Plaintiff v Defendants

1 There are two proceedings before me. In the first, the plaintiff, Ballantyne Suites Pty Ltd, sought leave to proceed against the first defendant, Ballantyne Chambers Pty Ltd (in liquidation). Leave is required under s 471B of the Corporations Act because Ballantyne Chambers is in liquidation. Leave was granted by an Associate Judge. The liquidator has appealed from the order made by the Associate Judge. The appeal is by way of a rehearing,[1] although the Court will give such weight to the decision of the Associate Judge as appears proper.[2]

2 The second proceeding is brought by the liquidator. He seeks to be appointed as the receiver of the trust assets held by Ballantyne Chambers.

3 In short terms, Ballantyne Suites says that in October 2011 it replaced Ballantyne Chambers as the trustee of two unit trusts - BPS 1 Trust and BPS 2 Trust. Ballantyne Suites says that as the new trustee it is required to get in and secure the trust assets which include two offices at 27 Ballantyne Street, South Melbourne registered in the name of Ballantyne Chambers. Ballantyne Suites has sought a transfer of the properties from the liquidator of Ballantyne Chambers. The liquidator has refused to provide the transfer. Hence, Ballantyne Suites now wants to commence proceedings against Ballantyne Chambers and the liquidator to secure a transfer of the properties but requires leave before it can begin those proceedings against the company.

4 The liquidator opposes the application for leave unless conditions are imposed that would see his fees, costs and expenses paid no matter the result of the litigation. An alternative submission by the liquidator was that he be appointed as a contradictor in the proceeding with his fees, costs and expenses to be paid. The liquidator says that he does not have funds to defend the proposed claim. He also says that he has not been able to indentify any unsecured creditors of Ballantyne Chambers. Consequently, there are no creditors of the company who would benefit from defence of the proposed claim. Nevertheless, the liquidator contends that if leave is granted and the proceeding is brought, it should be defended. This is because he is concerned that the purported beneficiaries of the unit trusts who sanctioned the change of trustee (who I will refer to as the new beneficiaries) obtained the units from the former unit holder (Mr Henry Mischel) within the relation back period relevant to his bankruptcy. If that is so, the liquidator says that the transfer would be void. The new beneficiaries are the Bradley Mischel Discretionary Trust and the Kelly Mischel Discretionary Trust. The beneficiaries of those trusts are Kelly and Bradley Mischel. They are children of Mr Henry Mischel. Consequently, the real dispute is whether Mr Mischel's bankrupt estate is the proper beneficiary of the unit trust or whether the proper beneficiaries are in effect his children. Although notice of the application was given to Mr Mischel's trustees in bankruptcy, they chose not to participate. It appears from their correspondence that Mr Mischel's trustees in bankruptcy are of the view that the units in the trust vested in them as at the date of their appointment.

5 On the basis of his concerns which I have outlined the liquidator also seeks to be appointed as receiver of the unit trust assets. I will deal first with that application.

6 In Martyniuk v King,[3] Warren J (as her Honour then was) considered the applicable principles for the appointment of a receiver by the Court. Her Honour said:

The general legal principle is that if misconduct, waste, or improper disposition of assets or that a trust is in a state of disarray can be shown, or if it appears that the trust property has been improperly managed, or is in danger of being lost or if it can be satisfactorily established that parties in a fiduciary position have been guilty of a breach of duty there is a sufficient foundation for the appointment of a receiver.[4]

7 In Burness v Belousoff,[5] Whelan J (as his Honour then was) determined that the liquidator of a company should be appointed as receiver of trust assets. In that case, the company in liquidation (Index Options) was the registered proprietor of properties in Geelong. The liquidator arranged for the properties to be put to auction. Two days before the auction, the liquidator received correspondence that another company (Valmann) was the trustee of the Index Options Trust and that the properties were trust property. Mr Paul Belousoff was the sole officer and shareholder of Index Options and Valmann and the only unitholder with voting rights under the Index Options Trust deed. The secured creditors were taking steps to realise the properties. Whelan J was satisfied that the liquidator's material established that Mr Belousoff was responsible for a serious failure to keep proper books and records and that there were grounds for serious concern that he was also responsible for the payment over of substantial funds of Index Options or the Index Options Trust in a most improvident manner. The liquidator's material also established that investors had lost a significant amount and that the company and/or the trust were hopelessly insolvent. Having referred to the decision in Martyniuk[6], Whelan J said:

If the assets in issue here are trust assets, those with claims on them include Index Options as the old trustee, and through it the trust creditors, and the unitholders.

