Grossman v E Katz Manufacturing Jewellers [2005] NSWSC 1044 | Case summary

4851/05 - RE MAUREEN MICHAEL MANAGEMENT PTY LTD JUDGMENT 1 HIS HONOUR: Maureen Michael Management Pty Ltd (the Company) carried on business as a modelling and theatrical agency. 2 The Company was wound up after a failed administration and Mr Lord was appointed liquidator. 3 This is an application by the liquidator of the Company under s 511(1)(a) of the Corporations Act 2001 (Cth) and the court's inherent power to order that he be paid remuneration and recover expenses in relation to the trust assets of the Company. The statutory power to my mind is merely incidental in this type of case. 4 The Company has no assets of its own, but has a trust account in which there is $ 49,103.59. 5 The trust account was in life operated by the Company as one into which clients paid fees which were to be paid out to performers. 6 The trust account appears to have been kept because of the requirements of the Entertainment Industry Act 1989 (the EIA). 7 Section 39 of the EIA provides that the monies in a trust account must be held exclusively for the purpose of paying performers (with a proviso to permit the agent to deduct a standard commission). 8 Mr Lord claims to have spent time on administration of the trust account which he assesses at $26,853.20 and, in addition, there are legal fees of $31,174.22 and advertising fees amounting to $213.80. 9 Mr Lord has agreed to cap his fees at $22,000 and the solicitors have agreed to cap their fees at $25,080. This excludes advertising and court filing fees. One can see that even under this arrangement, $47,900 out of $49,100 or 97.5% of the fund will be eaten up in costs and expenses. 10 Mr Lord estimates that the legitimate claims against the fund other than for fees would approximate $150,000, but this may be as low as $40,000. 11 Mr Lord says that he has notified all potential claimants to the fund of this present application. One, Mr Bird, objected: he said he did so on principle. Mr Bird was sent a copy of the originating process and leading affidavit, but did not appear at the hearing. 12 The application came before me in a busy Corporations List. Mr Lo Surdo appeared for the liquidator and furnished written submissions. I was not convinced by these and reserved my decision. 13 Upon considering the matter, I requested my Associate to send Mr Lo Surdo a memorandum asking for further assistance on two points, viz: (a) The effect of s 39 of the EIA; and (b) how, if at all, the principle of proportionality or general principles of equity affect an application to divert about 97% of a trust fund to the payment of trustee's fees and expenses. 14 Mr Lo Surdo made further written submissions directed to those issues on 13 October 2005. 15 Section 511(1)(a) of the Corporations Act empowers a liquidator to apply to the court to determine any question arising in a winding up. 16 Mr Lo Surdo relies heavily on the decision of Campbell J in Re Sutherland (2004) 50 ACSR 297. 17 That was a case where an administrator, who later became a liquidator administered trust funds operated by a travel agency. 18 Campbell, J said at [11]: "Although generally a trustee is not entitled to remuneration for his time and trouble in execution of the trust, there is an inherent equitable jurisdiction to allow a trustee remuneration, which is usually exercised sparingly and in exceptional cases." 19 The judgment went on to make it clear that the same principle applies to a liquidator of a company which had operated a trust fund. 20 His Honour held that one of the exceptional cases recognized in the authorities was where there was no practicable alternative to having a paid person administer a trust; see eg Re Freeman's Settlement Trusts (1887) 37 Ch D 148. 21 Thus the present case falls within the situations where the court will exercise its inherent power to grant the liquidator remuneration. 22 This approach was reinforced by the decision of Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd (2004) 52 ACSR 198. Barrett J there said at [11] that the guiding principle was that expounded by Dixon J in Re Universal Distributing Co Ltd (1933) 48 CLR 171 that a fund should bear the costs incurred (including remuneration) of its own administration and realisation. 23 Mr Lo Surdo also referred me to my own decision in Re Greater West Insurance Brokers Pty Ltd (2001) 39 ACSR 301. That case concerned a trust account under the Insurance (Agents and Brokers) Act 1984 (Cth) kept by a company now in liquidation. The liquidator administered the funds and claimed remuneration. 24 As the court was not dealing with a trading trust, I followed the principle laid down by M H McLelland J in Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674. This decision in turn followed Needham J's decision in Re Crest Realty Pty Ltd [1977] 1 NSWLR 664. 