have been demonstrated based upon claims to exoneration or reimbursement by a trustee of the Trust then the Receiver is justified in paying those claims only where the amounts so paid will be administered according to the priorities established under the Bankruptcy Act 1966 (Cth) and the Corporations Act. (4) If and to the extent that Ms Fotios establishes a valid security interest under the terms of a loan Deed executed between Ms Fotios and Helios as trustee of the Trust on or about 9 August 2021 that security interest ranks below the claims of: (a) the Experts to remuneration in respect of their appointment by the Court; (b) the Receivers in respect of their appointment by the Court (up to the maximum as ordered by the Court and as otherwise approved); (c) the Trustees in Bankruptcy in respect of work undertaken by them in assisting the Receivers in their care, preservation and realisation of the property of the Trust (up to the maximum as ordered by the Court and as otherwise approved); (d) the Trustees in Bankruptcy as trustees of the bankrupt estate of Mr Fotios to rights of reimbursement for personal expenditure by Mr Fotios or the Trustees in Bankruptcy to satisfy liabilities owed by Mr Fotios in his capacity as trustee of the Trust; and (e) the Trustees in Bankruptcy as trustees of the bankrupt estate of Mr Fotios to rights of exoneration for unsatisfied liabilities of Mr Fotios properly incurred in his capacity as trustee of the Trust the subject of claims by creditors to be subrogated to the right of indemnity of Mr Fotios as trustee. 12 The Receivers also seek an order that the maximum amount of their entitlement to remuneration pursuant to the orders of the Court appointing them as receivers of the Trust be increased to $550,000 and that the orders for their appointment be varied to increase the maximum amount to which the Trustees in Bankruptcy may be entitled on the basis of assistance provided to the Receivers in the care, preservation and realisation of the property of the Trust be increased to $125,000. Those orders are sought on the basis that necessary approvals will be obtained approving any remuneration. The application arises because the orders appointing the Receivers imposed a cap on the level of remuneration.

The issues for consideration 13 Therefore, the following issues remain for consideration on the application: (1) Does the Court have power to give further advice of the kind sought by the Receivers? (2) What, if any, advice should be given? (3) In what terms should the advice be expressed?

Issue 1: Does the Court have power to give further advice of the kind sought by the Receivers? 14 The Receivers have been appointed as officers of the Court. Their appointment with the consent of both the Trustees in Bankruptcy (of the estate of Mr Fotios) and the Administrators (of Helios) was an efficient and sensible way of investigating and dealing with the assets and liabilities of the Trust in circumstances where (a) there was in all likelihood a net deficiency in the Trust fund; (b) the affairs of the Trust were in the hands of an insolvent trustee; and (c) the main claims against the Trust were the claims to be made based upon the rights of indemnity of the two trustees, one former (Mr Fotios) and one current (Helios). 15 It may be questioned whether the Receivers, by virtue of their appointment by court order, became trustees of the Trust in any sense that enables them to seek advice by way of direction of the kind that has long been given by courts of equity to trustees and is now recognised (and in some instances expanded) by legislation: Australian Securities and Investments Commission v Commercial Nominees of Australia Limited atf Confidens Investment Trust [2002] NSWSC 576 at [10] (Barrett J). 16 Equally, the broad statutory authority now conferred upon the Court by s 90-15 of each of the Insolvency Practice Schedule (Corporations) and Insolvency Practice Schedule (Bankruptcy) being Schedules 2 to each of the Corporations Act and the Bankruptcy Act respectively, relates to questions arising in the external administration of a company or the administration of a bankrupt estate. The Receivers are not undertaking an administration of either such character. They are giving effect to the orders of the Court as to their appointment. The fact that the Receivers are also the Administrators does not assist. The present application relates to their actions as receivers pursuant to the terms of the orders that govern their appointment. Possibly, it might be said that the application concerns the claims to be made against the assets of the Trust by the Trustees in Bankruptcy and the Administrators and on that basis some aspects of the advice may be sought within the statutory authority: see Mansfield v Thousand Angeles Island Pty Ltd (in liq), in the matter of Thousand Angeles Island Pty Ltd (in liq) (No 2) [2021] FCA 283 (Farrell J). However, it is not necessary to determine whether that is so because I am satisfied that the Court has inherent jurisdiction to provide judicial advice to the Receivers it has appointed for the reasons given by Barrett J in Commercial Nominees at [11] and I am satisfied that the directions sought by way of advice concern matters that are within the scope of the appointment of the Receivers. 17 Authorities concerning the nature and extent of the modern statutory power in the insolvency practice schedules to which I have referred were collected conveniently by Middleton J in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 6) [2020] FCA 1172 at [23]-[28]. They recognise that the modern statutory power extends beyond the giving of advice to the making of orders that determine substantive rights. If orders of that character had been sought on the present application then it may have been necessary to consider whether those statutory powers exist in the present circumstances. However, counsel for the Receivers disavowed any application for orders that would determine or alter rights or claims. The application was framed as an application for what might be termed judicial advice. I considered the nature and extent of that jurisdiction in the context of an application for advice by a private receiver in Preston, in the matter of Sandalwood Properties Ltd [2018] FCA 547. I am satisfied that advice of that character may be given by the Court to a receiver appointed by Court order.

