Re Cloud Nine Melbourne Pty Ltd (In Liq) [2024] VSC 357 (21 June 2024)

1 On 19 February 2024 Peter Malone ('the Liquidator') was appointed liquidator of Cloud Nine Melbourne Pty Ltd (ACN 160 781 831) ('the Company') pursuant to s 513B of the Corporations Act 2001 (Cth) ('Corporations Act') at a meeting of the members of the Company where they resolved to wind up the Company.

2 The Company was incorporated on 15 October 2012. Rockey Dean is the Company's sole director, shareholder and secretary. On 15 October 2012, the Company was appointed as trustee of the Rockey & Preeti Family Trust (ABN 95 580 756 778) ('the Trust').

3 From at least June 2016, the Company operated a Red Rooster franchise store trading as Red Rooster Doncaster ('the Business') pursuant to a Franchise Agreement with Red Rooster. The agreement with Red Rooster was terminated on 18 February 2024.

4 The Liquidator brings this application under s 63 of the Trustee Act 1958 (Vic) ('Trustee Act') seeking orders conferring power to sell or otherwise deal with the property of the Company held on trust and other orders. In support of this application, the Liquidator relies on his affidavit affirmed on 6 June 2024 together with three affidavits relating to service of the application. The Liquidator also relies on detailed submissions dated 19 June 2024.

5 In the alternative to orders under s 63 of the Trustee Act, the Liquidator relies on the power of the Court to appoint a receiver under the Supreme Court Act 1986 (Vic) and the Supreme Court (General Civil Procedure) Rules 2015 (Vic) ('the Rules').

6 Notice of the application has been given to creditors of the Company, to its director and to ASIC, and no person appears to oppose the orders sought by the Liquidator. To the extent necessary I propose to make orders dealing with the short service of the application. It is appropriate to make those orders as expedition of the application is required because the Liquidator has agreed to sell plant and equipment relating to the business for which a 50% deposit has already been paid and the sale of those assets is required to be completed prior to 1 July 2024.

7 As submitted by Counsel for the Liquidator the Court has power under s 63(1) of the Trustee Act to confer power on a trustee in circumstances where it is expedient to do so. Section 63(1) provides:

Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may be order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorized to be expended, and the costs of any transaction are to be paid or borne as between capital and income.

8 In Re Cremin (in his capacity as liquidator of Brimson Pty Ltd (in liq),[1] Moshinsky J said:

...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...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...

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...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...

9 In this matter the primary relief sought by the Liquidator is orders under the Trustee Act. It would also have been open to the Liquidator to rely on the Supreme Court Act 1986 (Vic) and the Rules as is his alternative application. As Osborne J said in the matter of Urban Property Melbourne Pty Ltd,[2] there 'is no bright line about whether the preferable course is to confer power under the Trustee Act or to appoint a receiver under the Supreme Court Act'.

10 In Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd,[3] Gordon J considered the circumstances in which it might be appropriate to make orders under s 63 of the Trustee Act. Those circumstances include where:

(a) The company has become a bare trustee of the assets of the trust upon the appointment of the liquidator;

(b) The company had acted only as trustee of the trust and in no other capacity;

(c) All assets owned by the company were held by it as trustee and all liabilities incurred by it were incurred in its capacity as trustee; and

(d) No new trustee had been appointed.

11 The first question that arises on the application is whether the Company only acted as trustee of the Trust.

12 In Re Amerind Pty Ltd (receivers and managers apptd) (in liq),[4] Robson J listed factors that have been taken into account when determining that question:[5]

(a) the existence of constituent trust documents which establish a trust, including any draft trust documents which cross-reference one another;

(b) whether accounts were maintained separately to the company's operational expenditure accounts and/or the company's own property;

(c) whether the company's name in its capacity as trustee was noted on key employment documents, such as letters of employment and tax file declarations;

(d) whether invoices rendered by the company in question were issued by the company in its capacity as trustee of the trust;

(e) whether company meeting minutes disclosed the existence of a trust, or disclosed that the company was operating as a trust;

(f) whether expenses were accounted as receipts of the company as trustee; and

(g) whether records, contained in the general ledger of the company, recorded activity consistent with the operation of a trust, such as the issue of units.

13 The affidavit of the Liquidator establishes that:

(a) There are constituent Trust documents, including the Trust Deed;

(b) An ABN was registered in the name of the Company as trustee of the Trust on 22 October 2012;

(c) the bank accounts of the Company are all in its capacity as trustee of the Trust. There is no evidence that the Company maintained separate accounts for activities as trustee and in its own right;

(d) the Company entered into the franchise agreement in its capacity as trustee of the Trust;

(e) The Company lodged Business Activity Statements ('BAS') for the quarters ending September 2022, December 2022, March 2023 and June 2023 in its capacity as trustee of the Trust. The Company does not appear to have lodged income tax returns, or prepared financial statements;

(f) the Company dealt with its creditors including its financiers in its capacity as trustee for the Trust.

