Re Mackie Group Pty Ltd (in liq) (in its capacity as Trustee of the Jupelina Unit Trust) [2017] VSC 477 (1 September 2017)

1 This application is made under s 479(3) of the Corporations Act 2001 (Cth) (Corporations Act); alternatively, under Schedule 2 Division 45 ss 45-1 and 45-5 and Division 90 ss 90-15 and 90-20 of the Corporations Act.

2 The application is supported by an affidavit of Mr Matthew James Jess of 23 March 2017 (the Jess Affidavit) and an affidavit of Ms Catherine Ann Ballantyne dated 11 July 2017 (the Ballantyne Affidavit).

3 It is an application by the liquidators of Mackie Group Pty Ltd (the Company) for orders in the nature of directions in relation to matters that have arisen in the Company's winding up, in particular, concerning the priority of payment of an amount to Unitholders under the Jupelina Unit Trust (the Trust) of which the Company is the Trustee.

4 The applicants initially invited the Court to resolve the issue as to whether s 556 of the Corporations Act applied in this context which concerned trust assets. However, given this issue is currently the subject of conflicting authority[1] and, further, is under consideration by both the Victorian Court of Appeal[2] and the Full Court of the Federal Court,[3] the applicants did not pursue a determination of this question. Rather, the applicants sought an (amended) form of directions (the revised orders) which might apply regardless of whether s 556 applies or not.

5 The issues in the case are therefore whether the Court ought to make the following revised orders:

1. The Applicants have leave to file the Further Amended Interlocutory Process dated 16 August 2017 forthwith.

2. Pursuant to s 479(3) of the Corporations Act 2001 (Cth) (Act), the Court directs that:

a. the Applicants are justified in conducting the winding up of Mackie Group Pty Ltd (in liquidation) Pty Ltd (ACN 006 524 456) (the Company) and the execution by the Company as Trustee of the Jupelina Unit Trust (Trust) on the basis that the Company is entitled to have full recourse to the assets of the Trust (Trust Property) to meet its liabilities as Trustee for remuneration determined in accordance with the Corporations Act and general expenses of the winding up properly incurred (collectively the Applicants' Remuneration and Costs); and

b. the Applicants' Remuneration and Costs are to be paid from the Trust Property in priority to the claims of unsecured creditors of the Company or the Trust, Unitholders in the Trust and members of the Company.

a. the payment made by the applicants on 17 July 2013 to the petitioning creditor Graham Duckitt in the amount of $10,000 pursuant to the order of the Court made on 1 July 2013; and

b. the payments made by the Applicants on 18 February 2016 to the former employees Wendy and Graham Duckitt in the amount of $1,500 each;

were paid honestly and reasonably and in the discharge of their duties as liquidators and the Applicants ought fairly to be excused by the Court pursuant to s 1318(2) of the Act or alternatively s 67 of the Trustee Act 1958 (Vic) for any negligence, default or breach in connection with each of those payments.

4. The Court directs the Applicants to pay any distribution of profit for the financial years ending on 30 June 2012 and/or 30 June 2014 to a beneficiary or Unitholder pursuant to the terms of the Trust Deed only if all admitted claims by unsecured creditors of the Company have been first paid in full.

5. For the purpose of distributing any entitlement to In Home Care Pty Ltd in its capacity as a Unitholder of the Trust, the Court directs that it would be appropriate for the Applicants to set off the amount of the debt of $152,471 payable by In Home Care Pty Ltd to the Company against the amount that the Applicants would otherwise be liable to pay to In Home Care Pty Ltd.

6. The costs of the Applicants in this application are to form part of the Applicants' Remuneration and Costs.

6 As will be seen below, the application is unopposed.

7 A preliminary issue of jurisdiction was raised given the commencement of changes to the Corporations Act made by the Insolvency Law Reform Act 2016 (Cth).

8 Pursuant to s 1617 of the Corporations Act, if proceedings are brought under the old provisions of the Corporations Act before the commencement day of the new provisions, being 1 September 2017,[4] then the old provisions continue to apply on and after the commencement day in relation to the proceedings despite the amendments and repeals made by Schedule 2 to the Insolvency Law Reform Act 2016 (Cth). Further, nothing in that Schedule affects the power of the Court to make orders in relation to the proceedings.

9 Thus, as these proceedings were brought under the old provisions of the Corporations Act before the commencement date of the new provisions, s 479(3) remains operative allowing the liquidators to apply to the Court for directions in relation to any particular matter arising under the winding up.

