Freelance Global v Bensted [2016] VSC 181

LIQUIDATORS - Are liquidators of a former corporate trustee entitled to costs and expenses of salvage from trust funds? - Salvage principle in Re Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171 and equitable allowance principle in Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32 applied.

COSTS - What are the appropriate orders for the costs of parties representing unascertained persons joined pursuant to r 16.01(2) of the Supreme Court (General Civil Procedure) Rules 2015?

1 By originating process, the plaintiffs seek declarations, liquidators' directions and relief by exoneration pursuant to s 511 of the Corporations Act 2001 (Cth) ('Corporations Act'), at equity and, if necessary, s 1318(2) of the Corporations Act and s 67 of the Trustee Act 1958 (Vic) ('Trustee Act').

2 The first plaintiff, Freelance Global Limited ('Freelance Global' or 'the Trustee'), operated a contractor agency business as the trustee of a discretionary trust called Freelance Trust No. 1 ('the Trust'), which was established by a deed of settlement dated 1 July 1992 ('the Trust Deed'). The second and third plaintiffs ('the Liquidators') were appointed voluntary administrators of Freelance Global on 28 February 2014. At the second meeting of creditors in the voluntary administration on 7 April 2014, they were appointed liquidators.

3 The Liquidators have received claims from certain beneficiaries of the Trust alleging an entitlement to money held by Freelance Global as trustee of the Trust. As at 28 February 2014, the money was held in two bank accounts, being:

(a) the 'General Account' with a balance of $392,720.44; and

(b) the 'Held Account' with a balance of $753,371.54.

Further, debts were owed to Freelance Global (totalling $2,838,657.02), which have been recovered by the Liquidators since 28 February 2014.

4 Freelance Global has unsecured creditors' claims in excess of $36 million and the Commissioner of Taxation is a contingent creditor for approximately $66 million.

5 For the purposes of the determination of the issues, the following orders were made for the representation of unascertained persons pursuant to r 16.01(2) of the Supreme Court (General Civil Procedure) Rules 2015:

(a) Ms Barbara-Anne Bensted, the first defendant, was appointed to represent herself, Paul Greenwood, Steven Harris, Peter Janssen, Brian John Phillips and Ramesh Kumar Yarramsetty, being people who claim to be entitled to money in the Held Account ('Held Account Beneficiaries');

(b) Mr Anthony Perryman, the third defendant, was appointed to represent himself and all the beneficiaries of the Trust other than the Held Account Beneficiaries and the second defendant, Mr Fred Ndiritu ('General Beneficiaries'); and

(c) The Deputy Commissioner of Taxation, the fourth defendant, was appointed to represent all unsecured creditors of the first plaintiff other than the Held Account Beneficiaries, the General Beneficiaries and the second defendant ('Unsecured Creditors').

6 Mr Ndiritu claims money in the Held Account, the General Account, and as an unsecured creditor of Freelance Global; and is therefore a defendant in his own right.

7 Freelance Global's business involved organising the provision of services by individual contractors to clients of Freelance Global. In summary, the business operated as follows:

(a) Freelance Global entered into contracts with its clients for the provision of services to those clients by a contractor specified in the contract.

(b) Freelance Global entered into arrangements with various employee contractors, sub-contractors and beneficiary contractors to provide the services to the clients pursuant to the contracts referred to in paragraph 7(a) above.

8 This proceeding relates to the beneficiary contractors for whom the business model was as follows ('Beneficiary Contractors'):

(a) Freelance Global acted solely as the trustee of the Trust; and, except for some funds held on a bare trust (referred to below), held no assets except as trustee under the Trust Deed.

(b) Prospective Beneficiary Contractors applied for, and were accepted as, general beneficiaries of the Trust.

(c) After completion of work by a Beneficiary Contractor, he or she would submit to Freelance Global a record of time spent on the provision of services to the client; and Freelance Global would invoice the client.

(d) On payment by the client into the General Account, Freelance Global would deduct its management fees and other applicable deductions. The balance of the payment was termed a 'reportable distribution.'

(e) On approval by the payroll manager, a director or the chief financial officer of Freelance Global, the reportable distribution would be paid from the General Account to the Beneficiary Contractor.

(f) The reportable distribution was paid as an 'advance' to:

(i) the bank account of a Beneficiary Contractor, or one or more 'secondary beneficiaries' (such as a spouse or immediate family member) as nominated by a Beneficiary Contractor;

(iii) the Held Account, if a Beneficiary Contractor had directed Freelance Global hold the fees pending further instructions.

(g) At the end of each financial year, Freelance Global would:

(i) offer each Beneficiary Contractor an opportunity to have the Trustee consider making a distribution to a secondary beneficiary; and

(ii) provide a beneficiary statement (which included a distribution statement setting out each distribution for the financial year) to each Beneficiary Contractor showing the total annual amount of distributions, and the total annual amount of administration fees, insurances, statutory payments, superannuation contributions and expense reimbursements.

9 Freelance Global employed sales representatives known as 'authorised distributors' who were responsible for signing up new Beneficiary Contractors.

10 Prior to a contractor signing an application to become a Beneficiary Contractor ('the Application'), which contained terms and conditions governing the relationship between Freelance Global and Beneficiary Contractors, the authorised distributors would inform proposed Beneficiary Contractors that:

(b) distributions from the Trust to Beneficiary Contractors were at the sole discretion of the Trustee;

(c) although the Trustee's distributions were discretionary, it was apparent that Beneficiary Contractors would not continue in the arrangement with Freelance Global if it did not exercise its discretion to pay the reportable distributions to, or at the request of, a Beneficiary Contractor; and accordingly

(d) Beneficiary Contractors only had one payment 'at risk' because, if the Trustee did not pay a Beneficiary Contractor after receipt of payment from a client for services performed by that Beneficiary Contractor, the Beneficiary Contractor would not continue to work for Freelance Global.

11 The terms and conditions attached to the Application included the following terms:

1. As a beneficiary, I will not have any right or entitlement to any income or capital of the Trust except for income or capital which Freelance determines in its absolute discretion to distribute to me. The same applies to any family member, company or trustee associated with me which may be or become a beneficiary of the Trust.

1. Even if I provide services on behalf of Freelance to Freelance clients, I am not guaranteed to receive any distribution from the Trust except on such terms as Freelance may decide in its absolute discretion.

1. Unless Freelance agrees to hire me as an employee, I will provide any services to Freelance clients as an independent contractor of Freelance, and may delegate the performance of any such services unless this is prohibited under Freelance's contract with a client.

1. Unless I am employed by Freelance pursuant to paragraph 6 above, I have no right to, or to demand, any remuneration, recompense or restitution from Freelance in respect of any services provided by me to any Freelance clients, other than distributions that Freelance may in its absolute discretion decide to pay to me subject to me providing such services.

1. Upon becoming a beneficiary of the Trust, I will be bound by the trust deed of the Trust as modified, varied, added to or amended from time to time.

12 If the Application was approved, Freelance Global would nominate and include the relevant Beneficiary Contractor as a general beneficiary of the Trust by way of written resolution. The terms attached to the nomination included the following:

1. any nominee shall cease to be a General Beneficiary without notice if the trustee of the Trust resolves at any time to exclude or remove the nominee as a General Beneficiary;
2. any nominee shall only receive a distribution from the Trust or an entitlement to Profit, net income or excess trust income of the Trust in the nominee's capacity as a beneficiary of the Trust if the trustee of the Trust so determines in its absolute discretion pursuant to its powers under the trust deed ...

13 The evidence from Mr Perryman was that he was told that the purpose of the system of engaging the Beneficiary Contractors as general beneficiaries under a discretionary trust was to allow them to reduce their tax liability by directing payment of the reportable distributions to others in a tax effective manner.[1]

1. The Court declares that the second and third plaintiffs (the "Liquidators"):

(a) are entitled to an indemnity secured by an equitable lien upon the amount of $757,138.44 ("Held Account Monies") held in the term deposit account with BSB 013 006 and account number 973 885 431 in respect of the payment of their costs, expenses and remuneration reasonably incurred in taking steps in their capacities as administrators and liquidators, respectively, of the first plaintiff ("Freelance Global") for the care, protection, preservation, realisation and distribution of the Held Account Monies; and

(b) are entitled to payment out of the Held Account Monies in a sum to be determined ("Held Account Expenses").