Where a trustee or former trustee is in liquidation it may still be appropriate for the liquidator to continue to administer the trust assets, through the administration of the corporate trustee if the company remains the trustee, or as receiver of the trust assets. There is always the real potential for conflicts of duty where a liquidator does perform such a dual function. This may mean that a liquidator acting in that dual role should seek directions before taking a particular course or if a significant conflict arises in fact, for example, over a matter such as his own fees, and that he will be replaced as receiver if he does not do so.

In the particular circumstances here the purported new trustee, Valmann, does not have and does not seek control of the assets. If it were to achieve control there are grounds for serious concern that they would be jeopardised, as the assets would again fall under the stewardship of Mr Belousoff.

In my view the existing situation is unsatisfactory. The liquidator may in a sense have control of the assets, as counsel for respondents submitted, but his entitlement to administer them is controversial. In circumstances where the secured creditors are moving to realise their securities, this position is most unsatisfactory. It is necessary that there be someone whose authority to administer, and if necessary deal with, the assets is clear. In the circumstances that person's authority should include the power to sell the assets if he considers it appropriate to do so. Subject to the observations I make below, it seems to me that this objective of ensuring there is a reliable person with authority to deal with the assets is best achieved if the liquidator is appointed receiver of the trust assets. [7]

8 Counsel for the liquidator submitted that given the liquidator's concerns, it was appropriate that he be appointed receiver of the unit trust assets just as had been done in Burness v Belousoff.

9 There is no doubt that in appropriate circumstances a liquidator may be appointed receiver of trust assets. However, I am not satisfied that such an appointment should be made here. First, the persons who have a real interest in challenging the validity of the transfer of units and appointment of Ballantyne Suites as trustee are the creditors of the bankrupt estate of Mr Henry Mischel. The trustees of the bankrupt estate have not taken any step at this stage to challenge the entitlement of the new beneficiaries and the appointment of Ballantyne Suites as trustee other than to state in correspondence their view that the units in the trust vested in them as at the date of their appointment. The liquidator points out that the trustees in bankruptcy say that there is a lack of funds in the estate. Nevertheless, in appropriate cases, there are methods which might be pursued by the bankruptcy trustees to obtain funding, including funding by creditors. The facts are distinguishable from those in Burness v Belousoff where the contest was whether the assets were trust assets or assets of the company in its own right. The creditors of the company and consequently the liquidator had a real and direct interest in the outcome of that question. Here, the liquidator and Ballantyne Chambers have no real interest in the litigation, other than in respect of securing payment of the liquidators' fees and expenses. Ballantyne Chambers now holds the properties as bare trustee. This is because the trust deeds provide that the office of trustee is determined and vacated if the trustee enters into liquidation. I accept for the purposes of this application that the liquidator's concerns about the validity of the transactions are genuinely held, but that is not a sufficient reason for the appointment of him as a receiver of the trust assets.

10 Second, in Burness v Belousoff the secured creditor was taking steps to realise the security properties. The uncertainty surrounding beneficial ownership of the properties in those circumstances was detrimental and could be eliminated by the appointment of the liquidator as receiver. In the present case, although it would seem that the secured creditor is charging default interest, that interest is being paid from rent earned from the properties and moneys paid by Ballantyne Suites. There is no evidence of any threat of action being taken by the secured creditor to realise the properties as there was in Burness v Belousoff.

11 Third, there is insufficient evidence of the matters referred to by Warren J in the passage from Martyniuk to which I have referred to justify the appointment of a receiver. In particular, there is no evidence of mismanagement nor of danger to the trust property. Rather, for the time being at least, Ballantyne Chambers remains as the registered proprietor. The appointment of a receiver is a drastic remedy and the liquidator has not established that such an appointment is necessary in the present case.

12 Fourth, the liquidator has not proffered an undertaking as to damages. In the circumstances of this case where there are no creditors of the company in liquidation who may have an interest in the trust assets and those persons who might have an interest have not taken action, an undertaking as to damages by the liquidator was required. Whilst no such undertaking was given in Burness v Belousoff, as I have said, the facts in that case are distinguishable.

13 Finally, although I do not place much weight on it, I do note that the new beneficiaries do not consent to the appointment of the liquidator as receiver.

