Kite v Mooney, re Mooney's Contractors Pty Ltd

THE COURT DIRECTS THAT: 7. Pursuant to s 90-15 of Sch 2 to the Corporations Act, the first plaintiff has, in respect of the assets of the trust, the powers that a liquidator has in respect of the business, property and assets of a company under the Corporations Act, including without limitation: (a) the first plaintiff is justified in treating the assets of and liabilities incurred by the second plaintiff in the conduct of its business as assets and liabilities of the Trust; (b) the first plaintiff be allowed remuneration for the work undertaken, over the period 9 December 2016 to 30 April 2017, for and relevant to the purpose of liquidation of the second plaintiff in the sum of $52,200 (plus GST); and (c) the first plaintiff would be justified in distributing the assets of the Trust as follows: (i) first, paying the amount of $3,745 to the first plaintiff as the first plaintiff's costs of this application; (ii) second, paying the amount of $52,200 (plus GST) to the first plaintiff for the remuneration referred to in (b) above; (iii) third, paying the first plaintiff remuneration on a time basis at a reasonable fee according to the hours for which he, or any employee of PKF Chartered Accountants ("PKF"), engage or have engaged in work necessary for and relevant to the purpose of the receivership or liquidation after 30 April 2017, such remuneration to be calculated at the standard rates of PKF from time to time for work of that nature, together with all reasonable out of pocket expenses capped at $40,000 (plus GST); and (iv) fourth, distributing in any surplus assets of the Trust, after payment of the amounts in (i)-(iii) above, to creditors of second plaintiff. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background 1 Leighton Scaffolding Pty Ltd (in liquidation) ("Leighton Scaffolding"), a company incorporated in October 2007, was ordered to be wound up in insolvency on 9 December 2016. At the time of the winding up order, John Vouris of PKF Chartered Accountants ("PKF") was appointed as its liquidator. The petitioning creditor was the Deputy Commissioner of Taxation. 2 By originating process filed 28 July 2017, Mr Vouris applied to be appointed as receiver and manager over the assets of the Leighton Scaffolding Discretionary Trust ("Trust") pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth) ("FCA Act") and ancillary orders. 3 Section 57(1) of the FCA Act provides: The Court may, at any stage of a proceeding on such terms and conditions as the Court thinks fit, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just or convenient so to do.

Change of liquidator 4 In about October 2017, Mr Vouris decided to resign as Leighton Scaffolding's liquidator. On 12 October 2017, Mark Roufeil of PKF signed a "Consent of Liquidator to Act" form in relation to Leighton Scaffolding. 5 On 31 October 2017, a meeting of creditors of Leighton Scaffolding passed a resolution removing Mr Vouris as external administrator from office and appointing Mr Roufeil as external administrator. 6 Section 473A of the Corporations Act 2001 (Cth) ("Corporations Act"), introduced by the Insolvency Law Reform Act 2016 (Cth), provides that a vacancy in the office of a liquidator appointed by the Court may be filled by the Court. Order 1 is in accordance with that provision: cf. Re Equiticorp Australia Limited (in liq) [2017] NSWSC 1456 at [6]. 7 Orders 2 and 3 amend the parties to the proceeding and the form of pleading to reflect the change of liquidator.

Evidence 8 The following affidavits were read in support of the application: (1) two affidavits of Mr Vouris affirmed 13 July 2017 and 5 September 2017; (2) an affidavit of Senray Loy, chartered accountant working under the supervision of Mr Vouris, affirmed 15 November 2017; (3) an affidavit of Kellie Stannard, Leighton Scaffolding's accountant from June 2013, sworn 15 November 2017; (4) an affidavit of Matthew Kennett, lawyer acting for Mr Vouris and Leighton Scaffolding, affirmed 24 November 2017; (5) an affidavit of service of documents on Paula Leighton sworn by Robin Brooks on 8 November 2017; and (6) an affidavit of attempted service of documents on Ellen Leighton, sworn by Andrew Jones but not dated.

