Horwath Corporate Pty Ltd v Huie [1999] NSWSC 583 | Case summary

1 HIS HONOUR: This is another stage of the litigation that has arisen out of a failure of the Astor Goldsbrough Trust. In simple terms that trust involved the present plaintiff, as trustee by itself, and a manager administering a scheme whereby owners of home units in the Astor Goldsbrough building would pool their units so that they could be operated as a hotel. Unfortunately, the moneys generated by the scheme were insufficient to keep it going and it has ceased trading. The trust deed does not explicitly deal with the situation as to what was to occur if losses were made in trading. 2 Clause 23 of the trust deed reads as follows: "23 Termination Procedure 23.1 On termination, the Trustee must realise the Assets of that Trust. That must be completed in 180 days if practical and in any event as soon as possible after that. Final Distribution 23.2 The net proceeds of realisation, after discharging or providing for all Liabilities of the Trust and meeting the expenses of termination, must be distributed pro rata to Participants according to the number of Units they hold. Set off 23.3 The Trustee may apply any distribution payable under this clause 23 against amounts owing by the Participant under clause 12." 3 On 20 April 1999, virtually by consent, I ordered and declared that: "1. The Trustee is now required to wind up the Astor Goldsbrough Trust ("the Trust") and that upon completion of winding up the Trust be terminated." 4 I then advised the trustee that it would be justified in taking certain steps to wind up the trust. These involved: "(d) collecting the receivables of the Trust and realising any other assets of the Trust; and (e) approaching the Court, if necessary, for further directions when the assets of the Trust have been realised." 5 I noted that various issues were postponed, including what was the date of the winding up of the trust, whether an order should be made for winding up under either s 583 or s 1074 of the Corporations Law, and if there is to be a court winding up who should be the liquidator. 6 The motion filed today was that the court appoint from the A List of liquidators an independent liquidator to wind up the affairs of the trust under the direction of the court. 7 There has been debate about what this really means. 8 There has not been the opportunity to research the point completely, but it would seem to me at this stage that if the court is to wind up the trust, like it would wind up a partnership, it can only do so in proceedings in which all of the quasi partners (in other words the unitholders of the trust) are parties; see Van Sandau v Moore (1826) 1 Russ 441; 38 ER 171. I should note the present defendant is in these proceedings as a representative contradictor, but she does not necessarily represent all unitholders. 9 Accordingly, I cannot at this stage have a winding up akin to a winding up of a partnership. 10 There is doubt as to whether the court can direct a winding up akin to the winding up of a company, at least outside the scope of s 583 of the Corporations Law. 11 I should make it clear that I am not dealing today with any rights that may exist under that section or s 1074, but merely on general equitable principles. 12 There is a sentence in the 3rd edition of McPherson on The Law of Company Liquidation (Law Book Co, Sydney, 1987) p 2 that: "Liquidation ... can take place only pursuant to, and in accordance with, the terms of the relevant statute." 13 Although one can argue with this proposition, logically it does seem to accord both with the historical practice of Courts of Equity and with the authorities such as they are. 14 In any event, there is a very real distinction between a corporation and a trust, in that with a corporation the property is vested in the corporation itself, but with a trust the property and the prima facie liability for the debts is vested in the trustee. 15 There does not appear to be any reported case before the English Joint Stock Companies Winding Up Act 1844, when many companies adopted the structure of a deed of settlement with the property held by trustees, where there was a winding up of the enterprise by the court. However, it may be that more extensive research will find some, or it may be the answer was that because of the rule that all the "shareholders" should be parties it was just impractical to bring such proceedings. 16 One must also focus on what a winding up really is. Traditionally it has been described by saying that it is the process of turning the horse around and leading him back to the stable; that is, that the corporation, figured by the horse, makes its way out of the stable, goes about its business, at the moment of winding up the horse turns around and starts moving back towards the stable. Thus the horse is still there, it is the same animal, it has got the same burdens, but it gradually releases its burdens until the moment of dissolution when it gets put back in the stable and dies. Thus winding up or liquidation is a process whereby assets are realised, claims are assessed and the assets cease to be assets of the corporation, the claims are satisfied, as much as they can be, and then the company dies. 17 Putting that concept into the realm of trust law is rather difficult. As Grbich and others say in Winding Up Trusts (CCH, Sydney, 1984) at pp 28 and following, it is very difficult indeed to release the equitable obligations and fiduciary duties that flow between trustees and beneficiaries, and to a more limited extent in the reverse direction. It is not feasible just to say that a trust comes to an end. One has not only got to deal with the assets and liabilities, one has also got to consider what is to happen to the equitable obligations. 