Issue 2: What, if any, advice should be given? 18 As has been noted, the Receivers seek specific advice as to four further matters relating to the affairs of the Trust. They are each dealt with below.

(1) Claims to unpaid present entitlements 19 The report prepared by the Experts identifies a number of parties who may have claims as beneficiaries for what are described as 'unpaid present entitlements'. The report indicates that those claims may be for amounts between $5.1 million and $8.4 million. However, on the evidence available to the Receivers, the existence of those claims appears to depend upon the terms of a handwritten note provided in 2019 by Mr Fotios to an accountant engaged to prepare accounts for the Trust. Therefore, there is a factual issue as to whether there is a proper basis to support the amounts shown for unpaid present entitlements in the accounts for the Trust. 20 In addition to the issue whether there is factual support for the claims, legal issues arise as to the character and enforceability of any such unpaid present entitlements as against the trustee of the Trust with a view to being subrogated to the trustee's right of indemnity against the assets of the Trust. 21 First, the Receivers have identified the possibility that an unpaid present entitlement in the name of Mr Fotios may have arisen from action taken in breach of what is described as the self-dealing rule. The Receivers refer to the decision in Minister Administering National Parks & Wildlife Act 1974 v Halloran [2004] NSWCA 118 at [54] and the extra-judicial writing of Edelman J (then of the Supreme Court of Western Australia) in the chapter 'The "Self Dealing" Rule In Equity' in J Glister and P Ridge, Fault Lines in Equity (Hart Publishing), 2012 which deals, amongst other things, with Clay v Clay [2001] HCA 9; (2001) 202 CLR 410 at [51]-[52], s 44 of the Property Law Act 1969 (WA) and s 57 of the Trustees Act 1962 (WA). It is sufficient for present purposes to note that there is an issue in that regard. Directions are not sought to deal with that aspect. 22 Second, the trust instruments for the Trust provide that the trustee may pay, apply or set aside the income of the Trust fund for one or more of the beneficiaries. Further, the trust instrument states that where an amount is 'set aside' it shall cease to form part of the Trust fund and will be held on a separate trust. Therefore, if the term unpaid present entitlements as used in the accounts for the Trust refers to amounts that have been set aside then there was an obligation on the part of the trustee to deal with such amounts separately as part of a different trust. It appears that no such steps were taken. 23 The Receivers suggest that it may be possible that a decision was made to pay the amounts (rather than set them aside for the benefit of an identified beneficiary in the hands of the trustee) and there was simply a failure to pay. They say that a conclusion to that effect is supported by the terms of the description 'unpaid present entitlements' as used in the accounts for the Trust. If that is correct then the amounts can be no more than a claim against the trust as a creditor for the unpaid debt. If that is not so and the amounts were 'set aside' but not dealt with separately, then the Receivers refer to the reasoning of Buss JA (Martin CJ and Pullin JA agreeing) in Chianti Pty Ltd v Leume Pty Ltd [2007] WASCA 270; (2007) 35 WAR 488. 24 The decision in Chianti concerned a claim to an amount which was said to be the total of the distributions made from a trust fund to Leume Pty Ltd as beneficiary. The claim was brought in the District Court of Western Australia. The issue for consideration by the Court of Appeal was whether the claim was within the jurisdiction of the District Court on the basis that it was a 'personal action'. 25 The terms of the trust instrument in Chianti appear to have been similarly expressed to those for the Trust the subject of the present application. They provided for the trustee to be able to pay, apply or set aside all or part of the net income of the trust fund and that if an amount was set aside then it shall cease to form part of the trust fund and was to be held by the trustee on a separate trust: at [63]. Resolutions were made by the trustee to apply specified amounts for the benefit of specified beneficiaries and for the 'application' to be effected by crediting those amounts to the beneficiaries in the books of the trust: at [64]. The books of account for the trust recorded such amounts as 'current liabilities' variously described as 'Beneficiaries' Loan Account', 'Beneficiaries' Current Account' and 'Unpaid Beneficiary Entitlement': at [66]. In apparent breach of the trust deed the amounts distributed were not held by the trustee in a separate trust fund nor were they accounted for on that basis: at [67]. 26 In the above circumstances, Buss JA concluded that Chianti (the trustee) held the distributed amounts on trust for Leume (the beneficiary) absolutely. Therefore, the distributed amounts were 'vested in interest and possession': at [70]. As there had been a demand made for payment that was sufficient to require the trustee to pay the vested amounts to the beneficiary and therefore it could (and did) pursue the payment of the amount as a personal action for money had and received. 27 Buss JA then considered an alternative basis advanced by Leume to support its case that it was pursuing a personal action which was to the effect that Chianti as trustee had admitted that the distributed amounts were owing to Leume on demand (including by describing them in the accounts as an Unpaid Beneficiary Entitlement) and that was a basis upon which the claim had been pursued in the District Court. The alternative basis was also accepted as a personal claim: at [77]. 