Leighton Scaffolding Discretionary Trust 9 Leighton Scaffolding was initially operated as a simple corporation, and all funds were held by the company in its own capacity. The company was in the business of providing scaffolding services (supplying, erecting and disassembling scaffolding) to the construction industry. 10 The Trust was established by a trust deed executed on 1 July 2013. The trust was established solely to conduct the trading activities of Leighton Scaffolding and, following the establishment of the trust, Leighton Scaffolding's sole activity was to act as trustee of the Trust. 11 The Trust is a discretionary trust. The sole named beneficiary is Craig Leighton, who is the sole director and secretary of Leighton Scaffolding. 12 Paula Leighton is the estranged wife of Craig Leighton. Ellen Leighton is the daughter of Craig and Paula Leighton. 13 The trust deed sets out an extensive list of eligible beneficiaries. 14 Clause 46 of the trust deed provides relevantly: The appointment of a trustee terminates automatically if any of the following occurs: … • The trustee enters into compulsory or voluntary liquidation (except for the purposes of amalgamation or reconstruction) …

Distributions from the trust 15 Ms Stannard's affidavit annexed the Trust's financial reports for the years ended 30 June 2014 and 30 June 2015. Those reports show that the following distributions were made to the following beneficiaries: (a) Financial year ended 30 June 2014: (i) Craig Leighton $92,073.00 (ii) Paula Leighton $7,700.00 (b) Financial year ended 30 June 2015: (i) Craig Leighton $84,660.00 16 Ms Stannard's evidence indicates that there have never been any distributions to any beneficiary other than the distributions in the previous paragraph. 17 On 24 November 2017, Mr Kennett contacted Paula Leighton. In response to his question about whether she proposed to attend the hearing that day, Mrs Leighton said: No I won't be. I don't want anything to do with this matter or the company in general. I have no interest in my husband's affairs. He also made it clear that the company and the trust have nothing to do with me. 18 Mrs Leighton was unable to provide an address for Ellen Leighton. She told Mr Kennett that she did not have any book or records of Leighton Scaffolding except for a few copies of some old job logs.

Steps taken in the liquidation 19 Since his appointment, the liquidator has taken the following steps in the liquidation: (1) interviewing Mr Leighton, and taking steps to gather information and books; (2) reviewing gathered books and records, identifying debtors, contacting debtors and demanding payment of debts, considering responses from debtors to demands, and assessing whether particular debts should be adjusted or written off; (3) taking steps to recover debts, including engaging a law firm to correspond with debtors: the liquidator has recovered $188,206.66 from debtors, approximately 97% of the debts determined by the liquidator to be valid and recoverable; (4) identifying and obtaining recovery of a preferential payment, in the amount of $5,000, made by Leighton Scaffolding to the Commissioner of Taxation during the "relation back period"; and (5) identifying and contacting creditors, considering proof of debt claims, preparing a report to creditors and holding a creditors meeting on 6 June 2017. The liquidator determined that the aggregate amount owing to creditors was $357,681.58.13. 20 At the 6 June 2017 creditors meeting, the creditors voted on and passed resolutions approving: (1) payment to the liquidator, as remuneration for the period from 9 December 2016 to 30 April 2017, of $52,200 (exclusive of GST); and (2) further remuneration for the period after 1 May 2017 at the cost of time spent, calculated at the hourly rates detailed in the "PKF Business Recovery & Insolvency Services Guide", up to a capped amount of $40,000 (exclusive of GST).