10 As indicated above, the Company (incorporated on 16 April 1991) is the Trustee of the Trust. The units in the Trust are held equally by each of the Zagga Pty Ltd (a company controlled by a director, Mr Ralph Mackie) and In Home Care Pty Ltd (a company controlled by the other director, Mr Graham Duckitt).

11 The Company formerly carried on business as a trustee providing marketing and project management services to a group of companies controlled by Mr Mackie (the Mackie Group). By the time of the appointment of the applicants, the Company had ceased trading.

12 The liquidators were appointed on 17 December 2012, with the winding up order being made on just and equitable grounds on the basis of a deadlock between Mr Mackie and Mr Duckitt.

13 The evidence before the Court is that the Company acted solely as Trustee of the Trust and all of the liabilities of the Company were incurred in its capacity as trustee pursuant to the terms of a trust deed titled 'Jupelina Unit Trust' and dated 20 February 1986 (the Trust Deed).

14 Pursuant to cl 7(c) of the Trust Deed, the Trustee was to deposit all receipts from the operation of the trust fund into a separate bank account and was to pay all current expenses and outgoings with respect to the trust fund. Pursuant to cl 7(d)(i), the Trustee was also to keep proper books of account of all sums received and expended by or on behalf of the trust fund. Clause 7(d)(ii) provided that the Trustee was to prepare a profit and loss account showing the calculation of the income of the trust fund for the period to the 30th of June as well as a balance sheet.

15 Further, after preparation of those accounts, the Trustee was to transfer to a Distribution Account the income of the Trust Fund (taking into account expenses) pending distribution to the unit holders.[5]

16 Clause 26(b) further provided an indemnity to the Trustee in respect of all liabilities incurred by it relating to the execution of any powers duties authorities or discretions vested under the Trust Deed and in respect of all actions proceedings costs claims and demands relating to anything done or omitted to be done concerning the Trust Fund.

17 Although it is common for a trust deed to provide for the automatic removal of a corporate trustee when it goes into liquidation or enters into some form of insolvency administration, in this case, the Trust Deed does not provide for automatic removal. Rather the Trustee needed to be removed by resolution.[6] However, there has been no resolution to remove the Company as the trustee.

18 As at the time of the appointment of the liquidators, the main assets of the Company were funds received following litigation brought by the Company against Reading Property Pty Ltd (Reading) for Reading's failure to proceed with a construction development (approximately $1.5M). The liquidators also subsequently pursued and recovered $320,000 in respect of the costs of this litigation in September 2013.

19 The applicants presently hold approximately $1,862,000 in available cash to distribute.

20 They estimate that the total remuneration (both outstanding and in future) will be $72,000.

21 The applicants have further adjudicated on and allowed total creditor claims in an amount of $1,668,456 (the Unsecured Creditor Claims).

22 In relation to the Unitholders, the applicants were required to prepare accounts and lodge income tax returns for the Company in its capacity as Trustee of the Trust for the financial years 2012-2016. They obtained advice from Pitcher Partners to assist in preparing those accounts. The accounts show that income was derived in the 2012 year (in the main from the amount awarded in the Reading litigation) and in the 2014 year (in the main from the costs from that litigation).

23 Consistent with the terms of the Trust Deed, the Company as Trustee is required to distribute income (net of expenses) pursuant to the trust. This has been calculated as $297,190 for each of In Home Care Pty Ltd and the Ralph Mackie Settlement Trust (the Accounting Distribution). However, these amounts have not been paid to the Unitholders, but have been recorded as 'undrawn beneficiary entitlements' in the financial statements.

24 Given the claims of the Unitholders (at $297,190 each); the claims of the unsecured creditors (of $1,668,456); and the estimated remuneration ($72,000), there are insufficient funds available (being $1,862,000) to pay all claims.

25 A further difficulty is that there is a difference between how income and expenses are treated for accounting purposes and for taxation purposes, in particular, the value of expenses brought to account for taxation purposes may be lower than for accounting purposes.

26 This occurred in this case such that there is a higher total Tax Distribution recorded for each of the Unitholders at $552,787.50.

27 Thus, although the Unitholders are only entitled to receive the Accounting Distribution of $297,190 (which they may not receive), they will be assessed, for tax purposes, on the Tax Distribution of $552,787.50.

28 The applicants have received legal advice to verify that the Accounting Distribution and the Tax Distribution were appropriately accounted for and were advised that the accounts were prepared correctly and appropriately.