28 Therefore, irrespective of the issue of self-dealing, it appears that if there are indeed unpaid beneficiary entitlements as described in the accounts of the Trust then they could form the basis for creditor claims against a responsible trustee as money had and received. However, by reason of the nature of the issues in Chianti the Court of Appeal did not need to consider whether there was some claim other a claim for money had and received that could have been advanced by Leume in the circumstances of the case. 29 It is possible that such factual circumstances may also give rise to a basis for a claim for compensation in equity that might affect the competing claims between creditors who are subrogated to the trustee's right of indemnity (for their unpaid claims) and beneficiaries who claim breach of duty by the trustee. 30 In Chief Commissioner of Stamp Duties v Buckle (1998) 192 CLR 226, the Court considered the nature of the interests held in trust property. The Court emphasised the distinction between the assets being administered by a trustee and the property held for the beneficiaries and stated at [48]: The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not 'trust assets' or 'trust property' in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries. (footnotes omitted) 31 The Court then dealt with the entitlement of the trustee to resort to the assets, stating at [49]-[50]: The entitlement to reimbursement and exoneration was identified by Lindley LJ as 'the price paid by cestuis que trust for the gratuitous and onerous services of trustees'. The right of the trustee has been described as a first charge upon the assets vested in the trustee, as one upon the 'trust assets', and as conferring upon the trustee an 'interest in the trust property [which] amounts to a proprietary interest'. However, the starting point in the class of case under consideration is that the assets held by the trustee are 'no longer property held solely in the interests of the beneficiaries of the trust'. The term 'trust assets' may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not 'encumbered' by the trustee's right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment 'takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation'. A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the 'trust assets' which may be enforced in the same way as any other equitable charge. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by s 66(1) of the Act. In valuing the interests of beneficiaries which are conveyed by an instrument, there is no encumbrance which the Act requires to be disregarded. (footnotes omitted) 32 Further, the right of a trustee to be indemnified from trust assets is for liabilities incurred in the authorised conduct of the trust by the trustee: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 371. Claims against the trustee for compensation arising from breach of the trustee's duty may limit the extent of the indemnity to which the trustee is entitled: Boensch v Pascoe [2019] HCA 49; (2019) 268 CLR 593 at [9] (Kiefel, Gageler and Keane JJ), [100] (Bell, Nettle, Gordon and Edelman JJ). 33 As the financial position of the Trust is uncertain, it may be the case that it has sufficient assets to meet proper claims for an indemnity with a surplus being available for beneficiaries. Further, the extent to which that is so may depend upon whether there are compensatory claims against either or both of the trustees that may be offset against the particular trustee's claim for indemnity by way of exoneration or recoupment. This possibility was not addressed in submissions advanced for the Receivers. In particular, it was not submitted that there was an absence of any basis to conclude that the extent to which the rights of creditors to be subrogated to the rights of indemnity of Mr Fotios and Helios as trustees may be affected by such claims. 34 There is nothing to indicate that the beneficiaries in respect of whom the unpaid beneficiary entitlements are listed in the accounts of the Trust (UBE Parties) would have a vested interest in the property of the Trust (as distinct from an entitlement to the distribution of income) or a basis to claim that the separate trusts as contemplated by the trust instrument for the Trust had been established. It appears that all that they would have would be a right to call for the Trust to be performed according to the terms of the trust instrument. In the absence of a vested beneficial interest in any of the trust property, it is difficult to see how there could be any form of tracing claim to the property of the trust based upon a failure to pay or set aside the unpaid beneficiary entitlements. I dealt with the authorities concerned with tracing based upon claims in equity in Goldus Pty Ltd (Subject to a Deed of Company Arrangement) v Cummins (No 4) [2021] FCA 1095 at [265]-[291], especially at [288]-[289]. 35 I observe as to these aspects that each of the UBE Parties was given notice of the present application and none sought to appear and contend for some right to the property of the trust that could be asserted in priority to the claims of creditors of Mr Fotios and Helios (as trustees of the Trust) to be subrogated to the right of indemnity (and associated charge or lien of the trustees against property of the Trust). 36 In all the circumstances, I am persuaded on the material presently available that advice should be given to the effect that the Receivers are justified in proceeding on the basis that any of the amounts of the unpaid present entitlements that are established are debts claimable by the UBE Parties as creditors of the relevant trustee of the Trust for which there is an entitlement to an indemnity against the property of the Trust on the basis of subrogation to the trustee's right of exoneration. 37 However, having regard to the value of the claims and the issue concerning whether there is a basis for any claims against either of the trustees for compensation, I propose to require that notice of the direction to be made by way of judicial advice be provided to the UBE Parties and will reserve liberty to them to apply within 30 days. I will also provide for operation of the orders by way of judicial advice to be deferred for 30 days or until further order to afford that opportunity. I do so because notice of the present application concerned a complex set of orders by way of advice and to enable the UPE Parties to have regard to these reasons in considering whether they wish to make any submissions on the application as parties with an interest.