18 Thus when looking at the word "termination" in cl 23.1 of the trust deed there is a lot to be said for the proposition that the word merely means that the business of the trust is to terminate. It cannot mean that the equitable obligation of trustee to beneficiaries, or beneficiaries to trustee ceases. In fact the opposite must be the case. The trustee in realising the assets will have expended money. There will be some implied right, at least prima facie, for the money to be reimbursed, which there would not be if the trust as a whole had come to an end. 19 There may be an argument cl 23 sets up some secondary trust or contractual relationship, but it is more likely the trust continues. So the winding up is really a mechanical process which has to be gone through as a matter of practicality in order to fulfil the aim of the deed, where the deed in itself is silent. It is really just another instance of the court in its implied powers applying a sort of cy pres scheme of management in order to fulfil the trust. 20 Under the deed the trustee is given the obligation to realise the assets. The authorities suggest that where a particular person is vested with obligations of this nature that prima facie the parties should be left to their bargain. Accordingly, as Erskine LC said in Middleton v Dodswell (1806) 13 Ves Jun 266; 33 ER 294, the court is more reluctant to take the administration of a trust out of the hands of an executor who has become a trustee, as opposed to an administrator of an estate, who has become a trustee, because in the first case particular confidence was reposed in the nominated executor. 21 So here the trustee in the deed is a person in whom particular confidence was placed. The applicant says that she and many of her colleagues as unitholders have lost confidence in the trustee. However, the loss of confidence does not seem, at least at this stage, to amount to allegations of breach of trust and there is insufficient, it seems to me, to cast aside the nominated trustee in favour of somebody else. 22 Under the order that was already made the trustee envisages coming back to the court after the assets have been realised. Today its counsel proffered an undertaking to the court that it would not distribute, except in accordance with permission already granted by the court, or upon further direction of the court, with a couple of qualifications. 23 It seems to me that that is a fair protection. This is because what appear to me at this stage to be the thorny problems are the liability, if any, of the beneficiaries to the creditors; the liability of the trustee to the creditors; and the question of the lien of the trustee. Those matters can be dealt with by the court in specific litigation with the appropriate parties or representative parties once it is seen, at least prima facie, what is the fund that is left to be split between the various disputants. 24 I have said on previous occasions that trusts are the creatures of equity and that rights and duties exist because of the orders that an Equity Court may make, and so essentially all trusts are under the supervision of the court (see for instance McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623, 637). However, as also appears from McLean's case, the court is guided by practice and precedent of the past and lets the trust run on in accordance with the trust deed, at least up until a certain point is reached. If that point is reached, then any beneficiary who complains is entitled, almost as of course, to an order for the specific performance of some obligation under the trust or for general administration, though usually, prima facie, at first instance at his or her own cost. 25 Accordingly, the present application is competent to have the trust administered under the jurisdiction of the court, or alternatively for some specific order to be made as to its administration. 26 There are two main matters to consider: (a) have the circumstances in the present case been made out that would justify an order? and (b) what are the discretionary considerations as to whether the order should be made? 27 As to (a) I do not consider the evidence at this stage is sufficient to displace the provisions of clause 23.1 of the deed entitling the trustee at least to realise the assets and then to administer and distribute under the direction of the court. Indeed, the undertaking as to the second really achieves a lot of what the applicant is seeking. 28 As to (b), the cost of imposing an A List liquidator at probably some $350 per hour, as a supervisor, would not at this stage seem to be money well spent. If there were some particular matters that needed supervision, then things may be different, but even then it would seem less expensive to direct that the trustee not do certain things except with the leave of the court, as opposed to putting in a liquidator as a supervisor. 29 It does not appear at this stage that this is a case where it is necessary for a skilled insolvency practitioner to go through the books and records of the trustee and the manager. If later in this litigation that appears to be the situation, I may then take some other direction. 30 Accordingly, I am not prepared at this stage to appoint an A List liquidator either as liquidator or supervisor or to put the trust under the administration of the court. 31 I have given these reasons as an ex tempore judgment. It would be of value for future generations to have gone into these questions thoroughly, but it seemed to be better just to give the result of the case because the greater probability will be that many of these issues will have to be thoroughly argued at a later stage of the litigation. It is far better if a full judgment has to be delivered, it is delivered after full argument from counsel. 32 I dismiss the notice of motion of 1 June 1999 without prejudice for a similar motion to be filed should circumstances alter. (Mr Gleeson sought that the costs of the plaintiff of the notice of motion of 1 June be paid out of the trust fund) 33 The costs of the trustees are to be paid out of the fund on the trustee basis. I reserve the costs of the applicant. 34 I stand the proceedings over to 9.50 am on 20 July to my list. I order that exhibits PX01, PX02 and DX03 be returned.

Horwath Corporate Pty Ltd v Huie

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