Lee (Liquidator) v Gasworks Domestic Pty Ltd

Introduction 1 The applicant, Mr Lee, is the liquidator of the company, Gasworks Domestic Pty Ltd (in liquidation) (the Company). He seeks an order pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) that he be appointed as the receiver of certain property, assets and undertakings which the Company held as trustee. In general terms, he asserts that such an appointment will assist him in the conduct of the liquidation by removing any doubt about his powers to dispose of those trust assets, which he must do in the course of the liquidation. Other ancillary relief is sought.

Background 2 At all material times immediately prior to its winding up, the Company was the trustee of the Gasworks Domestic Unit Trust (the Trust). It sufficiently appears that its sole undertaking was acting as the trustee of that Trust. 3 Mr Lee was appointed as liquidator of the Company on 18 July 2022 by a resolution of its members. 4 On the passing of the resolution, the Company's position as trustee was automatically terminated by the operation of cl 17.11 of the trust deed which had established the Trust. That clause provided: 17.11 VACATION OF OFFICE The office of trustee shall ipso facto be determined and vacated if the Trustee being an individual shall be found to be of unsound mind or a person whose person or estate is liable to be dealt with in any way under the law relating to mental health or if the Trustee shall become bankrupt or make any arrangement or composition with creditors generally or if the Trustee being a company shall enter into liquidation whether compulsory or voluntary (not being a voluntary liquidation for the purposes of amalgamation or reconstruction) or have a receiver or official manager or receiver and manager appointed. 5 Despite the automatic vacation of the trustee's office, since the date of Mr Lee's appointment, no other entity has been appointed in place of the Company. 6 Mr Lee seeks an order that he be appointed as receiver so that he might more easily discharge his obligations as liquidator by realising the Company's assets. Presumably, that means he wishes to realise the Company's rights of indemnity and exoneration against the trust assets in order to produce funds which might be applied to meet the claims of the Company's creditors after his costs, expenses, and remuneration have been satisfied.

Relevant legislation 7 Section 57(1) of the Federal Court 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. 8 It is well accepted that the power granted by s 57 is not confined to a closed class of circumstances. However, the usual purpose of the appointment of a receiver pursuant to s 57 is to protect or preserve property for the benefit of interested persons: QBE Insurance (Australia) Limited v WA Metal Recycling Pty Ltd [2016] FCA 238 (QBE Insurance) at [13] per Farrell J.