(2) The Trigg Property 38 The Trigg Property was registered in the joint names of Mr Fotios and Ms Fotios. The Trigg Property was the subject of a mortgage to secure borrowings by Mr Fotios in his capacity as trustee of the Trust from the Bank of Queensland. Under the terms of the relevant loan agreements, Mr Fotios and Ms Fotios agreed to guarantee the borrowings by Mr Fotios as trustee of the Trust and to mortgage their joint interests (in their personal capacities) in the Trigg Property to secure their obligations as guarantors. 39 The joint tenancy was severed upon the sequestration of the estate of Mr Fotios: Singh v Kaur Bal [No 2] [2014] WASCA 88 at [43] (Murphy JA, Pullin and Newnes JJA agreeing). The Trustees in Bankruptcy arranged the sale of the Trigg Property. The amount due to the Bank of Queensland was discharged at settlement of the sale and the burden of the payment to the Bank was applied equally to Mr Fotios and Ms Fotios as joint guarantors. The surplus from the sale was allocated as to half to the Trustees in Bankruptcy and as to half to Ms Fotios. The effect of the transaction was that property of Mr Fotios that formed part of his bankrupt estate (in respect of which the Bank of Queensland held security) was used to discharge half of the secured guarantee obligation in respect of the liability of the Trust to the Bank of Queensland and the property of Ms Fotios (in respect of which the Bank of Queensland also held security) paid the other half. 40 The Receivers submit that, in those circumstances, the transaction should not be viewed as one in which Mr Fotios paid anything as trustee. Rather, it is a case where the relevant claim is one to be made based upon a right of recoupment in respect of a trust liability incurred but not actually paid by Mr Fotios. For the following reasons I agree with that characterisation. 41 The guarantee to the Bank of Queensland was not provided by Mr Fotios as trustee. Both he and Ms Fotios guaranteed the obligations of Mr Fotios as trustee and provided their interest in the Trigg Property held in their personal capacities as security. Mr Fotios, in his capacity as trustee, has made no payment. The position of the Bank in respect of the borrowing by Mr Fotios as trustee was as an unsecured creditor. Therefore, although Mr Fotios incurred the liability as trustee, he has not discharged the liability as trustee. Upon payment of the amount at settlement, Ms Fotios as guarantor met half the liability to the Bank of Queensland of Mr Fotios that had been incurred in his capacity as trustee of the Trust and thereby became subrogated to the claims of the Bank of Queensland as a creditor of Mr Fotios in his capacity as trustee of the Trust. Those claims included the right to be subrogated to the claim of Mr Fotios as trustee. The same analysis applies to Mr Fotios.