Meetings with Mr Leighton and attempts to locate books and records of Leighton Scaffolding 21 The liquidator has received only limited assistance from Mr Leighton. 22 On 11 January 2017, Mr Loy and another accountant under Mr Vouris's supervision, Mr Li, interviewed Mr Leighton. Mr Leighton undertook to complete certain tasks for the liquidator, set out in Mr Vouris's affidavit, but he did not do so. Mr Vouris's evidence was that, as at 13 July 2017, Mr Leighton had failed to provide any assistance to Mr Vouris or any member of Mr Vouris's office in respect of the liquidation. 23 On 10 August 2017, Mr Vouris and Mr Loy met with Mr Leighton. When questioned on his failure to comply with previous undertakings to the liquidator, Mr Leighton explained that he had just finished a six month jail sentence and was currently completing a rehabilitation program. When asked if he was in possession of the books and records of Leighton Scaffolding, Mr Leighton said: I am not in possession of any of the books and records. I believe that my wife may have them, although I cannot be sure. My daughter may be in possession of some of them. I will contact my wife and attempt to get them for you. Alternatively, if you would like to contact her, you can call her on her mobile … 24 Since that meeting, Mr Leighton has made no further contact with the liquidator. On 8 and 18 September 2017, Mr Loy attempted unsuccessfully to contact Mr Leighton to seek an update on his endeavours to locate the books and records of the company. 25 On 18 September 2017, Mr Loy contacted Paula Leighton, seeking her address and an address for her and for their daughter. Mrs Leighton provided her own address, informed Mr Loy that she and her daughter were currently estranged and provided a possible address for her daughter. An attempt to serve the daughter with documents filed in this proceeding at the nominated address was unsuccessful. 26 The liquidator has also sought books and records of the company from Ms Stannard who said that her firm does not hold any of the records.

Legal principles 27 In Hosking, re Business Aptitude Pty Ltd (in liq) [2016] FCA 1438 ("Hosking"), I recorded the following propositions of relevance to this application: 17. The general ground upon which the Court appoints a receiver is the protection or preservation of property for the benefit of persons who have an interest in it: QBE Insurance (Australia) Ltd v WA Metal Recycling Pty Ltd, in the matter of WA Metal Recycling Pty Ltd (in Liq) [2016] FCA 238 ("QBE Insurance") at [13], citing Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600 at [15]. 18. Where a trustee is removed, it retains a right of indemnity from the trust assets secured by an equitable charge over them for its liabilities incurred by reason of acting as trustee: In the matter of Stansfield DIY Wealth Pty Ltd (in liquidation) [2014] NSWSC 1484; (2014) 291 FLR 17 ("Re Stansfield") at [10]. 19. There is a conflict of authority as to whether the liquidator of a corporate trustee, which has ceased to be trustee, has the power to sell trust assets to enforce the (former) trustee's right of indemnity. In Apostolou v VA Corporation of Aust Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84, Finkelstein J held, at [48]-[50], that the liquidator of a corporate trustee which held legal title to trust property in which it also had an equitable interest could sell the subject property pursuant to the power of sale conferred by s 477 of the Act and that this survived the removal of the corporate trustee. 20. However, in Re Stansfield, Brereton J disagreed with the decision of Finkelstein J and held (at [10],[16]-[20],[30],[33]) that, if a trustee company ceases to be trustee of a trust it can no longer exercise the trustee's power of sale under the trust instrument or general law and that s 477(2)(c) of the Act does not empower the liquidator to sell property held by the trustee company on trust, even if the trustee company has an equitable charge over it, because the property is not in itself "property of the company". 21. Notwithstanding this conflict of authority, it is well-established that a receiver and manager can be appointed over trust property to secure the trustee's right of indemnity out of the assets of the trust: SMP Consolidated Pty Ltd (in liquidation) v Posmot Pty Limited [2014] FCA 1382 ("SMP Consolidated") at [7] citing Re Indopal Pty Ltd (1987) 12 ACLR 54 at 57; Kerr, in the matter of Angel's Castle Pre-School Pty Ltd (In Liquidation) [2010] FCA 786 ("Angel's Castle Pre-School") at [25]; In the matter of Gramarker Pty Ltd; Clifford Sanderson (as liquidator of Gramarker Pty Ltd) v Kerr [2014] NSWSC 243 at [6]-[7]; Re Stansfield at [31], [33], [45]. 22. This Court has exercised its power under s 57(1) of the FCA Act for the purpose of appointing a liquidator of a former trustee company as receiver and manager of the trust, for example, in QBE Insurance and in Kite v Mooney, in the matter of Mooney's Contractors Pty Ltd (in liq) [2016] FCA 886.