Consideration 9 On this application, the proprietary claim made by Mr Lee as liquidator is in respect of the Company's right of indemnity (and perhaps exoneration), as trustee of the Trust, from the trust assets in respect of debts incurred by it, acting in its role as trustee and discharging its obligations. It is widely accepted that such a right of indemnity is secured by an equitable charge over the assets of a trust and is a right in respect of property which might be traced: RnD Funding Pty Ltd v Roncane Pty Ltd [2023] FCAFC 28. 10 That right of indemnity and the supporting equitable lien are not lost merely because the trustee ceases to act in that capacity. In Bendigo and Adelaide Bank Limited, in the matter of Reborn Enterprises Pty Ltd (Trustee) v Reborn Enterprises Pty Ltd (Trustee) [2016] FCA 1197 at [10], White J summarised the position in the following terms: The trustee of the Reborn Trust is entitled to be indemnified out of the assets for the time being of the Trust against liabilities incurred by it as trustee of the trust or in relation to the administration of the trust (cl 16.1). This express right of indemnity is in addition to the right of indemnity for which the general law provides. It is enforceable by way of an equitable lien over the assets of the trust: Rothmore Farms Pty Ltd v Belgravia Pty Ltd [1999] FCA 745. The right of indemnity and the equitable lien are not lost upon a trustee ceasing to occupy that position and vest in the liquidator in a winding up of a corporate trustee: Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 109. 11 It follows that s 57 of the Federal Court Act is properly engaged in the sense that Mr Lee, in his role as liquidator, is seeking to protect and preserve the Company's proprietary interest or property right in the Trust assets. 12 It may well be thought that, given the trustee's right of indemnity and supporting lien, there is no need to appoint a receiver because the Company might simply rely upon its lien to satisfy its right of indemnity (and/or exoneration). In that respect, it was once considered to be settled law that the power of sale granted by s 477(2)(c) of the Corporations Act 2001 (Cth) was sufficient to allow a company's liquidator to provide clear title in property to a purchaser of assets held in a trust of which the company in liquidation was the former trustee. That was thought to be so notwithstanding that the company in liquidation had ceased to be the trustee and relied upon its right of indemnity and supporting lien for access to the assets. 13 However, since 2014 there has been a number of conflicting decisions questioning the validity of that view. The resulting uncertainty was recognised by Moshinsky J in Aced Kang Investments Pty Ltd (in liq), in the matter of Aced Kang Investments Pty Ltd (in liq) [2017] FCA 476. There, his Honour explained the doubt which had arisen as to the scope of the power under s 477(2)(c) in these particular situations: 12. In circumstances where a company that is the trustee of a trust goes into liquidation, and thereupon ceases to be the trustee of the trust, does the liquidator's power of sale of the property of the company in s 477(2)(c) of the Corporations Act 2001 (Cth) extend to trust assets that remain registered in the company's name? The answer is uncertain on the present state of the authorities. There is no issue that, in such cases, the company holds the real property registered in its name as a bare trustee. Nor is there any issue that the company, as a former trustee, has a right of indemnity from the trust assets, secured by an equitable charge over those assets. However, a difference of opinion has emerged as to whether the power of sale of the property of the company in s 477(2)(c) extends to trust assets in such circumstances: see Apostolou (as trustee of the Vasiliou Family Trust) v VA Corporation of Australia Pty Ltd (2010) 77 ACSR 84 at [48]-[50] per Finkelstein J; Re South West Kitchens (WA) Pty Ltd (2014) 224 FCR 408 at [30]-[31] per McKerracher J; Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17; 103 ACSR 401 at [28]-[30] per Brereton J. 13. Given the state of the authorities, in a number of cases in the category described above liquidators have applied for appointment as receiver and manager of the trust property: see, eg, Kite v Mooney, in the matter of Mooney's Contractors Pty Ltd (in liq) [2016] FCA 886. 14 That uncertainty was also recognised in Combis, in the matter of Reehal Holdings Pty Ltd (in liq) (Trustee) v Reehal Holdings Pty Ltd (in liq) (Trustee) [2017] FCA 793 at [17] - [19]. 15 Currently, the position appears to be that, when a corporate trustee becomes insolvent and is immediately removed as trustee, it retains its rights of indemnity and exoneration from trust assets and those rights remain secured by an equitable lien or charge. However, neither the rights nor the supporting lien afford the erstwhile trustee a power of sale, but merely a security, the enforcement of which necessitates an application to the Court for an order for judicial sale. Section 57 of the Federal Court Act provides an alternative course and enables the liquidator to seek appointment as a receiver of the trust assets to enforce the rights of indemnity and exoneration by selling those assets. Clothed with the powers of a receiver, the liquidator has the undoubted ability to transfer good title to purchasers. The absence of any doubt about that necessarily increases the price for which the trust assets can be sold. 16 In those circumstances, there is no reason why the relief sought by Mr Lee should not be granted. It is possible to infer from the financial statements annexed to his affidavit sworn on 8 December 2022 that there are various creditors of the Company, the liabilities to whom arose in the course of its stewardship of the Trust. The financial statements also demonstrate that there are several trust assets which might be recovered and used to meet, in part, the Company's indebtedness. 17 It should be accepted that no conflict will result from Mr Lee, who is the current liquidator, being appointed the receiver of the Trust. The obligations and duties of each are role concordant: QBE Insurance at [18]; In the matter of Business Aptitude Pty Ltd (in liquidation) [2016] FCA 1438 at [26] per Gleeson J. 18 The orders sought by the liquidator also seek to accord the receiver substantial powers so as to enable the receivership to occur in an unhindered manner. The powers sought are of the usual type granted on applications of this nature and should be permitted on this occasion.

Liquidator's remuneration 19 Mr Lee also seeks an order that his remuneration, costs, expenses and disbursements incurred in acting as receiver of the Trust and liquidator of the Company (including the costs of this application) be paid from the proceeds received in respect of the Company's rights of indemnity or exoneration. He seeks a further order that he be paid his remuneration at his firm's usual rates. 20 In the originating application, the order sought in relation to Mr Lee's remuneration was that the amounts to which he would be entitled for acting as receiver of the assets and undertaking of the Trust and liquidator of the Company would be determined by the Court. I infer that he now seeks to amend that originating application to enable him to take his costs, expenses, and remuneration from the amounts that he might recover from the trust assets without any further Court order. 21 In this case, which is exceptional insofar as the amounts now available to Mr Lee in his capacity as receiver or liquidator are so minimal and are unlikely to cover even a fraction of his costs, expenses, and remuneration, it would be unjust to require him to make a further application to the Court for approval of those amounts. It is more appropriate that an order be made now that his remuneration, costs, expenses, and disbursements as receiver of the Trust and liquidator of the Company be paid to him from whatever funds he recovers and in that respect, his remuneration be paid at his firm's usual rates. 22 There is, in this case, no purpose to be served in trying to disentangle the tasks engaged in by Mr Lee as liquidator from the tasks undertaken by him, in that capacity, in the operation of the Trust. The miniscule amounts which might be recovered are unlikely to cover the costs of the administration of the Trust in any event. Nevertheless, it should always be noted that, even when a company in liquidation has acted solely as the trustee of a trust, it may be that some costs and expenses associated purely with insolvency matters, such as the obligation of the liquidator to file documents with the Australian Securities and Investments Commission and compliance with other statutory duties, are not matters referable to the administration of the trust for which there is any right to indemnity or exoneration. 23 In any event, in the circumstances of this case which are, as I have said, unusual, the order which I propose to make is that Mr Lee be entitled to recover his remuneration, costs, expenses and disbursements incurred in acting as receiver of the Trust and liquidator of the Company, including the costs of this application, from the assets that he recovers. He is entitled to recover his remuneration by reference to his firm's usual rates. 24 I will also order that his costs of this application be costs in the winding up. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.