2. The Court declares that, save as provided in this order, the fact that:

(a) a person became a beneficiary of the Freelance Trust No 1; and

(b) that person provided services to a client of Freelance Global, for which Freelance Global as trustee of the Freelance Trust No 1 received payment -

does not by reason of those matters alone entitle the person to a beneficial interest in the payment, or to prove as a creditor in the winding up of Freelance Global.

1. The Court declares that, subject to the Liquidators' rights to the Held Account Expenses, and payment of any costs payable out of the Held Account Monies pursuant to paragraph 13 below (the "Held Account Costs"), the Held Account Monies are held by the Liquidators on trust for the following persons in the following proportions:

(a) the first defendant, Barbara-Anne Bensted, 26.55%

(b) Paul Greenwood, 0.86%

(c) Steven Harris, 24.56%

(d) Peter Janssen, 0.56%

(e) Brian John Phillips, 3.60%

(f) Ramesh Kumar Yarramsetty, 5.08%

(g) the second defendant, Fred Ndiritu, 38.79%

1. The Liquidators are to pay the Held Account Monies less the Held Account Expenses and the Held Account Costs to the persons and in the proportions described in paragraph 3 above.
2. The Court declares that Freelance Global holds the sum of $3,766.90 on trust for Mr Ndiritu.
3. The Liquidators are to pay the sum of $3,766.90 to Mr Ndiritu from the funds held by Freelance Global other than the Held Account Monies (the "non-Held Fund").

7. The Court declares that:

(a) each of the persons mentioned in paragraphs 3(a) to 3(f) above (collectively, the "Held Account Beneficiaries") and Mr Ndiritu is an unsecured creditor of Freelance Global to the extent that any amount paid to him or her by the Liquidators pursuant to paragraphs 4 and 6 above is less than the amount that Freelance Global had allocated to that creditor out of the Held Account Monies but had not paid to him or her by the time the Liquidators were appointed as administrators; and

(b) additionally, Mr Ndiritu is an unsecured creditor of Freelance Global in respect of a claim against it by him for breach of trust in the amount of $18,609.34.

8. The Court declares that where:

(a) one of the "General Beneficiaries" (as that term is defined in the affidavit of Daniel Peter Juratowitch sworn in this proceeding on 23 December 2014) was the subject of a fixed distribution from the Trust in terms to the effect described in the affidavit of Daniel Peter Juratowitch sworn on 4 December 2015; and

(b) at any time after that fixed distribution was made:

(i) the beneficiary had satisfied the conditions of that distribution; and

(ii) Freelance Global had been paid funds in an amount sufficient to satisfy that beneficiary's entitlement under that distribution; but

(iii) the beneficiary had not been paid funds in an amount sufficient to satisfy his or her entitlement under that distribution -

that beneficiary has either:

(c) (if his or her remaining entitlement to payment can be traced into funds held by Freelance Global) a beneficial entitlement to payment of that part of those funds that represents that remaining entitlement; or

(d) (otherwise) a right to prove as an unsecured creditor of Freelance Global for that amount.

1. The Court declares that the periodic "advances" made to beneficiaries of the Freelance Trust No 1 were distributions under the deed of settlement dated 1 July 1992 establishing the Freelance Trust No 1.
2. The Court declares that, in addition to the Liquidators' rights to the assets that are both legally and beneficially owned by Freelance Global, the Liquidators are entitled to be indemnified out of all assets held by Freelance Global as trustee of the Freelance Trust No 1, for:

(a) all expenses that the Liquidators have incurred or will incur as administrators and liquidators of Freelance Global; and

(b) all remuneration to which the Liquidators are entitled or will become entitled under s. 449E or s. 499 of the Corporations Act 2001 (Cth) as administrators and liquidators of Freelance Global.

1. The Court declares that the Liquidators are entitled to pay out of the assets held by Freelance Global as trustee of the Freelance Trust No 1 sufficient funds to satisfy their entitlements to remuneration and expenses referred to in paragraph 10 above, with such entitlements to be determined pursuant to the Corporations Act 2001 (Cth).
2. The Court declares that under s 1318(2) of the Corporations Act 2001 (Cth) and s 67 of the Trustee Act 1958 (Vic) that the Liquidators acted honestly and reasonably, and ought fairly to be excused, for any breaches, defaults, failures or omissions relating to the application by them of assets held by Freelance Global as trustee of the Freelance Trust No 1 (or formerly as trustee of that trust) in satisfaction of:

(a) expenses incurred by the Liquidators as administrators or liquidators of Freelance Global; and

(b) remuneration to which the Liquidators were entitled under s 449E or s 499 of the Corporations Act 2001 (Cth) as administrators and liquidators of Freelance Global.

13. The costs of the proceeding are payable as follows:

(a) the plaintiffs' costs are to be paid on an indemnity basis:

(i) from the Held Account Monies in so far as they relate to the Held Account Monies; and

(ii) otherwise from the non-Held Fund;

(b) the first defendant's costs are to be paid on an indemnity basis from the Held Account Monies;

(c) the second defendant's costs are to be paid on an indemnity basis from the Held Account Monies and the non-Held Fund in proportions equivalent to the proportions that his claims against Freelance Global will be satisfied out of each of those funds;

(d) the costs of the third and fourth defendants are to be paid on an indemnity basis out of the non-Held Fund.

15 The distribution of net income of the Trust is governed by cl 4.1 of the Trust Deed which provides as follows:

The Trustee holds the Profit [of the Trust] ... of any Accounting Period ... on trust for the Beneficiaries ... and may [at any time during the Accounting Period] ... determine to pay, apply, allocate[2] or set aside or fix an entitlement[3] to all or any part ... of the Profit ... for the benefit of ... the Beneficiaries ... on such special terms and conditions (if any), including as to the performance of any obligations or the satisfaction of such condition, as the Trustee in its absolute discretion ... shall think fit.

16 Clause 4.5 provides the method for making a determination to distribute income as follows:

A determination ... pursuant to Clause 4.1 ... shall ... be irrevocable and may be effectively made and satisfied (without limitation) by any one or more of the following means:

4.5.1 by resolution of the Trustee ...; or

4.5.2 by placing such Amount to the credit of such Beneficiary in the books of account of the Trust Fund; or

4.5.3 by drawing any cheque in respect of such Amount ...; or

4.5.4 by paying the Amount over to or for the benefit of such Beneficiary ... and/or to such person on behalf of such Beneficiary as the Beneficiary ... shall direct in writing.

17 Clause 4.7 further provides that the Trustee can make a determination for the purposes of cl 4 by the methods set out in cl 9.1, which include by oral declaration, resolution executed by the Trustee and deed.

18 The rights of a beneficiary, after a determination in his or her favour, are set out in cl 4.6 as follows:

Any determination by the Trustee to pay, apply, allocate or set aside [net income] ... shall ... take effect immediately upon the determination of the Trustee [and the Beneficiary] ... shall have a present, vested, indefeasible and absolute entitlement to receive the same and obtain payment and a benefit thereof from the Trustee notwithstanding ... the same shall not have yet been paid, applied, allocated or set aside to or for the benefit of such Beneficiary by the Trustee.

19 Clause 4.8.1 relevantly provides that any net income to which a beneficiary has a 'present, vested, indefeasible and absolute entitlement' may be claimed by the beneficiaries at any time and, without limitation, 'shall be enforceable in equity to the extent that it is not paid out, satisfied or otherwise discharged'.

20 Clause 4.8.4 relevantly provides that any beneficiary entitlement which has not been paid out, satisfied or otherwise discharged does not, among other things:

...

(b) give rise to any interest in or entitlement to any specific asset, property, security or investment comprised in the Trust Fund or any part thereof but will be an absolute entitlement of such Beneficiary to an amount, sum, share or proportion (as the case may be) of the Trust Fund ... comprising the Beneficiary entitlement without reference to any specific asset, property, security or investment as aforesaid;

(c) entitle the particular Beneficiary to the transfer to him/her/it of any specific asset, property, security or Investment comprised in the Trust Fund or any part thereof but will entitle the particular Beneficiary to call for and require the immediate payment to him/her/it by the Trustee of so much of the Trust Fund ... which either in amount or value represents the Beneficiary entitlement.

