Grossman v E. Katz Manufacturing Jewellers

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

5888/04 - LINDA ANN GROSSMAN v E. KATZ MANUFACTURING JEWELLERS (ACT) PTY LIMITED & ANOR - CHRISTOPHER JOHN PALMER - APPLICANT JUDGMENT 1 Mr Palmer was appointed provisional liquidator of E. Katz Manufacturing Jewellers (ACT) Pty Limited ("the company") by order made by me on 15 November 2004 in proceedings in which winding up is sought on the just and equitable ground. By an interlocutory process filed on 13 December 2004, Mr Palmer seeks to clarify that he is entitled to be paid his remuneration out of assets of the Ervin Katz Family Trust of which the company is the trustee. Indeed, trusteeship of that trust, which appears to be a classic "trading trust", is the company's sole activity. The company, as such trustee, has carried on business as a manufacturer and wholesaler of jewellery. 2 In the month since his appointment as provisional liquidator, Mr Palmer has been active in preserving and securing stocks of jewellery and other assets. He foresees further activity in the coming weeks before the winding up proceedings come back before the court. The situation in which all the company's assets are held by it on trust is one that causes him to wish to clarify the availability of those assets as a source of remuneration. 3 A provisional liquidator's right to remuneration is principally a statutory right conferred by s.473(2) of the Corporations Act 2001 (Cth). The nature and quantum of the remuneration are, under that section, to be determined by the court. Although the section does not explicitly say so, the relevant company is the source of the remuneration. This is recognised in Rule 9.3 of the Supreme Court (Corporations) Rules 1999 under which a right to object to remuneration sought by a provisional liquidator is secured to any liquidator and any creditor or contributory. In the present case, however, all assets of the company, although vested in it at law, are held by it upon the trusts of the Ervin Katz Family Trust. 4 In such a case, the following general principles apply so far as concerns the company's right, as trustee, to be indemnified out of trust property: 1. A trustee is personally liable for debts contracted by him in his trustee capacity, whether or not that capacity has been made known to the creditor. 2. He is, however, entitled to resort to trust property for the purpose of meeting liabilities incurred by him in the course of activities which, as trustee, he is authorised to undertake. 3. That right might be exercised so that payment is made direct to the creditor out of the trust property or by the trustee's recouping to himself out of trust property an amount he has paid from his own funds. 4. A creditor of the trustee is entitled to be subrogated to the rights of the trustee against the trust estate and to stand in his shoes in respect of the right to be indemnified for the creditor's debt. 5. But the trustee can establish no claim to indemnity - and a creditor correspondingly can establish no claim to stand in the trustee's shoes - where the debt has been incurred otherwise than in the strict line of the trustee's duty and in proper exercise of his powers. 5 These principles are well established and as they apply to a trustee carrying on a business - the true "trading trustee" - are summarised in a passage in the joint judgment of Stephen, Mason, Aickin and Wilson JJ in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 which drew upon the High Court's decision in Vacuum Oil Pty Ltd v Wiltshire (1945) 72 CLR 319 and was described by King CJ in Re Suco Gold Pty Ltd (1983) 33 SASR 99 as "the authoritative exposition of the general principles concerning the bankruptcy of a trading trustee". See also Meagher, "Insolvency of Trustees", (1979) 53 ALJ 648 particularly at 652-653. 6 The Suco Gold case also stands as authority for the proposition that the liquidator's costs, expenses and remuneration may, in a case where the company is trustee of a trading trust, be paid out of trust property. The reasoning was, in essence, that it is part of the duty of the corporate trustee to incur debts and to pay those debts; that once winding up commences, the trustee's duty to pay debts can only be performed through the liquidator; that the liquidator can function only if the liquidator's statutory right to be remunerated is accommodated; and that the resultant charges for remuneration must therefore be regarded as debts incurred in performing the duties of a trustee so that the trustee's right of indemnity is attracted. 7 This reasoning in relation to a liquidator's remuneration has been adopted in a number of subsequent cases. I would refer in particular to the decision of Campbell J in Re Sutherland and French Caledonia Travel Service Pty Ltd (2003) 59 NSWLR 361 where the position was succinctly stated as follows at pp.423-4: "When a company which carries on no activities other than being the trustee of a trading trust goes into liquidation, the proper costs and expenses of the liquidator can be met from the assets of the trust: In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99. King CJ reached this conclusion on the basis that a trustee had a personal right to be indemnified from the trust assets for expenses the trustee has incurred in the administration of the trust, and a lien over the trusts assets to secure that right of indemnity. The trustee also has a personal right to resort to the trust property and pay expenses of administration of the trust from the trust assets, without first paying those expenses himself. When a trustee which is a corporation goes into liquidation, those personal rights, and that lien, are assets which are divisible in the