(3) The application of statutory priorities 42 As has been noted, the statutory priority regimes apply in dealing with competing claims to the property that is recovered by the Trustees in Bankruptcy or an insolvent administration of Helios in the exercise of the subrogated right of creditors to the charge or lien over the assets of the Trust that support the right to indemnity for exoneration. Therefore, the Receiver is justified in dealing with the trust assets on that basis. It may be noted that trust assets recovered to exonerate creditors must be applied to meet claims by trust creditors. However, trust assets recovered by way of recoupment are the trustee's personal property for distribution to creditors generally: Carter Holt at [155].

(4) The claimed security interest of Ms Fotios 43 As has been noted, the proposed advice refers to the terms of a loan Deed executed between Ms Fotios and Helios as trustee of the Trust on or about 9 August 2021. The loan Deed has been registered under the provisions of the Personal Property Securities Act 2009 (Cth) (PPSA) as being granted by each of Helios (using its ACN) and the trustee of the Trust (using its ABN). 44 By the terms of the PPSA, the priorities afforded by the registration are subject to a priority interest arising 'by operation of general law' that meets other specified statutory requirements: see s 73(1) of the PPSA. 45 As the loan Deed was granted by Helios in its capacity as trustee of the Trust and has been registered in respect of the interest of the trustee, it affords priority to claims by Helios in that capacity against the property of the Trust with effect from the registration. However, that position does not pertain to any priority interest arising at general law in favour of Mr Fotios in his capacity as the previous trustee. The loan Deed does not deal with claims of that kind. 46 In those circumstances, the Receivers seek advice to the effect that the interest in the property of the Trust that arises by reason of the rights of exoneration or recoupment of Mr Fotios as trustee of the Trust prior to the appointment of Helios as trustee has priority over the security interest in the Trust property created by the loan Deed. 47 As to the requirements of s 73(1), the following may be noted. 48 First as to s 73(1)(a)(ii), the rights of exoneration or recoupment of Mr Fotios that entitle him to a charge or lien over the property of the Trust arise by operation of the general law. No enforceable agreement or other instrument is required. As has already been explained, where the trustee pays or incurs the liability then the law recognises a right (or power) on the part of the trustee to be indemnified from the assets of the Trust and recognises a charge or lien over the assets of the Trust to the extent of the indemnity. 49 However, the terms of the deed for the Trust record an entitlement on the part of the trustee to the Trust to an indemnity. The relevant provision (cl 15) is expressed in the following terms: THE Trustees shall be entitled to be indemnified out of the assets for the time being comprising the Trust Fund against liabilities incurred by them in the execution or attempted execution or as a consequence of the failure to exercise any of the trusts authorities powers and discretions hereof or by virtue of being the trustees hereof but the Trustees shall not be entitled to be indemnified by any beneficiary personally in respect of any liabilities or other matters aforesaid other than in respect of any duty or tax which they are entitled to recover from the beneficiary by law. 50 Therefore, an issue arises as to whether, having regard to the terms of the deed, the right to indemnity arises 'by operation of general law' for the purposes of s 73(1)(a)(ii) of the PPSA or whether it is conferred by the terms of the Trust instrument. The issue has two aspects. The first aspect concerns whether the terms of the deed operate so as to comprehensively express the nature and extent of the trustee's indemnity with the consequence that the rights at general law do not remain. If so, the second aspect concerns whether rights conferred solely by the deed arise by operation of law for the purposes of s 73(1) or whether they are a security interest conferred by the instrument that must be registered if it is to be afforded priority. 51 As to the first aspect, there are cases dealing with the question whether the trustee's right of indemnity at general law can be excluded by the relevant trust instrument. They are complicated by the existence of the right of creditors to be subrogated to the right of indemnity and whether the trustee can, in effect, deprive creditors of that right by agreeing to forgo or limit the extent of the general law indemnity: see the review of the authorities by Debelle J in Moyes v J & L Developments Pty Ltd (No 2) [2007] SASC 261 at [37]-[44]. 