25 In Crest Realty at p 672, Needham J said that the then equivalent of section 495(1) of the Corporations Act imposed a duty on a liquidator to act in a responsible way in the administration of any trust of which the company is a trustee. 26 In Nathan at p 688, the judge said that what will fulfil the duty of acting in a responsible way in relation to a trust will depend on the circumstances. The flavour of the judgment is that the liquidator must direct his mind to whether he should have a new trustee appointed for the trust, put in a receiver, pay out monies to persons entitled or approach the court as to how he should discharge his duty. 27 It should also be noted that in Crest Realty, Needham J paid particular attention to the fact that the trust account was one where the relevant statute required monies to be held exclusively for the beneficiary and refused a liquidator's request that the funds be transferred to him. 28 I accept the general proposition that where a liquidator finds himself in charge of a trust fund and administers it, the court will normally exercise its discretion to allow the liquidator remuneration and expenses out of the fund. 29 However that is a general proposition. The exact analysis will differ between cases where the liquidator is administering a trading trust and has a right of indemnity in equity over the trust assets and cases where there is no trading trust. 30 In the latter case, the liquidator has the duty to act responsibly with respect to the fund. If he does so, the court will be inclined to grant him remuneration. 31 With respect, I cannot accept Mr Lo Surdo's submission that a liquidator has a right to remuneration which is not to be whittled down by provisions such as s 39 of EIA. There is no such right. The liquidator is remunerated because the court considers that it is just and fair to do so in all the circumstances of the individual case. 32 It is true that the courts lean in favour of granting a liquidator remuneration as a professional liquidator cannot be expected to work for nothing. However, it must also be said that liquidators go into these situations with their eyes open and it is possible for them to deal with the situation by other means. If they are to go to the court for remuneration, this is best done early in administration, not after they have used up the entire fund in administration which produced no benefit for anybody. 33 Although I could see that a great deal of the liquidator's staff time could be taken up with getting in claims and applying a Clayton's case or other appropriate analysis to them, it is very difficult to find that any reasonable person would spend anything like $26,853.20 on the exercise. Indeed if claimants were to be paid proportionately even less time would be occupied. It is also very hard for me to accept that any lawyer could charge $31,174.22 in advising a liquidator as to how to distribute a small fund amongst a number of claimants. 34 The fact that the legislature has made it clear in s 39 of EIA that the performing fees of performers are to be kept sacrosanct is a further factor that must be taken into account when making the assessment as to whether the liquidator has acted reasonably. 35 A further relevant matter is the legislature's command in s 60 of the Civil Procedure Act 2005 that the principle of proportionality applies to legal costs. 36 A reasonable trustee would make enquiries as to claimants and if he or she saw that the administration of the fund would cost too much, he or she would pay the money into court under s 95 of the Trustee Act 1925. 37 Accordingly, I could not make the orders that the liquidator seeks. 38 However, the court cannot just leave the matter in limbo. The liquidator should receive some remuneration and compensation. One way of doing this would be to allow him to rank pari passu with the other claimants. This would result in him receiving a quarter to one half of the fund. 39 It seems to me that the vast amount of time spent by the liquidator and his advisers administering the fund should mean that they should easily be able to produce to the court a scheme which would provide for the distribution of half the fund to performers. Provided that this is produced to the court, I would favourably consider that the liquidator should be paid the balance of the fund. 40 If the liquidator is unwilling to produce such a scheme of distribution by the end of November, the present application can be dismissed and the liquidator can pay the fund into court under s 95 of the Trustee Act 1925. 41 Accordingly, I will at this stage publish these reasons and stand the matter over to my list for mention at 9.50 am on 30 November 2005 provided that, if arrangements are made with my Associate at least in the previous week, that date can be changed to suit counsel's convenience.

Grossman v E Katz Manufacturing Jewellers

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