Are the Liquidators correct in characterising 'advances' as 'distributions' under the Trust Deed?

21 The Liquidators relevantly seek a declaration that the periodic 'advances' made to beneficiaries of the Trust were 'distributions' under the Trust Deed.

22 Following the payment of an invoice and approval from the relevant authorised person, Freelance Global would transfer, as an 'advance', amounts from the General Account to:

(a) the account of a Beneficiary Contractor or a nominated secondary beneficiary; or

23 I accept the Liquidators' submissions that these advances were in fact distributions made pursuant to a determination under cl 4.1 of the Trust Deed for the following reasons:

(a) Clause 4.5 of the Trust Deed provides that a determination in respect of a distribution to any beneficiary could be made:

4.5.2 by placing such Amount to the credit of such Beneficiary in the books of account of the Trust Fund;

...

4.5.4 by paying the Amount over to or for the benefit of such Beneficiary in such manner as the Trustee thinks fit and/or to such person on behalf of such Beneficiary as the Beneficiary or the Beneficiary's legal personal representative shall direct in writing.

(i) payments 'to or for the benefit of such Beneficiary' as directed by the Beneficiary Contractor; and

(ii) recorded in the books of account of the Trust Fund to the credit of the Beneficiary Contractor.

(c) The advances were recorded as being costs of sales and were not shown in the management accounts or elsewhere as assets or advances by way of loan. Further, the evidence is that there was no identified occasion on which a Beneficiary Contractor had repaid or been asked to repay such an advance.

24 Accordingly, I consider that the advances as made and the entries in the books of account of the Trust each constituted determinations pursuant to cl 4.1 of the Trust Deed; and were made irrevocably in accordance with the methods prescribed by cl 4.5.

25 Because the advances when made were irrevocable, I also accept the Liquidators' submission that the Trustee's invitation at the end of the financial year to each Beneficiary Contractor to have the Trustee consider varying the distributions already made (in the form of the advances) was legally ineffectual.

Are the funds in the Held Account held on trust for the Held Account Beneficiaries and Mr Ndiritu in the proportions determined by the Liquidators?

26 As noted in paragraph [8] above, on occasions, Beneficiary Contractors would direct the Trustee not to pay out reportable distributions until further instruction. In this situation, the Trustee would transfer the reportable distribution to the Held Account, which was an interest bearing account in the name of the Trustee.

27 The Trustee's books of account recorded the transfer of the money, in accordance with the direction of the Held Account Beneficiaries, from the General Account to the Held Account.

28 The evidence of the Liquidators is that the amounts received in the Held Account can be reconciled with the entries in the General Account, with the exception of $22,376.24, being funds of Mr Ndiritu ('the Discrepancy Funds') that were not so transferred. Accordingly, it was not contested that the Liquidators had properly calculated the percentage contributions of the Held Account Beneficiaries as follows:

1. Barbara-Anne Bensted 26.55%;

2. Paul Greenwood 0.86%;

3. Steven Harris 24.56%;

4. Peter Janssen 0.56%;

5. Fred Ndiritu 38.79%;

6. Brian John Phillips 3.60%; and

7. Ramesh Kumar Yarramsetty 5.08%.

29 As I have already found that the payment of money into the Held Account at the direction of the Held Account Beneficiaries constituted a determination under cl 4.1, I accept the Liquidators' submissions that the money so paid was subject to the 'present, vested, indefeasible and absolute entitlement' of the Held Account Beneficiaries and was held by the Trustee on trust for the Held Account Beneficiaries in the Held Account.

Are the funds in the General Account totalling $3,766.90 held on trust for Mr Ndiritu and is he otherwise an unsecured creditor for $18,609.34?

30 The relevant facts with respect to the Discrepancy Funds are as follows:

(a) Mr Ndiritu, a Beneficiary Contractor, had given Freelance Global a standing direction to move 71.43% of the remuneration to which he was entitled into the Held Account immediately upon payment by a client.

(b) Consistently with that direction, the books of account of the Trust record that:

(i) $18,609.34 (being 71.43% of $30,800 paid by a client on 28 November 2013 in respect of services provided by Mr Ndiritu); and

(ii) $3,766.90 (being 71.43% of $5,775 paid by a client on 27 February 2014 in respect of services provided by Mr Ndiritu)

were credited to Mr Ndiritu as if they had been transferred out of the General Account into the Held Account.

(c) The Discrepancy Funds were, in fact, not transferred into the Held Account, despite Mr Ndiritu directing the Trustee to do so, but were retained in the General Account.

(d) In the period between 28 November 2013 and 27 February 2014, the General Account balance fell below zero into overdraft and, as a result, the amount of $18,609.34 was dissipated. However, after the receipt of $3,766.90 into the General Account, on 27 February 2014, the General Account balance remained in excess of that sum until the appointment of the voluntary administrators on the following day.

31 It was submitted on behalf of the Liquidators and Mr Ndiritu that the sum of $3,766.90 was held on bare trust by the Trustee for Mr Ndiritu for the following reasons:

(a) The entry in the books of account of the Trust demonstrate an intention by the Trustee to make a determination under cl 4.1 for the distribution of this sum to the benefit of Mr Ndiritu; and the making of this entry is a prescribed method under cl 4.5 for making such a determination.

(b) Accordingly, Mr Ndiritu had an absolute entitlement to the sum and had directed it to be paid into the Held Account.

32 In accordance with recognised authority, the fact that the sum was mixed with other funds in the General Account does not impede the conclusion that the money was held on trust. In Re Hallett's Estate,[4] the Master of the Rolls, Sir George Jessel, explained simply why the mixing of trust money with other moneys did not impact on the trust relationship stating:

Supposing the trust money was 1000 sovereigns, and the trustee put them into a bag, and by mistake, or accident, or otherwise, dropped a sovereign of his own into the bag. Could anybody suppose that a Judge in Equity would find any difficulty in saying that the cestui que trust has a right to take 1000 sovereigns out of that bag?[5]

This principle has been specifically held by the High Court to extend to money paid into a bank account.[6] Further, the doctrine has been said to apply whether the trust money is mixed with the trustee's own funds or, as in this case, other trust money.[7]

33 In my opinion, the Trustee held the sum of $3,766.90 in the General Account on bare trust for Mr Ndiritu.

34 With respect to the sum of $18,609.34, there was no issue between the parties that this sum would similarly have been held on trust and had been wrongly dissipated by the Trustee. Accordingly, Mr Ndiritu has, at least, a right to claim that sum against the Trustee as an unsecured creditor.

35 However, the Liquidators contend the fact that, after this sum was received on trust for Mr Ndiritu, the General Account went into overdraft means that it was no longer 'practically possible' for Mr Ndiritu to trace the funds into the subsequently acquired funds of the Trust held in the General Account.[8]

36 At trial, counsel for Mr Ndiritu did not press submissions that the sum of $18,609.34 could be traced into the funds subsequently paid into the General Account. He accepted that the issue was resolved by the statement of McLure J in Re Global Finance Group Pty Ltd (in liq) as follows:

[t]he overwhelming balance of authority is to the effect that a proprietary claim to the traceable product will fail if trust money is paid into an overdrawn account.[9]

The rationale for the rule which prevents equitable tracing into an overdrawn bank account is that the property being traced must continue to exist in some form up to the time of, and through to, the traceable product. An overdrawn bank account is a debt owing by the trustee to the bank.

The effect of a payment into an overdrawn account is to reduce or cancel the trustee's indebtedness to the bank. Tracing is a factual process and a trust fund or part of it which is dissipated cannot be traced. The extinguishment or reduction of the trustee's indebtedness is regarded in effect as the disappearance of the property.[10]

38 However, counsel for Mr Ndiritu made an alternative submission that the Trustee, at the date of liquidation, did hold the $18,609.34 in the General Account on trust for Mr Ndiritu for the following reasons:

(a) Mr Ndiritu has an absolute entitlement to be paid that amount from the Trust in accordance with the terms of the Trust Deed.

