Grossman v E Katz Manufacturing Jewellers

THE APPLICATION OF OLDE AND ANOR RE: PROPESTATE PTY LTD (IN LIQUIDATION JUDGMENT 1 BRYSON AJ: The Plaintiffs Mr Olde and Mr Adams were appointed administrators of the Company by its directors on 14 February 2008, pursuant to section 436A(1) of the Corporations Act 2001 (Cth). At the same time they became administrators of two related companies, J and J Potten Holdings Pty Ltd and J and J Potten Pty Ltd. On the same day Mr Jason Potten, a principal figure in the affairs of the companies, became a bankrupt. Mr Potten was not a director of Propestate, although he conducted himself much as if he were. He was the director of the other two related companies. Propestate operated a real estate agency under the Raine and Horne franchise, with business offices at Castle Hill, Dural and West Pennant Hills. The business included a sales agency and also property management or rent rolls. The administrators were highly active, and took control of affairs and sold the business within a few days. Early investigations indicated that the Company's debts were altogether overwhelming, principally debts which were or purportedly were secured. The administrators reported that they did not get appropriate assistance from directors. The Company's obligations to keep written financial records have not been complied with and the records which the administrators recovered are largely incomplete. They reported "…No meaningful financial statements (have) been recovered relating to the trading operations of the Businesses" 2 The administrators made a comprehensive report to creditors dated 12 March 2008 and the creditors appointed the administrators as liquidators by a resolution at the creditors meeting under section 439A on 20 March 2008. In their report tabled before the creditors the administrators estimated realisable values at negative $5,223,461. Estimated liabilities to unsecured creditors, trust account creditors and employees totalled $1,344,000; about ten times the estimated realisable value of assets, but these figures were completely overwhelmed by an estimated secured creditor shortfall of $3,714,461. Two factoring companies had or claimed securities relating to factoring sales commissions. It was the view of the administrators and they reported that commissions on non-existent sales had been fraudulently factored to the value of approximately $3.85 million. 3 This application relates to one part of this complex and disastrous liquidation. As a licensee under the Property, Stock and Business Agents Act 2002, the Company was obliged to comply with Part 7, Trust Account, and pay money received by or on behalf of any person in connection with the business into the trust account (whether general or separate) at a bank (or other authorised deposit taking institution): See particularly section 86. The administrators found ten trust accounts operated by the company and the related companies, at St George Bank and the ANZ Bank; most were overdrawn or contained insignificant sums but four had significant credit balances. The administrators opened an account at Macquarie Bank into which they paid moneys coming under their control, including moneys in the trust accounts. As appropriate records had not been kept it was not easy to identify entitlements to funds in what were described as trust accounts; however, the administrators, later as liquidators, were able to identify, and acknowledged and paid out a number of entitlements to these funds. To take the simplest example, one of the trust accounts contained only a deposit relating to one identifiable transaction: when the transaction was completed these funds were accounted for. A number of other entitlements were identified and paid out: so that $148,220.82 was collected as recognisably proceeds of trust accounts, and paid into Macquarie Bank in February 2008, and after payment of claims (and also collection of interest and payment of bank fees) there was a closing balance on 31 October 2008 of $45,127.04. The liquidators hold the fund which now represents that credit as trustees: this is clear because they found and took control of money in accounts which were designated as trust accounts, kept by a licensee with a statutory obligation to keep trust accounts: so the liquidators themselves are trustees of these funds. However, they, after making efforts and expending considerable time and work, have not been able to identify the beneficial owners of the remaining amount. 4 There are a number of classes of people who in concept might be beneficial owners: landlords entitled to rent paid to the agents, purchasers entitled to deposits they had paid on projected sales which had not been exchanged, vendors for deposits paid on sales which had been exchanged: with stakeholder obligations. Then too, in concept the Company might be entitled to a charge on a deposit for commission when earned, and a factoring company might be entitled to a charge on that. There may be other classes. In the time which has passed it can for practical purposes be assumed that anyone who is in a position to claim to be the equitable owner of these funds and to show how his rights can be traced to a particular part of them would have to come forward and stated his claim to liquidators. It is still conceivable that someone exists who is able to show entitlement to some of the funds: but this is very unlikely. 5 The applicants asked the court to order that remuneration be paid to them from these funds. They asked the court to determine the amount of the remuneration; I am not engaged in determining the amount, which should be established by a reference to the Registrar for assessment. The applicants proposed detailed procedural arrangements relating to that process of assessment. However what is involved in principle and what I am addressing is the question whether the court should exercise its powers as a court of equity with general supervision over trust property and trustees to order and allow remuneration, and whether the remuneration should fall on the funds remaining in the hands of the trustees, that is the part of the proceeds of the Company's trust accounts for which equitable owners have not been identified. 6 An underlying assumption, which I do not question, that is these funds are not assets in the liquidation out of which the court can allow liquidators remuneration. Two persons intervened in the application, by leave. These persons have not contended or undertaken to prove that they have any identifiable right to any part of the fund. I cannot see from the facts before me how they could prove such a thing, but if they wanted to do so, they would have to take much more concrete action than simply opposing payment of the remuneration out of the funds; they would have to make some positive approach to the Court for ascertainment and enforcement of an entitlement to part of the fund, and if they succeeded that would give reality to the question of what the Court should do in the competition between an interest they can establish and the claim of a trustee to remuneration. That however, is not what is before me. If this remuneration is not allowed, the liquidators' claim for remuneration will fall against the assets of the company in the liquidation, which will be altogether inadequate to meet the liquidators' time-based work charges, fees and expenses. Indeed, there will be a significant shortfall even if the whole of the remaining fund related to the trust accounts is available as remuneration. 7 These interveners responded to a published notice relating to this application and directed to: "creditors who may have a stake in trust accounts previously maintained by Propestate…"