29 However, given, inter alia, the issues cited above, the applicants were concerned that they might be accused of acting unreasonably absent a court direction, particularly in terms of the appropriate priority between the unsecured creditors and the Unitholders. They have also obtained advice from Counsel which suggested that there was sufficient uncertainty to warrant an application to Court for directions.

30 At the first directions hearing on 26 April 2017, Mr Duckitt attended Court and was given leave to appear on that day on behalf of Wendy Duckitt (his wife, who is also a creditor) and In Home Care Pty Ltd.

31 Mr Duckitt appeared to be raising some opposition: in particular he raised an issue about the directions sought insofar as the Interlocutory Process sought an order regarding the payment of interest.

32 Orders were then made, inter alia, for the filing of any affidavit material by Mr Duckitt by 5 May 2017; and for the giving of notice to those parties who might have a claim against the fund. The application was also listed to be heard on 23 May 2017.

33 However, the applicants subsequently advised Mr Duckitt that they would seek leave to further file a 'Further Amended Interlocutory Process' wherein they would not seek an order for payment of interest on unsecured claims prior to payment to Unitholders.

34 On 5 May 2017, Mr Duckitt thereby informed the solicitors for the applicants by email that, on the basis of the proposed amendment, he would not be compiling any further interlocutory material. He did not in fact file any material in opposition.

35 This position was further confirmed on 16 August 2017, wherein Mr Duckitt attended in Court, but indicated that he did not wish to appear, and further, that he did not have any submissions to make in opposition.

36 On 17 May 2017, the Court listed this matter for an urgent directions hearing at 2.15 pm in circumstances where the applicants were concerned that they could not obtain a clear statement from Zagga Pty Ltd as to whether the application was opposed by that Unitholder, and, if so, on what grounds.

37 Mr Ayliffe appeared at that time (as town agent for Mr Sinn) on behalf of Mr Mackie and Zagga Pty Ltd (as trustee for the Ralph Mackie Settlement Trust).

38 Orders were made for the Mackie interests to file affidavits in opposition with any affidavits in opposition to be filed by 23 June 2017, and for the re-scheduling of the hearing to 16 August 2017.

39 It has subsequently become apparent that Mr Mackie and Zagga Pty Ltd do not, in substance, oppose the relief sought by the applicants.

40 Rather, in an email addressed to the Court of 4 July 2017, Mr Sinn advised that:

I advise that my clients have been able to reach an agreement with the Applicant liquidators which satisfies their concerns about the directions sought by the liquidators in the proceeding. Accordingly I am instructed to take no further part in the proceedings as concerns my clients. Although an Appearance has been filed, my clients will play no further part in the proceedings.

41 Despite notice being given of the adjourned dates, and of the material in support, no other person has appeared.

Order 1: Leave to file Further Amended Interlocutory Process

43 As noted above, the Further Amended Interlocutory Process alters the previous position such that the applicants do not now seek an order that interest be paid to unsecured creditors prior to Unitholders. It was served on the Unitholders and the other creditors.

44 The document is generally consistent with the revised orders the applicants asked the court to make. More particularly, the applicants did not press for an order that interest on unsecured claims be paid prior to Unitholders. In fact, the applicants did not seek any direction regarding priorities applying to the payment of interest at all.[7]

45 Accordingly, there will be leave to file the Further Amended Interlocutory Process in the form contained in exhibit CAB-3 to the affidavit of service of Catherine Ann Ballantyne dated 14 August 2017 with service dispensed with.

46 If s 556(1) determines the order of priority for distribution of Trust Property in the hands of the Company, then the payment of the Applicants' Remuneration and Costs is provided for in priority by s 556(1)(a).[8]

47 However, as indicated already, directions are sought regardless of whether s 556 does or does not apply. It is therefore important to resolve this issue by reference to general trust principles. They will be set out in some detail given their relevance to a number of the directions sought.

48 In Octavo Investments Pty Ltd v Knight,[9] the joint judgment of Stephen, Mason, Aickin and Wilson JJ helpfully sets out some critical trust principles:[10]

It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire, supra. The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorized to use for the purposes of carrying on the business: Dowse v Gorton [1891] A.C. 190.

In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trust, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied: Vacuum Oil Co Pty Ltd v Wiltshire, supra.

The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution. (Savage v Union Bank of Australia Ltd [1906] HCA 37; (1906) 3 CLR 1170, at 1186 Re Morgan; Pillgrem v Pillgrem (1881) 18 Ch. D. 93) but in the event of the trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee. Vacuum Oil Co Pty Ltd v Wiltshire, supra; Ex parte Garland [1804] EngR 336; (1804) 10 Ves. Jun. 110, at p 120; [1804] EngR 336; 32 E.R. 786, at p 789).