(b) No other beneficiary had any fixed entitlement to the remainder of the funds in the General Account as at the date it was closed.

(c) The General Account had a credit balance as at the date it was closed of $392,720.44.

39 In effect, counsel for Mr Ndiritu argued that the effect of the distribution of $18,609.34 to Mr Ndiritu was that the Trustee did not hold that sum on trust in the General Account. Rather, it created an obligation on the Trustee to pay that sum under the terms of the Trust Deed; and that obligation was charged over the amounts held in the General Account from time to time. As I understand the argument, the charge would become fixed on the funds in the General Account when payment was directed by Mr Ndiritu.

40 I reject the submissions of counsel for Mr Ndiritu for the following reasons:

(a) For the reasons set out above, I accept the submissions of counsel for the Liquidators that the distribution of the $18,609.34 to Mr Ndiritu and the failure to pay that sum into the Held Account constituted that sum being held in the General Account on trust for Mr Ndiritu.

(b) As counsel for Mr Ndiritu conceded, the concept of a 'floating' charge (other than under a deed) over the Trust assets was novel and he was unable to refer to any authority which supported the existence of such a charge.

(c) The terms of the Trust Deed provide that, after a determination, a beneficiary would have a right to payment from the Trustee.[11] However, the Trust Deed does not purport to grant unpaid beneficiaries any charge over the trust funds and, in particular, a 'floating' charge of the type as contended for by counsel for Mr Ndiritu.

(d) The fact that no other beneficiary may have any fixed entitlement to the remainder of the funds in the General Account does not, in my opinion, support the claim that Mr Ndiritu should have an equitable charge over such funds. Although the capacity of a corporation to grant by deed a 'floating' charge over subsequently acquired assets is well established, there must be a serious question as to the capacity of a trustee to do so. In circumstances such as these, such a floating charge may well interfere with the distributions which the Beneficiary Contractors, who generate the income constituting the future funds of the Trust, would expect to receive.

41 Accordingly, in my opinion, Mr Ndiritu is only entitled to claim the sum of $18,609.34 as an unsecured creditor of the Trust.

Are the Liquidators correct in their treatment of Fixed Distributions that were subject to conditions that had been satisfied prior to their appointment?

42 From 1 July 2013 until the appointment of the voluntary administrators, the Trustee issued a number of letters to the Beneficiary Contractors stating in substance as follows:

(a) a resolution had been made by the Trust to distribute a fixed amount to the Beneficiary Contractor ('Fixed Distribution'); and

(b) the Fixed Distribution would be made to the Beneficiary Contractor provided the Beneficiary Contractor satisfied the following conditions:

(a) during the year you will perform consulting services for those Freelance clients with whom you have negotiated to take assignments;

(b) you must perform any such services at your own expense and in a manner that is profitable for Freelance after deducting the fixed distribution;

(c) you must comply with our internal client service requirements from time to time to Freelance's reasonable satisfaction; and

(d) you must generate profit (that is, client billings) for the Trust equal to or greater than the quantum of the fixed distribution.

43 The evidence is that the purpose of these Fixed Distributions was to provide a basis upon which a Beneficiary Contractor could claim tax deductions for expenses incurred in carrying out the services. In practice, a Beneficiary Contractor's entitlement to a Fixed Distribution was satisfied by way of the various advances paid to that Beneficiary Contractor, in the usual manner, as and when work was performed during that financial year (as opposed to a lump sum payment in the amount of the Fixed Distribution).

44 The Liquidators' investigations have established that the following Beneficiary Contractors:

(b) have satisfied all of the stipulated conditions; and

(c) have not been paid the total sum of $11,256.08:

Paul Nelson $ 521.98

Adenrele Adekunbi $10,000.00

Alejandro Gordon Blasini $ 734.10.

45 Accordingly, as these three individuals were the subject of a determination and the conditions of that determination have been satisfied, I consider that, to the extent that the Fixed Distributions were unpaid, these individuals have an absolute entitlement to payment under the terms of the Trust Deed ('Fixed Distribution Beneficiaries'). For the same reasons as set out above with respect to Mr Ndiritu, the Fixed Distribution Beneficiaries will be entitled to claim a beneficial interest in the General Account held on trust to the extent that their entitlement can be traced to the funds held as at the date of the voluntary administration. Similar to Mr Ndiritu's claim, if the funds are unable to be traced, the Fixed Distribution Beneficiaries would be entitled to claim the unpaid sums as unsecured creditors.

Are the Liquidators correct in treating General Beneficiaries as not entitled to any beneficial interest in the Trust assets, and not capable of proving as unsecured creditors?

46 At the commencement of the voluntary administration, there were unpaid invoices issued by Freelance Global to clients in respect of services provided by Beneficiary Contractors. Part of the work of the Liquidators (as administrators and then liquidators) was to collect the debts the subject of those invoices.

47 The position of the Liquidators is that the General Beneficiaries are not beneficially entitled to, and are not creditors of Freelance Global in respect of any of these debts or payments, as the Trustee did not exercise its discretion to declare a distribution. The Beneficiary Contractors accept that the Trust is a discretionary trust and as such, in the absence of a determination under cl 4.1 of the Trust Deed, the General Beneficiaries:

(a) do not have an equitable interest in any identifiable property until the Trustee's discretion has been exercised formally;[12] and

(b) are not entitled to claim as unsecured creditors.

48 However, counsel for Mr Perryman contended that the Trustee did in fact make a determination pursuant to cl 4.1 by applying a 'standing policy' - that is, Freelance Global had a standing policy that the Beneficiary Contractors, relevantly, would be paid the amount invoiced for his or her services (less the agreed fees and deductions) after payment by the respective client for those services.

49 It was contended that the standing policy constituted a determination by the Trustee ('the standing policy determination'), as contemplated by the Trust Deed, and, in particular, reference was made to the following:

(a) Under cl 4.1 of the Trust Deed, the Trustee could determine to 'fix an entitlement' which was defined to include the creation of (among other things) a contingent entitlement.

(b) Clauses 4.5 and 4.7 did not purport to limit the method by which the Trustee could make a determination under cls 4.1 or 4.4.

(c) Clause 4.4 provided that the Trustee may determine that 'part ... of the Profit ... of any Accounting Period which occurs after a date specified in such determination ... shall be paid ... for the benefit of' beneficiaries.

50 It was submitted that cl 4.4 empowered the Trustee to make the standing policy determination for the distribution of future income of the Trust (including for future accounting periods) according to a formula.

51 Counsel for Mr Perryman contended that the standing policy determination arose from the following circumstances:

(a) The relationship between the work performed by the Beneficiary Contractor and the advance was well established on the evidence including:

(i) the invoices sent to clients noted that 'TO ENSURE PROMPT PAYMENT OF YOUR CONTRACTOR PLEASE QUOTE INVOICE NUMBER IN YOUR EFT REMITTANCE REFERENCE'; and

(ii) the evidence of Mr Michael Kelson, a director of Freelance Global, that payment to a Beneficiary Contractor would be made within one or two business days after receipt of payment for a relevant invoice; and no advances were made prior to such payment.

(b) There was a standing policy to make back-to-back payments of receipts from clients to Beneficiary Contractors, which applied at all times prior to the appointment of the voluntary administrators.

(c) The amount of the payment to Beneficiary Contractors was calculated with certainty by the payroll system because the amount of deductions were percentages, which had been agreed at the time of the Application.

52 Accordingly, it was submitted that, after the Trustee had decided to accept an Application by a Beneficiary Contractor, it then made the standing policy determination at the time the standing policy was applied to that contractor. This was said to occur when the Trustee incorporated that Beneficiary Contractor's details and payment instructions into Freelance Global's payroll system.

53 Counsel for the Liquidators submitted that the standing policy did not constitute a determination under the Trust Deed for the following reasons:

(a) Given that a determination was irrevocable,[13] the standing policy determination would deprive the Trustee of the flexibility it required in a discretionary trust arrangement, particularly for the purpose of obtaining tax advantages.

(b) The irrevocable fixing of entitlements was inconsistent with the terms and conditions attached to the Application as executed by the Beneficiary Contractor.[14]

(c) The standing policy determination was inconsistent with what the authorised distributors informed proposed Beneficiary Contractors and, in particular, the reference to the fact that if a payment was not made, a Beneficiary Contractor's right would be to withdraw services; and implicitly it had no other right to claim the payment.