liquidation. (King CJ says they pass to the liquidator - page 104, 105, 107, 109. This is not, with respect, strictly correct, as the rights of the company remain with the company, and the liquidator acquires powers to deal with the assets of the company in lieu of the directors, but this detail does not affect the validity of the main thrust of his Honour's argument.) The liquidator can, by using those personal rights and that lien, resort to the trust property to discharge all liabilities which the trustee incurred in administration of the trust before winding up supervened. Because those liabilities are in law the liabilities of the trustee, section 292 Companies Act (now section 556 Corporations Act 2001 ) requires those pre-liquidation liabilities to be discharged in the order of priority there laid out, thus giving the liquidator a priority over pre-liquidation creditors of the trust business." 8 Mr Lo Surdo, who appeared for Mr Palmer, said that, although these principles may be regarded as settled in relation to a liquidator as such (so that a liquidator may, in a case such as this, proceed in the knowledge that resort may be had to trust assets for his or her remuneration), the position is not as well settled in the case of a provisional liquidator. 9 The reasoning in Suco Gold does not apply with the same force to the remuneration of a provisional liquidator. A provisional liquidator does not perform the function of ascertaining and paying the debts incurred by the company as trustee, thereby giving effect to the statutory scheme of winding up which cannot be implemented without a liquidator. A provisional liquidator's role is very much more that of a custodian and protector of assets seen to be in jeopardy. His or her stewardship comes to replace that of the board of directors pending the court's decision whether winding up should be ordered and a liquidator appointed. 10 In these respects, a provisional liquidator is more akin to a receiver. It is that analogy that has caused a provisional liquidator to be regarded as entitled to a lien over the company's assets for his expenses, remuneration and costs. I refer particularly, in that connection, to the decision of the Full Federal Court in Shirlaw v Taylor (1991) 31 FCR 222. Once that right is recognised, the claim for remuneration is seen to be one that may be recouped out of the company's property so that it assumes, for the purposes of the Suco Gold principle, the status of a debt to be discharged by the company either in the ordinary course if the provisional liquidator's tenure comes to an end without any winding up order or in any winding up that follows on from the provisional liquidation. 11 The guiding principle in this area is that stated by Dixon J in Re Universal Distributing Co Ltd (1933) 48 CLR 171, namely, that where work is done in recovering, realising and preserving particular property constituting a fund, it is that fund that should bear the attendant costs, including remuneration. That principle was seen as applicable to the remuneration of a provisional liquidator of a company holding trust property in Re Oakleigh Acquisitions Pty Ltd [2001] WASC 230 at [44]. I refer also to 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (1999) 30 ACSR 377 where Finkelstein J considered the question of recoupment out of trust property of remuneration of a person who was the receiver of trust property and, successively, provisional liquidator and liquidator of the corporate trustee. Regarding remuneration and expenses as provisional liquidator, his Honour set out the position at paragraph 25 of his judgment as follows: "I need not take much time in dealing with Mr Korda's claims with regard to his costs and expenses of the provisional liquidation. The cases show that the costs of a provisional liquidator are to be treated in the same way as the costs of a receiver appointed by the court. This is for the reason that the court will appoint a provisional liquidator in much the same circumstances as it would appoint a receiver, namely to protect property for the benefit of all persons who are entitled to it. The better known cases are collected in Shirlaw v Taylor (1991) 31 FCR 222; 102 ALR 551; 5 ACSR 767. There the Full Court affirmed the principle that the appointment of a provisional liquidator is analogous to the appointment of a receiver and that the provisional liquidator has a lien for his or her costs and expenses over the assets under his or her control analogous to that of a court appointed receiver." 12 There is, of course, a difference between a receiver of trust property and a provisional liquidator of a corporate trustee in that the former is generally empowered to take control of and manage the trust property while the latter merely replaces, in a de facto sense, the board of directors of the corporate trustee and becomes the decision maker for that trustee without having direct possession of the trust property. But the reality is, in each case, that an external appointee is installed for the express purpose of preserving property seen to be in jeopardy and the general principle enunciated in Universal Distributing Co applies without regard for the intervening corporate personality in the provisional liquidation case. 13 It is, however, important to emphasise that trust property is available to meet remuneration of such a functionary only in respect of work done in and about the administration of the trust. This is so whether the functionary is a receiver, provisional liquidator or liquidator. In relation to liquidators as such, the applicable rule and its derivation are discussed in depth in the judgment of Campbell J in Re Sutherland and French Caledonia Travel Service Pty Ltd (above) at pp.422ff. In the present case, no such issue arises because trusteeship of the Ervin Katz Family Trust represents the company's sole activity. 