McLean v Hill, in the matter of TMC Plumbing & Drainage Pty Ltd

Introduction 1 The first plaintiff, Neil Stewart Mclean (the Liquidator), is the liquidator of the second plaintiff, TMC Plumbing & Drainage Pty Ltd (in liquidation) (ACN 125 902 525) (TMC). 2 TMC is, or was, the trustee of a trading trust called the TMC Hill Family Trust (the Trust). 3 On 16 September 2016, at an extraordinary general meeting, the members of TMC resolved that TMC be wound up voluntarily and that Mathew Gollant be appointed liquidator for the purpose of the winding up. 4 On 15 September 2017, Mr Gollant resigned as liquidator and the Court ordered that the Liquidator be appointed as liquidator of TMC. 5 Pursuant to cl 28.7 of the trust deed, if the trustee is a corporation and enters into liquidation, then that trustee "will be automatically removed as a Trustee". 6 The Liquidator applies under s 90-20 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act 2001 (Cth)) and s 57 of the Federal Court of Australia Act 1976 (Cth) for the appointment of the Liquidator as receiver and manager of the Trust for the purpose of realising the Trust assets. The Liquidator seeks the following orders (the terms of which reflect discussion during the hearing): 1. Pursuant to s 57(1) of the Federal Court of Australia Act 1976 (Cth), Neil Steward McLean, a registered liquidator, be appointed without security as receiver and manager over the business and assets of the TMC Hill Family Trust (Receiver). 2. The Receiver have, in respect of the business and assets of the trust referred to in paragraph 1, the powers that a receiver has in respect of the business and property of a company under s 420 of the Corporations Act (other than s 420(2)(s), (t), (u) and (w)) as if the reference in that section to "the corporation" were a reference to the trust including without limitation, the power to do all things necessary or convenient to: a. call upon and recover any moneys lent or advanced by the trust to a beneficiary of the trust; b. pay the creditors of the trust from the proceeds of the assets, pursuant to the priorities prescribed under the provisions of the Corporations Act; c. compromise any claims in its capacity as trustee of the trust or against any of the trust property on any terms the Receiver sees fit; d. bring any claim against any party on behalf of the trust; and e. execute any documents relating to the trust. 3. The costs, expenses and remuneration incurred by Mr McLean as liquidator of the second plaintiff and as the Receiver, including the costs of this application, be paid in priority from the property of the trust (including any proceeds from the recovery of any moneys owed to the trust). 4. There be liberty to apply to any person who can demonstrate sufficient interest to modify or discharge paragraphs 1 to 3 on not less than 48 hours' written notice to the plaintiffs. 5. The Receiver file and serve an affidavit upon completion of the receivership. 7 The plaintiffs rely on an affidavit of the Liquidator sworn on 21 June 2019 and a number of affidavits of service. 8 On 17 July 2019, orders were made joining Christian Hill and Kylie Lattenstein as defendants to this proceeding and for the filing by 7 August 2019 of all affidavit material upon which they intend to rely. 9 The defendants have not filed any affidavit material. The defendants have appeared today by their counsel. The defendants neither consent to nor oppose the orders sought by the plaintiffs.

Background 10 On 12 June 2007, TMC was incorporated. 11 Ms Lattenstein: (a) was a director and shareholder of TMC between 9 February 2009 and 30 June 2016; and (b) is a primary beneficiary of the Trust. 12 Mr Hill: (a) has been a director and a shareholder of TMC since 12 June 2016; and (b) is a primary beneficiary of the Trust. 13 Prior to liquidation, TMC in its capacity as trustee of the Trust operated a plumbing business (the Business). Based on the Liquidator's investigation to date, the Liquidator's view is that TMC operated the relevant Business exclusively in its capacity as trustee of the Trust, did not undertake any activities or conduct any business in its own right and at all times held, and continues to hold, all property on trust for the Trust. 14 According to a report as to affairs with respect to TMC, Mr Hill is the only debtor of TMC. It appears that there is an outstanding beneficiary loan account in relation to Mr Hill. This is the principal, if not sole, asset of the Trust. The unsecured creditors are as follows: (a) GFM Accountants Pty Ltd - $10,866; (b) ATO - Integrated Client Account - $150,192; and (c) Westpac - $1,000. 15 The Liquidator has undertaken land title searches with respect to Mr Hill in order to ascertain Mr Hill's financial position. The land title searches confirm that Mr Hill is a joint registered proprietor of a property located in Sunbury, Victoria. 16 As noted above, cl 28.7 provides that if the trustee is a corporation and enters into liquidation, the trustee will be automatically removed. The trust deed also contains a clause (cl 28.4) to the effect that, if the removal of a trustee would leave the trust without a trustee, then the removal of the trustee will only be effective if a new trustee is appointed immediately before, or simultaneously with, the removal of the trustee. The Liquidator is not aware of any new trustee having been appointed. The interaction between cl 28.4 and 28.7 is not entirely clear. A question arises whether the automatic removal under cl 28.7 is subject to the appointment of a new trustee under cl 28.4. However, it is unnecessary for present purposes to resolve this question. I will proceed on the basis that TMC is now the bare trustee of the Trust and does not have powers under the trust deed. 17 The trust deed confers on the trustee an express right to be indemnified out of the assets of the Trust in respect of liabilities incurred as trustee: cl 23(b). 18 Finally, the trust deed confers various powers on the trustee to deal with property held on trust. For example, the trust deed provides that: (a) the trustee has all the rights of a natural person to do anything, or to engage in any transaction or dealing, on behalf of the trust fund as it could do if it were the beneficial owner of the trust fund and absolutely entitled to it (cl 32); (b) the trustee has the right to advance and lend money to any person in any manner or form (cl 34(d)); (c) the trustee has power to receive and act upon the opinion of a legal practitioner and/or counsel and/or to take any legal or other action the trustee decided for the protection of any part of the trust fund (cl 34(p)(i)); and (d) the trustee has power to institute and defend proceedings at law and to proceed to a determination, or compromise of, any proceedings as the trustee decided (cl 34(ff)). 19 The Liquidator is of the view that, in respect of TMC, all liabilities were incurred in its capacity as trustee for the Trust and therefore TMC enjoys a right of indemnity from Trust assets. 20 The Liquidator seeks to be appointed as a receiver and manager over the business and assets of the Trust in order to realise the assets of the Trust (principally, the outstanding beneficiary loan account in relation to Mr Hill) for the benefit of the creditors of TMC.