(d) It was inconsistent with the reservation (referred to in the third application of Mr Perryman[15]) of the right by the Trustee to amend the commission and other deductions to be made from the payment.

(e) The inflexibility of the irrevocable determination could have significant undesirable consequences. For example, if a Beneficiary Contractor had directed a proportion of the entitlement to his or her spouse, substantial inconvenience might result from separation or divorce.

(f) The submission by Mr Perryman that a new standing policy was adopted on each of the two occasions he re-joined was not consistent with the fact that there was no evidence of the Trustee ever having resolved to exclude a General Beneficiary.

(g) The opportunity provided to Beneficiary Contractors to adjust the amount of advances received by other secondary beneficiaries at the end of the financial year (as referred to in paragraph 8(g)) was not consistent with a once-only irrevocable determination being made at the commencement of the relationship.

(h) The submissions of Mr Perryman that the advances were made as a matter of process was not consistent with the evidence that all the payments were checked and authorised by an appropriate officer of the Trustee (as referred to in paragraph 8(e)).

54 I reject the submission made on behalf of Mr Perryman that the Trustee had made a standing policy determination, substantially for the reasons submitted by counsel for the Liquidators. In particular, I note the following:

(a) There was no express resolution of the Trustee for a standing policy determination.

(b) Clauses 4.5.2 to 4.5.4 of the Trust Deed make provision for implied determinations by methods including payment of an amount and entries in the books of account of the Trust. However, the Trust Deed does not provide for a determination to be inferred from the circumstances relied on by Mr Perryman.

(c) In my opinion, the circumstances relied upon by Mr Perryman are more consistent with the Trustee merely establishing a practice for the 'back-to-back' payments which were necessary for the commercial efficacy of the Freelance Global business. This interpretation is also consistent with:

(i) the information provided by the authorised distributors about how the Freelance Global business would operate in practice;

(ii) the terms and conditions for admission as acknowledged by Beneficiary Contractors in the Application; and

(iii) the invitation to the Beneficiary Contractors to adjust distributions at the end of the financial year.

(d) In my opinion, if the Trustee intended to irrevocably exercise its discretion with respect to each Beneficiary Contractor at the outset of the arrangements, it would be expected that it would do so expressly. Such a significant departure from the usual practice in respect of discretionary trusts should not be readily inferred without a clear and unequivocal expression of such intent.

Should the Liquidators have certain expenses and remuneration, for the purpose described in the Further Amended Originating Process, out of the Held Account?

55 The plaintiffs submitted that the Liquidators were entitled to be indemnified for the costs incurred in the care, protection, preservation, realisation and distribution of the money in the Held Account.

56 The Liquidators did not contend that any rights under the Trust Deed could assist them with respect to the Held Account.

57 Liquidators of a corporate trustee acquire the powers to deal with the assets of the company in lieu of the directors including the corporate trustee's right of indemnity and exoneration. The liquidator can, by using those personal rights, have recourse to the trust property to discharge all liabilities which the trustee incurred in the administration of the trust before winding up supervened.[16]

58 Further, the expenses and remuneration of the liquidator of a corporate trustee, which acts in no other capacity, incurred in carrying out trust obligations are debts of the company, within the meaning of the Corporations Act, and may be paid from trust assets.[17]

59 However, a liquidator may not have an immediate right of recourse to trust assets if:

(a) the corporate liquidator engages in activities other than solely as the trustee of a trading trust;[18] or

(b) the terms of the trust deed 'are inadequate to provide sufficiently for the costs and expenses of the administrator or liquidator'.[19]

60 Accordingly, the Liquidators are not entitled, without Court order,[20] to draw on the the Held Account to recover expenses and remuneration for the following reasons:

(a) The Freelance Global was not acting solely as the trustee of a trading trust. It was the trustee under the Trust Deed, a bare trustee of the funds in the Held Account and a bare trustee of some funds in the General Account.[21]

(b) Freelance Global holds the Held Account on a bare trust. A trustee is not generally entitled to remuneration for 'the time and trouble in the execution of a trust'.[22] A bare trustee has no interest in the trust assets other than the holding of legal title, and has no active duties to perform. It simply awaits direction from the beneficiaries as to the distribution of the trust property.[23] The bare trustee's duties and powers are limited to protecting the trust assets; and the Liquidators cannot have any greater duties, powers and rights.[24]

61 As a result, the Liquidators ask the Court to make the orders for indemnification from the Held Account on the basis of the principles in Re Universal Distributing Co Ltd (in liq)[25] and Re Berkeley Applegate (Investment Consultants) Ltd (in liq).[26]

62 In Re Universal Distributing, Dixon J held that the liquidator had priority over a debenture holder for his expenses incurred in the realisation of the company's own assets, which were the subject of a debenture charge. However, the debenture debt was held to take priority over the general costs, charges and expenses of the liquidation.

63 The principle relied upon by Dixon J is sometimes referred to as the 'salvage' principle.[27] The principle is 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. This lien arises as a matter of law and does not require an order of the court.[28]

64 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.[29]

65 The Liquidators concede that there is at least a real doubt about whether the salvage principle alone would entitle them to have recourse to the Trust assets in the circumstances referred to in paragraph [60]. However, the Liquidators contend that the Court should make an order for the payment of costs, expenses and remuneration out of Trust assets pursuant to the principles established in Re Berkeley Applegate.

66 In Re Berkeley Applegate,[30] Edward Nugee QC (sitting as a deputy High Court judge) considered a claim by a liquidator of a company that held funds on trust on behalf of various investors together with its own 'free assets'. The liquidator's expenses and remuneration were likely to exceed the value of the free assets. The liquidator sought determination of the question whether any part of his expenses and remuneration could be paid out of the trust assets either directly or by way of payment to the company. It was common ground that there was no statutory authority for the payment of any part of the liquidator's expenses or remuneration out of the trust assets.[31] Edward Nugee QC distinguished the cases decided on the basis of the salvage principle; but held that the Court could, as a condition of enforcing the trust beneficiaries' rights in equity, require that an allowance be made for costs incurred and skill and labour expended in connection with the administration of the trust property. His Honour considered the allowance of fair compensation to the liquidator was an application of the principle that he who seeks equity must do equity.[32]

67 The Court's discretion to allow expenses and remuneration from trust assets is to be exercised sparingly[33] and factors supporting the exercise of the discretion include the following:

(a) The work in respect of which expenses and remuneration were incurred, would have had to have been done in the interests of the beneficiaries of the trust in any event.[34]

(b) The work has been of substantial benefit to the trust property and the beneficiaries.[35]

(c) The administration of the trust assets is complex and requires the expertise of an experienced and capable insolvency practitioner. Such practitioners would only do the work if they are not left out of pocket for the expenses incurred; and are fairly remunerated.[36]

(d) The liquidator was acting in accordance with the liquidator's 'duty to act in a responsible way'.[37]

(e) The corporation's own assets are insufficient to cover the costs of the winding up.[38]

68 In summary, the discretion will usually be exercised if the work has to be done in the interests of the beneficiaries and there is no practical alternative to allowing the remuneration.[39]

69 The submissions of the plaintiffs in support of the exercise of the discretion was as follows:

(a) The work performed and to be performed was and is necessary for the proper administration of the Trust (and the bare trust that arose upon the appointment of the Liquidators) being work for the purpose of identifying or attempting to identify Trust assets, protecting or attempting to recover Trust assets and distributing Trust assets to the persons beneficially entitled to them.

(b) Further and alternatively, to the extent necessary, the Court should exercise its inherent jurisdiction to make a discretionary equitable allowance for the costs incurred in administering the Trust (and the bare trust that arose upon the appointment of the Liquidators). The evidence establishes that significant work has been required of the Liquidators, and the Court can infer the benefits to creditors that have flowed from that work.

(c) In either case, the quantification of the amounts that the Liquidators will be entitled to draw down will be controlled by operation of the Corporations Act.