49 As indicated already, the trustee's right of indemnity explained above is also acknowledged in the Trust Deed and, further, pursuant to s 36(2) of the Trustee Act 1958 (Vic) (Trustee Act).[11]

50 A real question has arisen however as to the effect of a winding up upon the Trustees' right of indemnity, in particular, whether the liquidators may apply the proceeds of the right of indemnity to meet debts that may be described as private or 'non-trust debts.' This issue has arisen in the context of claims for remuneration by liquidators.

51 In the decision of the Full Court of the Supreme Court of Victoria in Re Enhill Pty Ltd (Re Enhill),[12] this issue arose in circumstances wherein the liquidator sought an order that he could utilise trust assets in discharging his costs and expenses (including his remuneration).

52 The Court held that the liquidator could do so, determining that the right of indemnity was property of the trustee available to its liquidator for division between the trustee's creditors generally. Further, that the liquidator was entitled to be paid his remuneration, costs and expenses pursuant to the predecessor to s 556. In so saying, the Court found that the trustee's interest was 'property of the company' for the purposes of those provisions.

53 However, Lush J also found that if this view was wrong, then the liquidator was entitled to the costs of identifying and realising trust assets by analogy to the treatment of Dixon J in Re Universal Distributing Co Ltd (in liq)[13] (Re Universal) (otherwise known as the 'salvage principle'). In that case Dixon J recognised the right of a liquidator to deduct the costs of calling in and converting the assets from the proceeds of realisation of assets covered by a debenture (before transmission to debenture holders).

54 In Re Suco Gold Pty Ltd (in liq)[14] (Re Suco), the Full Court of the South Australian Supreme Court also had cause to consider whether a liquidator was entitled to his costs and expenses, including remuneration.

55 In the leading judgment of King CJ, his Honour rejected the proposition from Re Enhill that the right of indemnity was available to all trust creditors, finding it to be in conflict with trust law.[15] However, he went on to determine that the liquidator's costs, expenses and remuneration were properly payable out of the trust funds noting that it was the duty of a trustee company to incur debts for the purposes of trust business and to pay those debts. Further, that, upon winding up, the debts of the trust could only be paid in accordance with the provisions of the Companies Act which necessarily required a liquidator who needed to incur costs and be paid remuneration. King CJ further stated:[16]

As the company's obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity. If that reasoning is wrong, I would, like Lush J. in Re Enhill Pty. Ltd. [1983] VicRp 52; (1982) 7 A.C.L.R. 8, be prepared to rely on the principle enunciated by Dixon J. in Re Universal Distributing Co. Ltd. [1933] HCA 2; (1933) 48 C.L.R. 171, at pp. 174-5.

56 Jacobs J placed more emphasis on the provisions of the Companies Act while Mathieson J agreed with the reasons of both.

57 The reasoning in Re Suco has been criticised insofar as it holds that liabilities are to be paid from the trust property in the order laid down by s 556. Rather, other judges and authors have expressed the view that s 556 is only addressed to the distribution of assets beneficially owned by the company (rather than trust assets). As indicated above, this question is currently under review by two appellate courts. However, the trust analysis utilised in Re Suco has been relied on in a number of decisions, particularly in New South Wales, to justify the payment of a liquidator's fees and remuneration where the trustee has no other activities.[17]

58 Thus, in the recent decision of Brereton J in Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2)[18] (Re Independent), His Honour rejected the proposition from Re Suco that s 556 could have any application given s 556 was concerned only with the distribution of assets beneficially owned by the company. He nevertheless found that the trustee had, and its liquidator now has, a right of indemnity in respect of liabilities incurred in acting as trustee. Further, that the creditors (who were entitled to be subrogated to the liquidator's lien) were entitled to share pari passu in the trust assets but only 'after' provision for the liquidator's remuneration and expenses. He further cited Re Suco and a number of other New South Wales cases for the following proposition:

The liquidators of a company which is the trustee of a trading trust and has no other activities, are entitled to be paid their costs and expenses, whether for administering the trust assets or for 'general liquidation work', out of the trust assets.[19]

59 It therefore appears that there is strong authority in favour of the proposition that the liquidators of a company which is the trustee of a trading trust with no other activities, are entitled to be paid their costs and expenses whether for administering trust assets or for general liquidation work. This appears to be based on the proposition that the liquidator, in winding up a corporate trustee, carries on the trustee's duty of managing the trust business for the benefit of the trust.