14 In a subsequent judgment in the same litigation (Re Application of Sutherland (2004) 50 ACSR 297), Campbell J referred in clear terms to the court's inherent jurisdiction with respect to trusts as a source of a power to sanction resort to trust property by way of remunerating not only a trustee as such but also a liquidator of a corporate trustee. His Honour referred to Re Berkeley Applegate (Investment Consultants) Ltd [1989] 1 Ch 32, Re Eastern Capital Futures Ltd (1989) 5 BCLC 223, Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674 and the 13 Coromandel Place case (above) as cases which "clearly accepted that the jurisdiction of the court to make an allowance to the person in fact administering a trust fund permitted a payment to be made to a liquidator". His Honour then said: "Those cases implicitly accept that the inherent jurisdiction of the court to allow remuneration in connection with the administration of a trust fund is one which can apply so as to allow remuneration not only to a trustee, but also to someone who is for practical purposes controlling a trustee." 15 I respectfully agree with his Honour's observations. They lead to a conclusion that the court has power, apart from s.473(2), to ensure that a provisional liquidator of a corporate trustee is remunerated out of trust assets. 16 Mr Palmer seeks re-assurance that the assets of Ervin Katz Family Trust (of which the company is trustee) may be applied in meeting any remuneration to which he may be adjudged entitled as provisional liquidator of the company. Because the company's activities are confined to its role as trustee, he is, in my opinion, entitled to that re-assurance but there is a question as to the form in which it should be given. 17 The interlocutory process seeks the re-assurance by way of declaratory relief. Mr Lo Surdo explained that the interlocutory process had been framed in that way because of doubt as to whether the court may, under s.479(3) of the Corporations Act, give a direction to a provisional liquidator, as distinct from a liquidator. He referred, in that connection, to the decision of Needham J in Newmont Pty Ltd v Laverton Nickel NL (1978) 3 ACLR 830 where it was held that the provision of the Companies Act 1961 allowing the court to give directions to a liquidator extended also to a provisional liquidator, even though not expressly mentioned. Mr Lo Surdo's concern is that the terms of the 1961 Act are not the same as those of the present Act in relevant areas and that the process of reasoning that led Needham J to his conclusion may no longer apply. 18 In my opinion, the court may give a direction to a provisional liquidator where it considers it expedient to do so in the interests of the due conduct of the provisional administration over which the provisional liquidator presides. Whether or not s.479(3) (which refers to a "liquidator") applies to a liquidator appointed provisionally, the court's inherent jurisdiction is the source of an equivalent or parallel power. The position is as stated by Austin J in Re United Medical Protection Ltd (No 3) [2002] NSWSC 488: "As to directions under s 479 (3), it is not entirely clear that this section is available in the case of a provisional liquidator, as opposed to a liquidator after a winding up order has been made. The word "liquidator" is defined in s 9 of the Corporations Act to include a provisional liquidator in Chapter 7, but not generally in Chapter 5. Section 472 (6) states that the exercise by a company's provisional liquidator of his or her statutory powers is subject to the control of the Court, but it confers standing, to apply with respect to the exercise or proposed exercise of any of those powers, on a creditor or contributory or ASIC but not the provisional liquidator. However, the Court has inherent jurisdiction to provide directions to an official liquidator appointed as provisional liquidator, because an official liquidator is an officer of the Court: see Re PR Clark Holdings Pty Ltd (1977) 2 ACLR 416, 418-19; Re Rothwells Ltd [1990] 2 Qd R at 186 (quoting from Palmer's Company Precedents (17th ed, 1960) Part 2 page 103). Therefore I am satisfied that I have the power to give directions to Mr Lombe as provisional liquidator, on his application, either under s 479 (3) or in the exercise of the Court's inherent jurisdiction. Of course, directions of the kind that I shall give to Mr Lombe have the relatively limited significance described by McLelland J in Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674; see also Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466." 19 The appropriate course, in my view, will be to give to Mr Palmer a direction in the terms I have foreshadowed, that is, that the assets of the Ervin Katz Family Trust of which the company is trustee may be applied in meeting any remuneration to which Mr Palmer may be adjudged entitled as provisional liquidator of the company. It is preferable that there be no declaratory order as such upon the provisional liquidator's ex parte application and that the matter be left to be dealt with by a direction alone until the point is reached where the court actually makes, after due notice, an order for the payment of particular remuneration in satisfaction of the statutory right to be remunerated. 20 If Mr Palmer is minded to apply for a direction rather than a declaration and arranges for an appropriately amended interlocutory process to be filed by delivery to my Associate by 12 noon on 17 December 2004, I shall make the direction before the end of term. **********

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