70 The submissions do not suggest that the plaintiffs intend to seek indemnity with respect to any costs that would not have been recoverable under the salvage principle. Certainly salvage costs would include what I would, in this case, expect the very significant cost of 'the processes of identifying the trust assets and those entitled to them and taking such steps as may be appropriate in the circumstances for the purpose of divesting from the company the trust assets and any continuing obligations in relation to them'.[40]

71 It was submitted on behalf of Ms Bensted that the Liquidators were not entitled to indemnification from the Held Account because cl 10.6 of the Trust Deed provided that the right of indemnity was limited solely to the assets of the Trust, which relevantly consisted of the money in the General Account. The submission was that the Held Account was not held on a bare trust; but rather it was implicitly held on the same terms as the Trust Deed (except that it was fixed rather than discretionary).

72 I reject this submission because no facts were put forward to support the proposition that somehow a fixed trust with respect to the Held Account would incorporate the terms of a discretionary Trust Deed. Counsel was also not able to refer me to any authority in support of this submission.

73 Further, I accept the submission of the plaintiffs that the Liquidators' claims with respect to the Held Account, which were based on the principles in Re Universal Distributing[41] and Re Berkeley Applegate,[42] were claims made qua liquidator and not through the Trustee. Accordingly, any fetters on the Trustee's right of indemnity arising out of the Trust Deed do not affect these claims.

74 The orders sought by the plaintiffs were otherwise unopposed by the defendants and accordingly I consider it appropriate to make a declaration in the terms sought.

Do the Liquidators have a right to indemnification out of assets of the Trust, and may they satisfy that right by paying out the proceeds of the Trust assets?

75 The declaration proposed by the plaintiffs is as follows:

The Court declares that, in addition to the Liquidators' rights to the assets that are both legally and beneficially owned by Freelance Global, the Liquidators are entitled to be indemnified out of all assets held by Freelance Global as trustee of the Freelance Trust No 1, for:

(a) all expenses that the Liquidators have incurred or will incur as administrators and liquidators of Freelance Global; and

(b) all remuneration to which the Liquidators are entitled or will become entitled under s. 449E or s. 499 of the Corporations Act 2001 (Cth) as administrators and liquidators of Freelance Global.

76 Under cls 10.5 and 10.9 of the Trust Deed, the Trustee had an express right to be repaid its expenses and remuneration out of the Trust property; and that right extended to the Liquidators while they acted as voluntary administrators. However, on the order for winding up, Freelance Global was disqualified from acting as trustee by operation of cl 11.3 of the Trust Deed; and Freelance Global thus became a bare trustee of the assets of the Trust.[43]

77 Counsel for the Liquidators submitted that, despite the matters referred to in [60] above, the Liquidators should be entitled to an order for the costs and expenses of the winding up from the Trust assets under the Corporations Act for the following reasons:

(a) Although the Held Account funds were technically held on a separate trust from the assets of the Trust, the Trustee operated that account as part of its conduct of the trust business. Further, the 'Held Account Monies' would be quarantined by proposed orders and the order for the general costs and expenses of the winding up would not extend to the Held Account.

(b) The Trustee's right of indemnity with respect to pre-disqualification debts was not lost by its disqualification on liquidation.[44] The Liquidators can use the Trustee's right of indemnity for the purpose of fulfilling their duty to pay the debts incurred by the Trustee, prior to the winding up order, in accordance with the priority under s 566 Corporations Act, which accords priority to the costs and expenses of the winding up.

78 Ms Bensted supported the claim for indemnification but argued that the indemnity from the Held Account should be limited to costs incurred in identifying the details of the money in the Held Account.

79 Mr Ndiritu disputed any entitlement of the Liquidators to be indemnified out of the Held Account.

80 Mr Perryman submitted that, except for a modest entitlement for the costs incurred in the care, protection, preservation, realisation and distribution of the Trust, based on the principles in Re Universal Distributing, the Liquidators should have no entitlement to indemnification from the amounts distributed pursuant to the standing policy determination. However, as I have determined that there were no distributions pursuant to the standing policy determination, I must reject this submission.

81 The Deputy Commissioner does not oppose the order.

82 In my opinion, the plaintiffs are entitled to an order in the form requested substantially for the reasons as submitted. In particular, I note the following:

(a) Freelance Global, as the outgoing trustee, retains its right of indemnity under the Trust Deed for creditors' claims and liquidator's expenses and remuneration incurred while properly acting as a trustee. However, the right is not so clear, 'where the trustee is removed as trustee consequent upon the winding up, by virtue of a disqualification clause in the trust deed'.[45]

(b) Whether or not the Liquidators have no immediate right of recourse to the Trust assets, because it could be said that Freelance Global had acted in other capacities, the Court has power to order that the Trust assets be applied to meet claims under s 556 of the Corporations Act in the course of the winding up.[46] Freelance Global certainly acted 'at least to [a] significant extent'[47] as a trustee of a trading trust; and I do not consider that there is any reason of substance why the Liquidators should not be put in as good a position as the liquidator of a corporate trustee that acted solely as the trustee of a trading trust.

(c) As the liquidators of Freelance Global, the Liquidators were required to discharge the pre-liquidation liabilities that had been incurred (albeit as trustee) in the order of priority set out in s 566 of the Corporations Act.[48]

(d) The payment of the pre-liquidation debts in accordance with s 566 of the Corporations Act requires that a liquidator be appointed. The appointment of a liquidator necessarily involves the incurring of costs and expenses and the section provides that these are to be paid in priority 'to other unsecured debts'. Accordingly, it is 'reasonable to regard the [costs and expenses of the winding up] as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's indemnity'.[49]

83 It is not necessary to determine if the same conclusion would be reached if the debts were incurred after disqualification, if for example, a liquidator continued trading. In this case the evidence establishes that the business was sold by the Liquidators, when they were voluntary administrators, and therefore before disqualification of Freelance Global as the trustee.

84 If I am wrong in reaching the above conclusion, I consider that the same result can be achieved by the application of the principles in Re Universal Distributing and Re Berkeley Applegate.

85 The following relevant limits have been applied to indemnity under the salvage principle:

(a) General liquidation matters do not fall within the salvage principle and work not related to the beneficiaries could not be charged against their assets.[50]

(b) If work relates to more than one trust, the liquidator has to 'estimate the costs and expenses incurred insofar as they relate to each trust and only charge those costs to the trust on whose behalf the work was performed. If that estimate is not possible then a pari passu distribution of the costs and expenses will be in order ...'.[51]

(c) If the liquidator has performed work for investors for whom no money is held on trust, the liquidator cannot recover the costs of the work for other assets held on trust, unless such costs are properly divisible.[52]

(d) If the trustee cannot apportion the costs claimed with some accuracy between the various trusts, 'the maxim that equality is equity should provide the solution to the problem of apportionment'.[53]

86 The Liquidators expressed concern that an order under the salvage principle would not cover certain costs such as investigation of the company's affairs, the reporting to ASIC and to creditors, preparation and presentation of final accounts for the purpose of procuring deregistration, and the cost of proceedings to augment the assets of the company (not all of which might involve trust assets - e.g., possibly the proceeds of unfair preference actions).

87 In this case, on the basis of the principles in Re Berkeley Applegate, I would allow for costs and expenses as claimed by the Liquidators because such costs and expenses are for work that must be done in the interests of the beneficiaries and there is no practical alternative to allowing the remuneration.

88 Accordingly, I propose to make an order for indemnity in the terms as sought by the plaintiffs.

Should the Liquidators obtain exoneration for remuneration and expenses already paid?

89 The Liquidators seek an order (to any extent necessary) under s 1318(2) of the Corporations Act or s 67 of the Trustee Act that the Liquidators acted honestly and reasonably, and ought fairly to be excused, for any breaches, defaults, failures or omissions relating to the application by them of assets held by Freelance Global as Trustee of the Trust in satisfaction of:

(a) expenses incurred by them as voluntary administrators and liquidators of Freelance Global; and

(b) remuneration to which they were entitled under s 449E or s 499 of the Corporations Act as voluntary administrators and liquidators of Freelance Global.

90 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.

91 Section 1318(2) of the Corporations Act provides:

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.[54]

92 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 an environment involving risk in commercial decision-making.[55]

93 The Liquidators seek exoneration for the payments made during the period in which they were voluntary administrators, as set out in Table 1 below.

Table 1: Summary of receipts and payments during

Agent Fees - Payment to FWS Employee for Assistance in VA

94 The Liquidators also seek exoneration for the payments made during the period in which they were liquidators, as set out in Table 2 below.

Table 2: Summary of receipts and payments during

Amount Transferred from Voluntary Administration Period

95 The relevant facts relied upon by the plaintiffs in support of the application for exoneration were as follows:

(a) The Liquidators continued to operate the Freelance Global business after they were appointed voluntary administrators and liquidators on 28 February 2014 and 7 April 2014 respectively. They assumed that, as the company had acted solely as the Trustee of the Trust, their remuneration and expenses of the administration and liquidation could be paid from the assets of the Trust. Accordingly, they made the payments referred to in Tables 1 and 2.

(b) The Liquidators were not aware, at the time of the making of the payments, that there was doubt about the entitlement of a Liquidator to pay expenses and remuneration from assets of the Trust without a court order in circumstances where the Trustee was disqualified from acting as a Trustee upon liquidation.

96 I am prepared to make the order for exoneration as sought for the following reasons:

(a) I accept the unchallenged evidence of Mr Daniel Juratowitch, one of the Liquidators, that at no time did the Liquidators intend to deal with any of the assets inconsistently with their duties as administrators or liquidators.

(b) The Liquidators obtained no improper benefit from a breach of trust and the orders I propose to make would have, if applied retrospectively, allowed them to draw down their proper costs, expenses and remuneration from the assets of the Trust.

(c) While there was some imprudence in proceeding on the basis that their entitlement to remuneration was not affected by the fact that the money was impressed with a trust, I accept that the requirements of the Liquidators to obtain court authorisation before exercising their indemnity with respect to remuneration expenses is an unclear area of the law.

(d) The defendants have not sought to challenge the bona fides of the Liquidators and, except as referred to below, do not oppose the application for exoneration.

97 Mr Perryman submitted that exoneration should not be permitted out of the distributions made pursuant to the standing policy determination. However, I have found that no such distributions were made.

98 The Deputy Commissioner observes that relief under s 1318(2) of the Corporations Act is conditioned on the person seeking relief having a reason to apprehend that a claim will or might be made. It has been held that 'might' in this context 'must be taken to require that the claim in question is a real, not fanciful or remote possibility'.[56] In my opinion, the requirement that a claim is a real, not fanciful or remote possibility is satisfied by the fact that the Liquidators have probably made payments from Trust money without authority. It can realistically be expected that unsatisfied creditors, who became aware of this fact, would make a claim against the Liquidators to reimburse the unauthorised payments.

99 In my opinion, the circumstances are similar to the facts of Caterpillar[57] where Gordon J granted relief under the same sections to a liquidator, who had sold trust assets without the requisite power.

100 In the circumstances, I find that the Liquidators have acted honestly and reasonably. Accordingly, I consider that it is appropriate to relieve the Liquidators from liability for any negligence, default, breach of trust or breach of duty relating to the payment of expenses and remuneration by them from the assets of the Trust, providing the Liquidators would have been entitled to such payments if these orders had been in effect before the payments were made.

101 Each of the parties contended that their respective costs should be paid on an indemnity basis. As a general rule, costs of all parties to proceedings of this kind are ordered to be paid from the fund on an indemnity basis. I consider that the application of the general rule is appropriate in this case; but the issue remains - from which funds are the costs to be paid?

102 The plaintiffs submit that the appropriate costs orders are as follows:

(a) The plaintiffs' costs are to be paid on an indemnity basis:

(i) from the Held Account in so far as they relate to money in the Held Account; and

(ii) otherwise from Trust funds not in the Held Account ('the non-Held Fund').

(b) Ms Bensted's costs are to be paid on an indemnity basis from the Held Account.

(c) Mr Ndiritu's costs are to be paid on an indemnity basis from the Held Account and the non-Held Fund in proportions equivalent to the proportions that his claims against Freelance Global will be satisfied out of each of those funds.

(d) The costs of Mr Perryman and the Deputy Commissioner are to be paid on an indemnity basis out of the non-Held Fund.

103 Each of Ms Bensted and Mr Ndiritu submit that their costs should come from the assets of the Trust other than the Held Account.

104 Mr Perryman did not make any submissions as to the source of the payment for his costs.

105 The Deputy Commissioner sought an order for the payment of his costs from the assets of the Trust.

106 This proceeding principally relates to the identification of trust assets and the persons beneficially entitled to such assets. In my opinion, the costs should be paid from the trust fund in respect of which the costs most closely relate. I consider that the orders proposed by the plaintiffs substantially accord with that objective. However, I will hear from the parties as to any further submissions with respect to costs.

107 Subject to final submissions from the parties, I propose the following directions and orders:

1. The Court directs that, save as otherwise provided in these orders, the second and third plaintiffs (the "Liquidators") would be justified in rejecting claims by persons, in the winding up of the first plaintiff ("Freelance Global"), to be beneficially entitled to the assets of Freelance Global (whether held on trust or otherwise) or to be entitled to prove as creditors in the winding up of Freelance Global, based solely on the fact that:

(a) the person became a beneficiary of the Freelance Trust No 1; and

(b) that person provided services to a client of Freelance Global, for which Freelance Global as trustee of the Freelance Trust No 1 received payment.

1. The Court directs that (subject to the Liquidators' rights pursuant to paragraph 8 and the costs payable pursuant to paragraph 12 below), the Liquidators would be justified in dealing with the amount of $757,138.44 held in the term deposit account with BSB 013 006 and account number 973 885 431 ("Held Account Monies") as being held by the Liquidators on trust for the following persons in the following proportions:

(a) the first defendant, Barbara-Anne Bensted, 26.55%

(b) Paul Greenwood, 0.86%

(c) Steven Harris, 24.56%

(d) Peter Janssen, 0.56%

(e) Brian John Phillips, 3.60%

(f) Ramesh Kumar Yarramsetty, 5.08%

(g) the second defendant, Fred Ndiritu, 38.79%

1. The Court directs that the Liquidators would be justified in paying the Held Account Monies (less the amounts payable as expenses, remuneration and costs pursuant to paragraphs 8 and 12 below) to the persons and in the proportions described in paragraph 2 above.
2. The Court directs that the Liquidators are justified in paying the sum of $3,766.90 to Mr Ndiritu from the funds held by Freelance Global other than the Held Account Monies (the "non-Held Fund") as money held on trust for Mr Ndiritu.
3. The Court directs that the Liquidators are justified in dealing with the non-Held Fund on the basis that:

(a) each of the persons mentioned in paragraphs 2(a) to 2(f) above (collectively, the "Held Account Beneficiaries") and Mr Ndiritu is an unsecured creditor of Freelance Global to the extent that any amount paid to him or her by the Liquidators pursuant to paragraphs 2 and 3 above is less than the amount that Freelance Global had allocated to that creditor out of the Held Account Monies but had not paid to him or her by the time the Liquidators were appointed as administrators; and

(b) additionally, Mr Ndiritu is an unsecured creditor of Freelance Global in respect of a claim against it by him for breach of trust in the amount of $18,609.34.

6. Where:

(a) one of the Fixed Distribution Beneficiaries (as defined in paragraph [45] of the reasons for judgment) was the subject of a Fixed Distribution (as defined in paragraph [42] of the reasons for judgment); and

(b) at any time after that Fixed Distribution was made:

(i) the beneficiary had satisfied the conditions of that distribution; and

(ii) Freelance Global had been paid funds in an amount sufficient to satisfy that beneficiary's entitlement under that distribution; but

(iii) the beneficiary had not been paid funds in an amount sufficient to satisfy his or her entitlement under that distribution -

the Court directs that the Liquidators are justified in dealing with the non-Held Fund on the basis that the beneficiary has either:

1. (if his or her remaining entitlement to payment can be traced into non-Held Funds) a beneficial entitlement to payment of that part of those funds that represents that remaining entitlement; or
2. (otherwise) a right to prove as an unsecured creditor of Freelance Global for that amount.