14 I am satisfied that the Company traded solely in its capacity as trustee of the Trust and in no other capacity; that all assets of the Company are held on behalf of the Trust; and that all debts incurred by the Company were incurred on behalf of the Trust.

15 I am satisfied that it is appropriate to make orders pursuant to s 90-15 of Schedule 2 of the Corporations Act ('Insolvency Practice Schedule'), that the Liquidator is justified and acting reasonably in proceeding on the basis that it:

(a) carried on business in its capacity as trustee of the Trust;

(b) the Liquidator incurred liabilities as trustee for the Trust;

(c) all of the property of the Second Plaintiff is properly characterised as property held by the Company in its capacity as trustee of the Trust; and

(d) the creditors of the Company are creditors whose debts have been incurred by the Company in its capacity as trustee of the Trust.

16 Due to the ipso facto provision of the Trust deed, following the appointment of the Liquidator on 19 February 2024, the Company no longer has the power to realise the assets of the Trust or to rely on its right of indemnification. As a result, the Company is currently a bare trustee pursuant to the Trust Deed and holds the assets of the Trust for the beneficiaries of the Trust. As bare trustee, the Company has limited powers only to deal with the assets of the Trust and to pay creditors out of the Company's trust property.

17 In Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd,[6] Gordon J described the position that applies:

The company is and will remain a bare trustee. It may still hold the assets of the Trust. Its duties, powers and rights are limited to protecting the Trust assets: see, by way of example, Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) [2008] FCAFC 184 at [79]; Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) [2010] FCA 978 at [52] and Herdegen v Federal Commissioner of Taxation [1988] FCA 419; (1988) 84 ALR 271 at 281. However, the bare trustee retains its right of indemnity or exoneration and its lien over the assets of the Trust.

18 In Jones, in his capacity as liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) v Matrix Partners Pty Ltd,[7] the full Federal Court held that the liquidator of an insolvent corporate trustee cannot sell the trust property without an order of the court or by appointment of a receiver over the trust assets. The trust assets are not property of the company but rather trust property in which the corporate trustee has an interest by way of a lien or charge to secure its right of exoneration.

19 The operation of the ipso facto clause in this case puts the Company in the position described by Gordon J in Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd,[8] and supports the making of orders pursuant to s 63 of the Trustee Act noting the limitations that otherwise apply to exercise of powers by the liquidator as described by the full Federal Court in Jones, in his capacity as liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) v Matrix Partners Pty Ltd.[9]

20 In Civil Construction Network Services Pty Ltd (in liq),[10] I considered the following factors supported orders being made under s 63 of the Trustee Act rather than orders being made appointing the liquidator as a receiver under the Supreme Court Act 1986 (Vic):

(a) The property of the trust will be exhausted following its sale and subsequent distribution to creditors;

(b) The conferring of a power of sale upon the liquidator appears the most convenient and efficient way to proceed;

(c) The company is not trading, there is no ongoing business to be conducted;

(d) Where the liquidator is given a power of sale, there is no risk of confusion as to the roles or as to the capacity in which the liquidator is acting as might be the case if the appointment was as receiver and manager.

21 I accept the Liquidator's submission that the circumstances here are similar to those in Civil Construction Network Services Pty Ltd (in liq).[11] I agree that orders pursuant to s 63 of the Trustee Act conferring power on the Liquidator to sell or dispose of any part of the trust property, to compromise claims made against the Company in that capacity and to take steps to protect, realise and preserve the remaining Trust property and to bring claims against any party on behalf of the Trust is both just and appropriate.

22 Given the modest funds available in the administration, to make orders pursuant to the Trustee Act is more cost efficient than appointing the liquidator as receiver. If that course would be adopted it will be necessary for two separate administrations to proceed concurrently, winding up and receivership. That is not the case if the orders that are sought by the Liquidator are made pursuant to the Trustee Act.

24 The first matter concerns action taken by the Liquidator between the date of his appointment and the date of the orders I propose to make. The Liquidator seeks an order absolving him of any liability for past dealings with Trust property between his appointment and the date of order, either under s 1318 of the Corporations Act, or directions under the Insolvency Practice Schedule or the Trustee Act.