52 The issue was considered by Santow J in JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147 where his Honour expressed the following views at [86]-[88]: … I accept the Plaintiffs' submission that the rights of reimbursement and exoneration arises a necessary incident of holding the office of trustee and are integral to the institution of a trust and for the benefit not only of the trustee, but also its creditors, whether or not aware they are dealing with a trust. They operate to create in favour of a trustee a beneficial interest in the trust assets similar or equivalent to an equitable charge. Hence as a matter of legal principle the trust's entitlement to recover liabilities incurred in carrying on the trust exists and arises independently of any provision contained in the trust deed; see Commissioner of Stamp Duties v Buckle (supra) at 245. The better view is that the Trustee's rights of reimbursement and exoneration could not be excluded through the instrument of trust; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties at 589 per McPherson J. Furthermore, even if that view were not correct, it would require a much clearer statement of an affirmative intention on the part of the Settlor in the Trust Deed to exclude the otherwise automatic operation of the Trustee's entitlement to reimbursement and exoneration … 53 The relevant passages from the High Court's decision in Buckle have already been quoted. They concern the particular character of the trustee's right (or power) in respect of an indemnity. As has been noted, the High Court made clear that the trustee's indemnity takes the form of being able to access part of the assets of the Trust and not as a claim against the interest of the beneficiaries. Statements to similar effect are to be found in Carter Holt Harvey. In Buckle, the Court went on to approve of a statement summarising the position of the trustee in respect of claims for exoneration or recoupment in the following terms: 'the trustee has a preferred beneficial interest in the trust fund'. The description of the character of the trustee's right to indemnity from the assets being administered as an entitlement to be exercised directly against the assets rather than as a claim to some form of security over property otherwise held for the beneficiaries emphasises its general law character. It provides the context in which to construe any provision in a trust instrument concerned with a right of indemnity against the assets comprising the trust fund. 54 The issue was considered by Brooking J in RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 (though without any reference to the reasoning of the High Court in Buckle). His Honour there concluded that a statutory provision in the Trustees Act 1958 (Vic) was a statutory recognition of the equitable rule which had the effect that the right of indemnity existed if and so far only as a contrary intention is not expressed in the trust instrument. It thereby enabled a trustee to accept an appointment on the basis that there was no indemnity but if the instrument did not so provide then the equitable position applied. The relevant provision in the Trustees Act 1962 (WA) is not to the same effect. It provides that a trustee 'may reimburse himself [or herself] for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers': see s 71. 55 To these matters may be added the principle that in construing commercial instruments clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach arising by operation of law: Concut Pty Ltd v Worrell [2000] HCA 64 at [23] (Gleeson CJ, Gaudron and Gummow JJ) quoting from Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 All ER 883 at 893. The same logic may be applied to the indemnity that a trustee may seek at general law from the assets of the trust. 56 In the present case, the provision in the Trust deed does not suggest any intention to alter or abandon the equitable right to an indemnity (or power to apply the assets of the trust by way of indemnity). In those circumstances, given the present state of the authorities it seems to me that the general law source of the trustee's indemnity is preserved by the terms of the trust instrument. This is either because the trustee cannot contract out of the existence of that general law right because it exists to protect not only the trustee but also creditors of the trustee or alternatively because the provision in the trust instrument present case does not manifest an intention to affect the general law right. Put another way, this is not a case where the source (and therefore the character) of the right to an indemnity is to be found only in the terms of the Trust deed. 57 Therefore, it is not necessary to consider the second aspect to which I referred earlier. 58 Second as to s 73(1)(b) & (c), where, as here, the claim is be a creditor who is subrogated to the trustee's indemnity then, in the ordinary course, there will have been a supply of goods or services by the creditor that gives rise to the claim. However, it is the supply of services by the trustee that gives rise to the claim. Relevantly for present purposes those services will be the incurring of liabilities in respect of the trust or the making of payments to discharge liabilities of the trust. Those services appear to meet the statutory definition. If they do not and the character of the liabilities to the creditors are themselves relevant, it may be inferred for present purposes that there has been such a supply where there is a bona fide creditor claim. If there has not been a supply of goods or services by the trustee then the requirements of the PPSA will not have been met. 59 Third, as to s 73(1)(d), there is no suggestion that another law determines the priority. 60 Fourth, as to s 73(1)(e), the lien or charge in favour of Mr Fotios as trustee must have arisen at a time when Mr Fotios had no actual knowledge that the acquisition of the goods or services was a breach of the loan Deed. By reason of the chronology that must be the case because the load Deed was entered into after Mr Fotios ceased to be trustee of the Trust. 61 Therefore, the general law right of Mr Fotios as the previous trustee of the Trust remains. As it meets the requirements of s 73(1) it is afforded priority over the registered interests created by the loan Deed which are exercisable only against the subsequent right to an indemnity of Helios as the subsequent trustee of the Trust.

