Michell (Liquidator) v Delltta Holdings Pty Ltd

DAVIES J: 1 The plaintiff is the liquidator of Diamond Ace Holdings Pty Ltd (in liquidation) ("Diamond Ace"), which was ordered to be wound up in insolvency on 15 March 2019. Until 14 March 2019, Diamond Ace was the trustee of the Brookhill Trust, and the only significant activity it conducted was in its capacity as trustee of the Brookhill Trust. On 14 March 2019, the appointor of the Brookhill Trust purported to remove Diamond Ace as trustee and appoint the defendant, Delltta Holdings Pty Ltd (in liquidation) ("Delltta Holdings") as trustee. Delltta Holdings was placed into liquidation pursuant to a creditors' voluntary winding up on 1 May 2019. 2 The plaintiff has applied for orders pursuant to ss 23 and/or 57 of the Federal Court of Australia Act 1976 (Cth) ("the FCA Act") and/or r 14.21 of the Federal Court Rules 2011 (Cth) ("the Rules") appointing him as receiver and manager of the property of the Brookhill Trust. The trust assets include cash of approximately $47,000 and the right to recover money from the purchaser of a mango farm, Bin Min Orchard Pty Ltd, which had been owned by the Brookhill Trust and sold in June 2017, subject to a terms contract, when Diamond Ace was trustee of the Trust. The contract of sale required the purchaser to pay the purchase price of $800,000 in instalments secured by a mortgage in favour of Diamond Ace over the mango farm. However, the purchaser defaulted on the instalments and there is an estimated $700,000 presently outstanding on the contract of sale. 3 When it was trustee of the Brookhill Trust, Diamond Ace incurred liabilities totalling approximately $444,674. The plaintiff does not hold sufficient cash on behalf of Diamond Ace to satisfy those liabilities or his remuneration and expenses in the liquidation, hence application has been made for his appointment as receiver and manager of the property of the Brookhill Trust. 4 Section 23 of the FCA Act relevantly provides: The Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate. 5 Section 57 of the FCA Act relevantly provides: (1) 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. (2) A receiver of any property appointed by the Court may, without the previous leave of the Court, be sued in respect of an act or transaction done or entered into by him or her in carrying on the business connected with the property. (3) When in any cause pending in the Court a receiver appointed by the Court is in possession of property, the receiver shall manage and deal with the property according to the requirements of the laws of the State or Territory in which the property is situated, in the same manner as that in which the owner or possessor of the property would be bound to do if in possession of the property. 6 Rule 14.21 of the Rules relevantly provides: A party may apply to the Court for an order: (a) appointing a receiver to have the powers of a receiver and manager; and (b) requiring the person appointed as receiver to file a guarantee; and (c) providing that the person's appointment does not take effect until the guarantee is filed. 7 The liquidator of the defendant has been served with the application and supporting material and has advised that he does not oppose the appointment of the plaintiff as the receiver and manager of the assets of the Brookhill Trust. The appointor of the Brookhill Trust has also been given notice of the application and of the material in support of that application and of the hearing date today, but there has been no appearance by the appointor. 8 The relevant principles in considering the application are not in doubt and are well-established. In short, where a trustee is removed, it retains a right of indemnity from the trust assets secured by an equitable charge over them for the liabilities it incurred by reason of acting as a trustee. The trustee does not have the right to retain as against the defendant possession of the trust assets in order to secure its right of indemnity but 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: see Hosking, in the matter of Business Aptitude Pty Ltd (in liquidation) [2016] FCA 1438 ("Hosking") at [17]-[22]; Cremin, in the matter of Brimson Pty Ltd (in liquidation) [2019] FCA 1023 ("Cremin") at [48]-[51]. 9 In Hosking, Gleeson J referred to a then-extant conflict of authority as to whether the liquidator of a corporate trustee which had ceased to be a trustee had the power to sell trust assets to enforce the former trustee's right of indemnity. Since Hosking, it is now settled that the liquidator cannot sell the trust property without an order of the court, or by the appointment of a receiver over the trust assets: Jones v Matrix Partner Pty Ltd; re Killarnee Civil & Concrete Contractors Pty Ltd (in liquidation) [2018] FCAFC 40; 260 FCR 310 at 323 [44] per Allsop CJ, Farrell J agreeing at 351 [196]. The reason, as explained by Moshinsky J in Cremin, is that 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 and 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) of the Corporations Act 2001 (Cth): Cremin at [49]. 10 It has also recently become settled law that the proceeds from the exercise of a corporate trustee's right of exoneration may only be applied in satisfaction of the trust liabilities to which that right relates: Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20; 93 ALJR 807 at 821-2 [40] per Kiefel CJ, Keane and Edelman JJ, Gordon J agreeing at 835 [106]. In the present case, as Diamond Ace did not conduct any other activity other than as trustee of the Brookhill Trust, there is no issue about the application of the proceeds of the sale of trust assets otherwise than to satisfy the debts owed to trust creditors. 11 I am satisfied that the orders sought should be made as there are insufficient cash resources in the possession of the plaintiff as liquidator to satisfy the liabilities of Diamond Ace as trustee of the trust and the liquidator's remuneration and expenses. There are also no obvious conflicts that may disentitle the plaintiff from being appointed as receiver and manager. The plaintiff requires leave pursuant to s 500(2) of the Corporations Act to proceed against the defendant because the defendant is in liquidation. The liquidator of the defendant has indicated that he does not oppose the orders sought, and it is therefore proper and appropriate that the defendant be joined as a party so that the orders made by the court bind the defendant as trustee of the trust. Further, notwithstanding that there is no opposition to the orders sought by the liquidator of the defendant, provision will be made for liberty to apply to modify the substantive orders made in this proceeding if that may become necessary and appropriate. Finally, having regard to the purpose of the plaintiff's appointment as receiver and manager, it is appropriate to make orders that the liquidator's costs and expenses and remuneration as liquidator and receiver and manager, including the costs of this application, be paid from the realised trust assets. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.