25 In Amirbeaggi,[12] Markovic J set out the requirements for making a declaration under s 1318:[13]

The Court has power, pursuant to s 1318 of the Corporations Act, to excuse an administrator who inadvertently sells trust assets when he or she does not have the power to do so: see Caterpillar at [42]; Suncoast at [21], [29]-[39]...

In order for Ms Amirbeaggi to obtain the relief she sought under s 1318(2) of the Corporations Act she had to establish that:

(1) she had reason to apprehend that a claim would, or might, be made against her;

(2) such a claim is in respect of any negligence, default, breach of trust or breach of duty in her capacity as administrator; and

(3) she acted honestly in relation thereto,

see Suncoast at [29].

In Suncoast Reeves J noted that the nature of the apprehension that a claim might be made was that there "must be an objective basis for believing that the claim will or might be made against that person": at [31] quoting Re Vouris [2003] NSWSC 702; (2003) 177 FLR 289 at [116] per Campbell J.

26 Here the Liquidator took action to realise assets and otherwise conducted the administration in circumstances where the Company was not trustee of the Trust (by reason of its automatic removal as trustee). While the possibility of a claim being made against the Liquidator is low is this case, such a possibility does exist. I will make an order relieving him from liability pursuant to s 1318 of the Corporations Act, s 90-15 of the Insolvency Practice Schedule and s 67 of the Trustee Act.

27 The second matter concerns the remuneration costs and expenses of the Liquidator.

28 The Liquidator has provided an account of the work undertaken by him since his appointment and seeks orders concerning his remuneration, costs and expenses, including those costs and expenses be paid in priority from the Trust property.

29 The principles to be applied when considering applications such as these were outlined by Sloss J in Re Mandeville Group[14] where her Honour observed:

209 When addressing the liquidator's claim for remuneration and recovery of costs and expenses, counsel for the plaintiffs referred the Court to the decisions of Brereton J in Re Stansfield and of Riordan J in Re Matthew Forbes Pty Ltd (in liq), and the later observations made by Gordon J in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth as confirming that a liquidator's entitlement to recover remuneration, costs and expenses in cases of this kind are regulated by the priority regime established by s 556(1) of the Corporations Act. Counsel submitted that orders for the liquidator's costs and remuneration are now routinely made pursuant to s 556(1) even though the relevant property is trust property.

210 In the circumstances, I am satisfied that it is appropriate to order that the liquidator is entitled to be paid his remuneration, costs and expenses properly incurred in preserving, realising or getting in the assets of the Trust, including the Property, and of and incidental to this application (including the costs of the contradictor), and that such remuneration, costs and expenses are to be paid in accordance with the priority specified in s 556(1) of the Corporations Act.

30 It is appropriate in this case to make the orders sought by the Liquidator concerning remuneration, costs and expenses. For the avoidance of doubt, the order will specify that it operates in relation to such remuneration, costs and expenses from 19 February 2024, the date of appointment.

31 While no party has appeared to oppose the orders sought and even though notice has been given, it is appropriate to include an order granting liberty to apply to any person or creditor with sufficient interest on three business days' notice to the Liquidator. In the circumstances I propose to make an order in the form provided by Counsel for the Liquidator with the addition in paragraph 8 of the words 'to include remuneration, costs and expenses from 19 February 2024, being the date of the appointment of the liquidator'.

[1] [2019] FCA 1023 [49], [50] (Moshinsky J), referred to with approval in Deppeler, in the matter of Old Port Road Pty Ltd (in liq) [2021] FCA 980 [16] (O'Bryan J); Anderson (Liquidator) v Aravanis (Trustee), in the matter of Anderson [2021] FCA 1185 [11] (Colvin J).

[2] [2021] VSC 847 [34]-[35]. See also Mutton (Liquidator), in the matter of Balsub Pty Ltd (In Liquidation) [2020] FCA 741 [25] (Anastassiou J).

[3] [2011] FCA 677 [26].

[4] (2017) 320 FLR 118; [2017] VSC 127 ('Re Amerind').

[6] [2011] FCA 677 [26].

[7] [2018] FCAFC 40; [2018] 260 FCR 310.

[8] [2011] FCA 677.

[9] [2018] FCAFC 40; [2018] 260 FCR 310.

[10] [2020] VSC 474, [30], [42] (Delany J).

[12] Re Simpkiss Pty Ltd (in liq) [2018] FCA 2121 (Markovic J) ('Amirbeaggi').

[13] Ibid [46]-[48] (Markovic J). See also Re Suncoast Restoration Pty Ltd (in liq) [2013] FCA 355; (2013) 211 FCR 203, [29]-[39].

[14] [2020] VSC 293 [209]-[210].