1. The Court directs that the Liquidators are justified in treating the periodic "advances" (referred to in [8(f)] of the reasons for judgment), which were made to beneficiaries of the Freelance Trust No 1, as distributions under the deed of settlement dated 1 July 1992 establishing the Freelance Trust No 1.
2. The Court directs that the Liquidators are justified in paying their costs, expenses and remuneration reasonably incurred in taking steps in their capacities as administrators and liquidators, respectively, of Freelance Global for the care, protection, preservation, realisation and distribution of the Held Account Monies (including identifying the trust assets and those entitled to them and taking such steps as may be appropriate in the circumstances for the purpose of divesting the Held Account Monies from Freelance Global and any continuing obligations in relation to them) from the Held Account Monies.
3. The Court directs that, in addition to the Liquidators' rights to the assets that are both legally and beneficially owned by Freelance Global, the Liquidators are entitled to be indemnified out of all assets held by Freelance Global as trustee of the Freelance Trust No 1, for:

(a) all costs and expenses that the Liquidators have incurred or will incur as administrators and liquidators of Freelance Global; and

(b) all remuneration to which the Liquidators are entitled as administrators and liquidators of Freelance Global -

and that the Liquidators are justified in paying their costs, expenses and remuneration from the non-Held Fund.

1. The Court directs that the costs, expenses and remuneration of the Liquidators, under paragraphs 8 and 9, are to be fixed pursuant to s 449E or s 499 of the Corporations Act 2001 (Cth) as appropriate (to the extent that they have not already been so fixed).
2. Pursuant to s 1318(2) of the Corporations Act 2001 (Cth) and s 67 of the Trustee Act 1958 (Vic) the Liquidators are relieved from liability for any negligence, default, breach of trust or breach of duty relating to the payment by them from the assets held by Freelance Global as trustee of the Freelance Trust No 1 (or formerly as trustee of that trust) in satisfaction of:

(a) expenses incurred by the Liquidators as administrators or liquidators of Freelance Global; and

(b) remuneration to which the Liquidators were entitled under s 449E or s 499 of the Corporations Act 2001 (Cth) as administrators and liquidators of Freelance Global;

providing the Liquidators would have been entitled to such payments under orders 9 or 10, if these orders had been made before the payments.

12. The costs of the proceeding are payable as follows:

(a) the plaintiffs' costs are to be paid on an indemnity basis:

(i) from the Held Account Monies in so far as they relate to the Held Account Monies; and

(ii) otherwise from the non-Held Fund;

(b) the first defendant's costs are to be paid on an indemnity basis from the Held Account Monies;

(c) the second defendant's costs are to be paid on an indemnity basis from the Held Account Monies and the non-Held Fund in proportions equivalent to the proportions that his claims against Freelance Global will be satisfied out of each of those funds;

(d) the costs of the third and fourth defendants are to be paid on an indemnity basis out of the non-Held Fund.

[1] However, by 2014 the Australian Taxation Office undertook audits and assessed the Beneficiary Contractors on the basis that the reportable distributions were assessable salary and wage income notwithstanding the fact that the payments took the form of trust distributions.

[2] 'Allocate' is defined to include allocating a sum to the credit of a beneficiary in the books of account of the Trust Fund or paying a sum to such beneficiary or dealing with the sum as the beneficiary directs: cl 1(13).

[3] 'Fix an entitlement' is defined to mean confer or create a vested, contingent, defeasible or indefeasible entitlement: cl 1(22).

[4] (1880) 13 Ch D 696.

[6] Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322, 338 (Dixon CJ and Fullagar J).

[7] Stephens Travel Service International Pty Ltd (recs and mgrs apptd) v Qantas Airways Ltd (1988) 13 NSWLR 331, 348 (Hope JA with whom Kirby P and Priestley JA agreed).

[8] Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322, 338-339 (Dixon CJ and Fullagar J); Re Diplock; Diplock v Wintle [1948] Ch 465, 521 (Lord Greene MR, Wrottesley and Evershed LJJ); Williams v Peters [2009] QCA 180; [2010] 1 Qd R 475, 486 [5] (McMurdo P), 493 [37] (Muir JA with whom Fraser JA agreed).

[9] [2002] WASC 63; (2002) 26 WAR 385, 412413 [129].

[12] Geraint W Thomas, Alistair Hudson, The Law of Trusts (Oxford University Press, 2nd ed, 2010) 22-34, [1.29].

[14] Referred to in paragraph [11] above.

[15] Mr Perryman worked as a Beneficiary Contractor during three separate periods and made an Application on each occasion.

[16] Re French Caledonia Travel Service [2003] NSWSC 1008; (2003) 204 ALR 353, 410 [201] (Campbell J) explaining the reference by King CJ in Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 to such rights passing to the liquidator.

[17] Re Enhill Pty Ltd [1983] VicRp 52; [1983] VR 561, 565 (Young CJ), 570 (Lush J) & 572 (Gray J); Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 110 (King CJ with whom Jacobs J & Matheson J agreed); Re French Caledonia Travel Service [2003] NSWSC 1008; (2003) 59 NSWLR 361, 423-425; [2003] NSWSC 1008; 204 ALR 353, 410-411 [201]-[205] (Campbell J).

[18] Re French Caledonia Travel Service [2003] NSWSC 1008; (2003) 59 NSWLR 361, 425; [2003] NSWSC 1008; 204 ALR 353, 411 [206] (Campbell J); Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674, 685-686 (McLelland J).

[19] Parbery v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425, 431 [20] (Palmer J); Re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297, 299-300 [11] (Campbell J).

[20] See Georges v Seaborn International [2012] FCA 75; (2012) 288 ALR 240, 301 [298] (Gordon J); Parbery v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425, 431 [20], 432 [23] (Palmer J).

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

[23] 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).

[24] FCT v Bruton Holdings Pty Ltd (in liq) [2008] FCAFC 184; (2008) 173 FCR 472, 498 [79] (Ryan, Mansfield and Dowsett JJ).

[25] [1933] HCA 2; (1933) 48 CLR 171 ('Re Universal Distributing').

[26] [1989] Ch 32 ('Re Berkeley Applegate').

[27] Thackray v Gunns Plantations Ltd [2011] VSC 380; (2011) 85 ACSR 144, 146 [3] (Davies J).

[28] Ibid [54]. 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 Insol LJ 37.

1. [29] 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, [49] (Davies J).

[30] [1989] Ch 32.

1. [36] Parbery v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425, 434 [32] (Palmer J); Re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297, 300 [11] (Campbell J).

[37] Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, 688-689 (McLelland J).

1. [38] Re Berkeley Applegate [1989] Ch 32, 53; Re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297, 300 [11] (Campbell J).

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

[40] Re G B Nathan & Co Ply Ltd (in liq) (1991) 24 NSWLR 674, 689 (McLelland J).

[41] [1933] HCA 2; (1933) 48 CLR 171.

[42] [1989] Ch 32.

[43] Barnet, Re Fulkoto Pty Ltd (in liq) [2013] FCA 595, [2] (Dowsett J); Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677, [6] - [7] (Gordon J) (Caterpillar).

[44] Coates v McInerney & Anor (1992) 8 ACSR 748, 749 (Anderson J).

[45] Caterpillar [2011] FCA 677 [18] (Gordon J).

[46] Caterpillar [2011] FCA 677 [30] (Gordon J).

[47] Re G B Nathan & Co Pty Ltd (in liq) 1991 24 NSWLR 674, 686 (McLelland J).

[48] Re French Caledonia Travel Service [2003] NSWSC 1008; (2003) 59 NSWLR 361, 424 [202] (Campbell J);

[49] Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 110 (King CJ).

[50] 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377, 385.

[53] Parbery v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425, 431 [20], 432 [34] (Palmer J).

1. [54] Section 1318(4)(d) expressly provides that the right to relief under s 1318 applies to liquidators.

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

1. [56] Re Suncoast Restoration Pty Ltd (in liq) [2013] FCA 355; (2013) 211 FCR 203, 213 [30] (Reeves J) citing CGU Insurance Ltd v Porthouse [2008] HCA 30; (2008) 235 CLR 103, 120-121 [64] (Gummow, Kirby, Heydon, Crennan and Kiefel JJ).

[57] [2011] FCA 677.