Applicable principles 21 I recently dealt with a similar application by a liquidator for orders concerning the realisation of trust assets: Cremin, in the matter of Brimson Pty Ltd (in liq) [2019] FCA 1023. I refer to the summary of the applicable principles at [48]-[51] of that judgment. For ease of reference, I incorporate the substance of those paragraphs into these reasons in the following paragraphs. 22 A company that is the trustee of a trading trust has a right of indemnity to resort to the trust assets to vindicate its right to be exonerated from a liability that it has incurred in the course of carrying out trust business. In circumstances where such a company goes into liquidation, its right of indemnity and accompanying equitable lien over the trust assets endures, notwithstanding that the company has been removed as trustee of the trust and only holds the trust assets as a bare trustee: see Jones v Matrix Partner Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018) 260 FCR 310 (Jones v Matrix) at [85], [142], [198]. 23 There has, until recently, been a difference of opinion as to whether, in such circumstances, the liquidator's power to sell the "property of the company" in s 477(2)(c) of the Corporations Act permits him or her to sell trust assets: see Aced Kang Investments Pty Ltd (in liq), in the matter of Aced Kang Investments Pty Ltd (in liq) [2017] FCA 476 at [12]. It is now settled that the liquidator of an insolvent (former) corporate trustee cannot sell the trust's property without order of the Court, or by appointment of a receiver over the trust assets: see Jones v Matrix at [44] per Allsop CJ (Farrell J agreeing at [196]); Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17 at [10]; Apostolou v VA Corporation of Aust Pty Ltd [2011] FCAFC 103 at [45]. The rationale for this position is that, on a proper understanding, the trust assets are not the "property of the company", but are instead trust property in which the corporate trustee has a proprietary interest by way of lien or charge to secure its right of exoneration: see Jones v Matrix at [89]. Thus, to the extent that the subject of a sale is the whole of a trust asset, rather than merely the company's lien or charge in respect of that asset, it is not authorised by the power of sale in s 477(2)(c). 24 The courts are generally willing, upon an appropriate application, to make orders permitting the liquidator of a (former) corporate trustee to sell trust assets. In situations where the property of the trust will be exhausted following its sale and subsequent distribution to creditors, it may be appropriate merely to give the liquidator a power of sale: see Jones v Matrix at [91]. The more common course is, however, for the liquidator of the insolvent (former) corporate trustee to apply to be appointed a receiver for the purpose of selling the trust assets and distributing the proceeds among trust creditors: see Jones v Matrix at [142] per Siopis J; Amirbeaggi, in the matter of Simpkiss Pty Ltd (in liq) [2018] FCA 2121; Taylor v CJ & KL Bond Super Pty Ltd, in the matter of CJ & KL Bond Pty Ltd (in liq) [2018] FCA 1430; Staatz v Berry, in the matter of Wollumbin Horizons Pty Ltd (in liq) (No 3) [2019] FCA 924. Orders appointing a liquidator as a receiver for this purpose may be made nunc pro tunc to authorise sales of trust assets that have already occurred: Jones v Matrix at [91], [152], [198]. 25 The proceeds from an exercise of a corporate trustee's right of exoneration may only be applied in satisfaction of the trust liabilities to which that right relates: see Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (Carter Holt) at [40] per Kiefel CJ, Keane and Edelman JJ; at [92] per Bell, Gageler and Nettle JJ; at [106] per Gordon J. Thus, the liquidator of a (former) corporate trustee may only apply the proceeds of a sale of trust assets to satisfy debts owed to trust creditors (as opposed to general creditors). This includes the costs of the liquidation (including the liquidator's remuneration) because such costs constitute debts incurred by the company in discharging the duties imposed by the trust: Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 110 per King CJ; Jones v Matrix at [105]-[106]. In circumstances where a company has only ever acted as a trustee of one trust and that has been the totality of its affairs, no issue arises as to the application of trust assets to general creditors because all of the company's creditors are trust creditors. In this situation, the proceeds from the exercise of the right of exoneration are to be distributed to the trust creditors in accordance with the order of priority prescribed by the Corporations Act: Jones v Matrix at [100]-[108] per Allsop CJ; see also Carter Holt at [93]-[96] per Bell, Gageler and Nettle JJ; at [111], [156]-[158] per Gordon J.

Consideration 26 TMC is entitled to a right of indemnity (a right of exoneration) with respect to the debts owed to creditors of the Trust. As set out above, TMC acted solely as trustee of the Trust, and this was the totality of its affairs. All of the creditors of TMC are, therefore, trust creditors and no issue arises concerning the application of trust assets to general creditors (as distinct from trust creditors). In these circumstances, it is appropriate to make orders to facilitate the realisation of the Trust assets and the application of the proceeds in favour of the Trust creditors. 27 In the circumstances of the present case, as summarised above and set out in more detail in the Liquidator's affidavit sworn on 21 June 2019, it is also appropriate to make the additional orders sought by the plaintiffs. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky.