Morton as liquidator of Best Golf Balls Pty Ltd (in liq) v Best Golf Balls Pty Ltd

Introduction 1 This is an application made by Mr Gavin Charles Morton as the liquidator of Best Golf Balls Pty Ltd (in liquidation) (Best Golf Balls). He seeks orders pursuant to s 1318(2) of, and s 90-15 of Sch 2 to, the Corporations Act 2001 (Cth) (the Act), as well as s 57 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act), to facilitate the winding up of Best Golf Balls.

Background 2 Best Golf Balls was incorporated on 15 February 2006, and was appointed as the trustee of the Blent and Woodward Unit Trust (the Trust) by a trust deed dated that same day. At all times, it has acted as the trustee of the Trust, and its only undertaking as trustee was the operation of a wholesale sporting goods business, which ceased trading on or around 26 April 2023. 3 Mr Morton was appointed liquidator of Best Golf Balls on 1 June 2023 when it entered into voluntary liquidation. Upon its liquidation, by operation of cl 7.2.1 of the trust deed, Best Golf Balls ceased being the trustee of the Trust. It thereupon held the assets of the Trust as a bare trustee, and to date, no other trustee has been appointed by the unitholders of the Trust to take over its functions. Indeed, Mr Morton has ascertained that the appointers under the trust deed have no intention of appointing a new trustee. 4 Mr Morton, through his investigations into the affairs of Best Golf Balls, has also ascertained that the company held the assets of the business on trust, and that the liabilities incurred in the course of the business were also incurred by it only as trustee of the Trust. 5 Mr Morton has incurred costs and expenses and has earned remuneration in conducting his investigations into the affairs of Best Golf Balls, and he expects to incur further costs, expenses and be entitled to further remuneration to finalise the liquidation.

Relief under s 90-15 of the Insolvency Practice Schedule 6 One important issue which arises in this matter is the inadequacy of the company's books and records, which has made it difficult for Mr Morton to identify, with complete precision, the nature of the assets and liabilities. For that reason, he seeks an order pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS), being Sch 2 to the Act, confirming that he is justified and acting reasonably in proceeding on the basis that: (a) Best Golf Balls has carried on business solely in its capacity as trustee of the Trust; (b) all of the assets of Best Golf Balls are properly characterised as property held by it as trustee of the Trust; and (c) the creditors of Best Golf Balls are creditors whose debts have been incurred by Best Golf Balls in its capacity as trustee of the Trust. 7 Section 90-15 of the IPS provides as follows: 90‑15 Court may make orders in relation to external administration Court may make orders (1) The Court may make such orders as it thinks fit in relation to the external administration of a company. Orders on own initiative or on application (2) The Court may exercise the power under subsection (1): (a) on its own initiative, during proceedings before the Court; or (b) on application under section 90‑20. Examples of orders that may be made (3) Without limiting subsection (1), those orders may include any one or more of the following: (a) an order determining any question arising in the external administration of the company; (b) an order that a person cease to be the external administrator of the company; (c) an order that another registered liquidator be appointed as the external administrator of the company; (d) an order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company; (e) an order in relation to any loss that the company has sustained because of a breach of duty by the external administrator; (f) an order in relation to remuneration, including an order requiring a person to repay to a company, or the creditors of a company, remuneration paid to the person as external administrator of the company. Matters that may be taken into account (4) Without limiting the matters which the Court may take into account when making orders, the Court may take into account: (a) whether the liquidator has faithfully performed, or is faithfully performing, the liquidator's duties; and (b) whether an action or failure to act by the liquidator is in compliance with this Act and the Insolvency Practice Rules; and (c) whether an action or failure to act by the liquidator is in compliance with an order of the Court; and (d) whether the company or any other person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and (e) the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group. Costs orders (5) Without limiting subsection (1), an order mentioned in paragraph (3)(d) in relation to the costs of an action may include an order that: (a) the external administrator or another person is personally liable for some or all of those costs; and (b) the external administrator or another person is not entitled to be reimbursed by the company or its creditors in relation to some or all of those costs. Orders to make good loss sustained because of a breach of duty (6) Without limiting subsection (1), an order mentioned in paragraph (3)(e) in relation to a loss may include an order that: (a) the external administrator is personally liable to make good some or all of the loss; and (b) the external administrator is not entitled to be reimbursed by the company or creditors in relation to the amount made good. Section does not limit Court's powers (7) This section does not limit the Court's powers under any other provision of this Act, or under any other law. 8 It is noted that the Court can exercise the power under s 90-15(1) on its own initiative or on an application brought for that purpose, and the Court has a broad discretion, which is to be exercised in all the circumstances of the case. 9 Here, Mr Morton, who is a well-regarded, highly respected insolvency practitioner, has deposed to his efforts to ascertain the precise nature of the circumstances surrounding the Trust. His view is that Best Golf Balls operated the 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. In those circumstances, I am prepared to make the orders sought under s 90-15 of the IPS, which justify Mr Morton acting on the basis of his findings as to the manner in which Best Golf Balls had operated.

Appointment of the liquidator as receiver and manager 10 Mr Morton also seeks an order that he be appointed receiver and manager of the assets of the Trust pursuant to s 57(1) of the Federal Court Act and without security. Section 57(1) relevantly provides that: 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. 11 The principles on which the Court exercises its power to make such orders were recently collected and considered by Moshinsky J in Re Cremin, Brimson Pty Ltd (in liquidation) (2019) 136 ACSR 649, 655 - 656 [48] - [51] as follows: Applicable principles [48] 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 (in his capacity as liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (in liq)) v Matrix Partners Pty Ltd (2018) 260 FCR 310; 354 ALR 436; 124 ACSR 568; [2018] FCAFC 40 (Jones v Matrix) at [85], [142], [198]. [49] 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 Re 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) 103 ACSR 401; 291 FLR 17; [2014] NSWSC 1484 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). [50] 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 her capacity as liquidator of Simpkiss Pty Ltd (in liq)) v Simpkiss Pty Ltd (in liq) [2018] FCA 2121 (Amirbeaggi); Taylor (in his capacity as CJ & KL Bond Super Pty Ltd (in liq)) v CJ & KL Bond Pty Ltd (in liq) (as trustee for the CJ & KL Bond Superannuation Fund) [2018] FCA 1430 (Taylor v CJ & KL Bond Super Pty Ltd); Staatz (as liquidator of Wollumbin Horizons Pty Ltd (in liq) v Berry (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]. [51] 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) 368 ALR 390; [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; 7 ACLR 873 at 883 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. 12 This present matter is the archetypal case in which the orders of the nature sought should be made. They are necessary for Mr Morton to utilise the assets of the company to meet the costs of the winding up. The company's assets include its rights of indemnity and exoneration from the assets of the Trust in circumstances where its liabilities have arisen consequent upon the stewardship of that Trust. 13 Mr Morton has deposed that the liabilities of Best Golf Balls are, in fact, liabilities incurred in the performance of its role as trustee of the Trust and, therefore, the company has a right of indemnity in respect of them. Because Best Golf Balls is no longer the trustee under the trust deed, but holds the assets as a bare trustee, it requires the orders which are sought to allow it to exercise the continuing right of indemnity. In those circumstances, it is appropriate that the order sought in this respect be made.

Ancillary orders 14 Further orders are sought in relation to the dispensation of the need to provide a guarantee pursuant to rr 14.21(b) and 14.22 of the Federal Court Rules 2011 (Cth). That is a standard order in cases of this nature, and there is no reason why it ought not be made. 15 It can also be accepted, as was submitted on behalf of Mr Morton, that the receiver should have sufficient powers to adequately enforce the indemnity of Best Golf Balls - the powers proposed in the draft order are adequate to achieve that. 16 Mr Morton further seeks an order that he be relieved from any liability arising from any dealings with the property of the Trust. That order is sought pursuant to s 1318(2) of the Act, which provides as follows: Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought. 17 That order is sought to protect Mr Morton in the circumstances of this case where there is some doubt as to the precise nature of the financial position of the company, as Mr Morton has deposed to. In particular, a not insignificant problem is the inadequacy of the company's books and records. It is relevant to note that the amount that is likely to be recovered is very small - at present, the only asset that has been identified is a bank account containing the sum of $20,686.10. In those circumstances, and given that Mr Morton is a well-respected insolvency practitioner, an order should be made so as to absolve him from any future claims. 18 Finally, he seeks orders in relation to his remuneration, costs and expenses. Given the very small amount available to him in the matter, it is appropriate that the Court make the order in relation to remuneration on this application to remove any doubt about his entitlements to it. 19 Orders will also be made granting liberty to apply to the receiver and any person who can demonstrate a sufficient interest in the variation of the orders, if that is required. Given the small amount that is available to any party, it is unlikely that that will occur, but it is appropriate that the order be made. 20 Given the foregoing, it is appropriate to make each of the orders sought by Mr Morton in the form of the draft handed up at the hearing by his legal representative, Mr Bartholomew. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.