14 I would refuse the liquidator's application for appointment as receiver of the unit trust assets.

15 Turning then to the application for leave to proceed against the company in liquidation, it seems that the principles to be applied are uncontroversial. The Court must be satisfied that there is a serious question to be tried with the test being akin to that for an interlocutory injunction.[8] The Court will consider whether there is a solid foundation for the proposed claim and that there is a serious dispute.[9] In the exercise of its discretion, the Court will also take into account matters such as whether it may lead to an avalanche of litigation against the company; whether it is a test case for a large class of potential claimants and the level of resources available to the liquidator to defend the claim. Importantly, and relevant in this case, is whether the relief sought by the proposed plaintiff would otherwise be unavailable. That was the position in Vagrand Pty Ltd v Fielding.[10] The Full Federal Court said:

We do not suggest that, in a case where the desired relief is otherwise unavailable, an applicant is automatically entitled to leave under s 371(2) of the Companies Code, or its equivalents. The question of leave is always a matter of discretion. But the circumstance that relief is not otherwise available to an applicant must always be a significant factor in favour of leave.[11]

16 So in this case, the relief sought (that is the transfer of the properties into Ballantyne Suites' name) is not otherwise available absent proceedings for that relief. The affidavit material establishes that there is a serious matter for investigation. In particular, on their face, the documents relied upon by the plaintiff support its allegation that it is the current trustee of the two trusts and consequently is entitled to be registered as proprietor of the two properties. At a trial, the validity of that evidence may be investigated and tested as may the liquidator's concerns about the circumstances in which the units in the trust were transferred, including the timing of those transfers. That is the appropriate time for adjudication of the issues in dispute if an earlier resolution cannot be reached. To determine those issues finally now, in effect by refusing to grant leave to proceed, would be premature.

17 As to the issue of whether conditions ought be imposed, the liquidator relied on the decision of Rowland J in JJ Leonard Property Pty Ltd v Leonard (WA) Pty Ltd (in liq).[12] In that case, a creditor sought to bring proceedings against the company in liquidation for rectification of a charge that had been given to it but which did not specify the property secured by the charge. Rowland J granted leave conditional on the liquidator's costs of the application and the proposed action being paid by the plaintiff irrespective of the result. His Honour stated:

If the plaintiff succeeds, the unsecured creditors will be prejudiced in the sense that they will not receive payment of the amount of their debts which they originally hoped to secure. If, however, the assets were secured and a court finds that the security is not void as against the liquidator then the prejudice suffered by the unsecured creditors is really only the loss of an expectation and they would be getting a benefit to which there were not entitled if I refused leave.

In my view, however, there are reasonably strong arguments that the relief sought is entirely discretionary and as a successful claim will defeat rights apparently already accrued to the unsecured creditors by virtue of the winding up and because the liquidator would be justified in defending the action in order to protect the rights of such creditors who have not contributed in any way to the present situation. I will grant leave conditional on the plaintiff undertaking to pay the defendants' costs of this application and the proposed action irrespective of the result of the latter.[13]

18 The liquidator says that in circumstances where he has the concerns that he has, it is appropriate that he be protected in relation to recovery of his fees and expenses. There is no doubt that on granting leave to proceed the Court may impose conditions as to payment of the liquidator's fees and expenses and JJ Leonard Properties provides but an example of when and in what circumstances such a condition may be imposed. However, that case is very different from the one before me. As I have said previously, there are no unsecured creditors who would benefit from the litigation and those who might have chosen not to take part. In my opinion, it is not appropriate to impose any conditions on the grant of leave in this case.

19 For the same reasons, there is no basis for appointing the liquidator as a contradictor. As to the suggestion that a condition might be imposed requiring the trustees in bankruptcy to be named as parties, in my opinion, if they have a sufficient interest in the proceedings it is for them to apply to be joined as a party or to be granted leave to intervene. This is so even though funding may be limited and sources would have to be found to fund such an application.

20 The appeal from the Associate Judge should be dismissed.

[1] Supreme Court (Corporations) Rules 2003 (Vic), Rule 16.5(1), Supreme Court (General Civil Procedure) Rules 2005 (Vic), Rule 77.06(7). The appeal was instituted before the commencement of the amendments to these Rules made by the Supreme Court (Associate Judges Appeals Amendment) Rules 2012.

[2] Southern Motors Pty Ltd v Australian Guarantee Corporation Limited [1980] VicRp 23; [1980] VR 187 at 189-190.

[3] [2000] VSC 319.

[5] [2006] VSC 302; (2006) 59 ACSR 716.

[6] [2000] VSC 319.

[7] [2006] VSC 302; (2006) 59 ACSR 716, [17]-[20].

[8] Vagrand Pty Ltd v Fielding (1993) 41 FCR 550.

[12] (1987) 5 ACLC 575.