Caps on remuneration 62 Having regard to the evidence concerning the nature of the claims to be considered by the receivers and associated dealings by the Trustees in Bankruptcy I am satisfied that there should be an increase in the caps on remuneration provided for in the orders. I do so noting that ultimately there will need to be approval by the Court of any remuneration claimed by the Receivers and any amounts claimed by the Trustees in Bankruptcy on the basis that they, in effect, form part of the receivership because they were taken to preserve the property in receivership, before any amounts could be paid from the property the subject of the receivership.

Issue 3: In what terms should the advice be expressed? 63 Having regard to the views that I have reached concerning priorities and in the interests of ensuring that there is a single set of orders that deal comprehensively and consistently with all issues, I propose to recall the orders that have already been made and make a single set of orders dealing with all matters the subject of the application for advice. 64 The orders should reflect the nature of the jurisdiction being exercised and should be expressed as advice to the Receivers as to what is appropriate rather than suggest that they involve any form of determination or adjudication of the issues. As I have indicated, the orders should also provide for notice to be given by the Receivers to the UBE Parties both of these reasons and the orders to be made by way of advice. 65 I am satisfied that it is appropriate in all the circumstances for the orders to provide for the reasonable costs of and incidental to the application as approved by the Court to be costs of the receivership to be paid out of the assets of the Trust. 66 I will hear from the Receivers and the other parties as to the final form of the orders having provided a draft of proposed orders to the parties at the time of publication of these reasons. I will list the application at a time convenient to the parties for the purpose of receiving any further submissions as to the form of orders to be made on the application. I certify that the preceding sixty-six (66) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.

Trustees Act 1958(Vic)

Corporations Act 2001(Cth)s 440D, Schedule

Trustees Act 1962(WA)ss 57, 71

At a glance

Court

Decision date

Before

Source

Judgment (17 paragraphs)

Parties

Legislation Cited (6)

Cases Cited (28)

Cited By (3)