Consideration 28 On behalf of the liquidator it was submitted that it was just and equitable to appoint the liquidator as the receiver and manager, without security, over the property, assets and undertakings of the Trust because it would allow the liquidator to realise the company's rights of indemnity as former trustee of the Trust. I accept this submission. The liquidator seeks to use the proceeds of realising the assets of the trust to discharge the liabilities incurred solely in its capacity as trustee. I also accept that the appointment would bring certainty to the process of finalising the liquidation. 29 Although the liquidator did not obtain Mr Leighton's consent to his appointment as receiver and manager, I do not consider that the lack of consent should preclude the order where reasonable attempts have been made to engage with Mr Leighton and those attempts have been unsuccessful. I also note that, although Mr Vouris did not depose to an absence of belief that a replacement has been appointed as trustee of the trust, I do not consider that there was any reason to believe that a new trustee had been appointed and, in particular, the evidence of Ms Stannard and the communications with Mrs Leighton do not raise any such concern. 30 There is no evidence of a conflict between the duties of the liquidator as liquidator and as receiver and manager.

Employee entitlements 31 An issue raised at the hearing on 24 November 2017 was the treatment of entitlements of former employees of Leighton Scaffolding. The evidence before the Court is that: (1) upon the company being placed into liquidation, there were only two weeks of wages for two employees, and up to two years of superannuation, that were unpaid; and (2) those two employees, Peter Blount and Luke Stevens, has each lodged a proof of debt form for their unpaid wages. 32 The unpaid wages and unpaid superannuation amounts were recorded as "TBD" in the estimated financial position of Leighton Scaffolding as set out in the "Official Liquidator's Report to Creditors" prepared for the meeting of creditors on 6 June 2017 ("creditors report"). The creditors report also indicates that the employees are afforded a priority over unsecured creditors for outstanding entitlements pursuant to s 556 of the Corporations Act. It was resolved at the creditors' meeting on 6 June 2017 that the report was read and understood. 33 The liquidator referred to recent case law to the effect that s 556 does not have a relevant obligation in connection with the payment of liabilities from trust property, particularly, Re Independent Contractor Services (Aust) Pty Limited (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222 at [23]­[25], Kite v Mooney, re Mooney's Contractors Pty Ltd (in liq) (No 2) [2017] FCA 653 at [109] and Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2017] VSC 127; 2017) 320 FLR 118 ("Re Amerind"). 34 Applying this line of authority, the liquidator does not have an obligation under the Corporations Act to give priority to the outstanding employee entitlements of Leighton Scaffolding, and, with all else equal, would be entitled to treat them as ranking pari passu in distributing the assets of the company. However, there have been recent challenges to the correctness of the line of authority: judgment has been reserved in an appeal from Re Amerind and by a Full Court of this Court in the matter of Killarnee Civil & Concrete Pty Ltd (in liquidation) (WAD181/2016). 35 It is not necessary for me to address this issue. As counsel for the liquidator noted, it falls to the liquidator to ensure that any distribution of surplus assets in accordance with the Court's orders is appropriate in light of the creditors report and matters voted on by creditors and it is a matter for the liquidator whether to seek a relevant direction.

Costs 36 As in Hosking, the liquidator sought to recover the costs of the receivership and the general costs of the liquidation from the proceedings recovered from the Trust's debtors. This is appropriate where the company's sole function was to act as trustee of the Trust: cf Re Stansfield [2014] NSWSC 1484 at [45]. 37 I am satisfied that I should make orders for the payment of remuneration in the amounts specified in the evidence of Mr Vouris having regard to the resolutions passed at the 6 June 2017 creditors meeting, set out at [20] above. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.