60 Even if this is wrong, the principles in Re Universal have been relied upon to justify such an order.[20] Thus, in the recent decision of Riordan J in Freelance Global Ltd (in liq) v Bensted,[21] His Honour noted that the application of the salvage principle entitled a liquidator acting reasonably to be indemnified out of trust assets for its costs and expenses in identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; and distributing trust assets to those beneficially entitled to them.[22]

61 In the current case the liquidators have engaged in work so as to complete financial statements to identify assets; have taken steps to recover amounts owed to the trust; have adjudicated claims; and have taken advice to ensure that trust funds are distributed to those entitled to them. Given some of the complexities raised by the operation of the trust, they have also deemed it necessary to obtain various advices.

62 I am satisfied that the work generally needed to be done in the interests of the beneficiaries such that remuneration should be awarded. There also appears to be no alternative if the trust is to be properly determined.

63 I further note that there are other factors which support the making of the proposed order:

• there was no other activity apart from acting as a trustee; it follows that there is otherwise no other (non-trust) property available to meet the liquidators' costs;

• the liquidators are not 'bare trustees' but have had active duties to perform as trustees;[23]

• remuneration has been approved by meetings of creditors; and

• no objection was raised to the form of the order for costs/remuneration.

64 I am therefore satisfied that it is appropriate to make an order for the liquidators' costs and remuneration, either on the basis of the trust principles derived from Re Suco, or, alternatively, pursuant to the salvage principles in Universal.

65 In terms of the form of order, the applicants do not seek the quantification of the proper amount of costs at this stage.[24] However, in exercising its inherent jurisdiction to allow remuneration out of trust assets, the liquidators are generally entitled to 'reasonable remuneration'. Regard may also be had to the relevant provisions in the Corporations Act, particularly s 473(10), though the court is not exercising its statutory jurisdiction, but rather its inherent jurisdiction to allow remuneration out of trust assets in connection with a trust fund.[25]

66 Accordingly, the following orders are appropriate:

a. the Applicants are entitled to have recourse to the assets of the Trust (Trust Property) for remuneration and general expenses reasonably incurred in administering the trust and in respect of the winding up (collectively the Applicants' Remuneration and Costs); and

b. the Applicants' Remuneration and Costs are to be paid from the Trust Property in priority to the claims of unsecured creditors, Unitholders in the Trust and members of the Company.

67 I am also satisfied that the applicants have acted reasonably and in good faith in bringing this application for advice and directions. Accordingly the following order is appropriate:

The costs of the Applicants in this application are to form part of the Applicants' Remuneration and Costs.

Order 3: Payments made on 17 July 2013 and 18 February 2016

68 A payment was made on 17 July 2013 in respect of certain costs awarded by Court order of 1 July 2013 which were to be costs 'in the winding up.' They were taxed in an amount of $10,000 and were paid in the belief that s 556(1)(b) applied.[26]

69 A further payment was made on 18 February 2016 in respect of Graham Duckitt and Wendy Duckitt in respect of their leave entitlements pursuant to s 556(1)(g).[27] The amount paid was $1,500 each on the basis that they were 'excluded employees' pursuant to s 556(1B).[28]

70 If s 556 applies, these payments appear to have been made correctly given they would have a priority under sub-ss 556(1)(b) and (1)(g).

71 If, however, s 556 does not apply, then these payments will have been made in error as no such priority would apply. The payment would not however prevent the payment of any other unsecured creditor given the availability of funds described already.

72 I accept the payments were made by the liquidators honestly and reasonably in the ordinary course of carrying out their duties in circumstances where they believed that s 556 applied. Further, that they were made prior to the publication of the decisions in Re Independent[29] and Re Amerind[30] which have highlighted considerable doubt about the applicability of s 556.

73 Section 1318 of the Corporations Act provides that the Court may relieve a liquidator either wholly or partly from liability for negligence, default, breach of trust or breach of duty on such terms as the Court thinks fit, if it appears to the Court in any such civil proceeding or apprehended proceeding that the liquidator has acted honestly and that, having regard to all the circumstances of the case, ought fairly to be excused.

74 Further, s 67 of the Trustee Act provides that the Court may relieve a trustee, either wholly or partly, from personal liability for any breach of trust, should it appear to the Court that the trustee acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the Court in the matter in which he committed such breach.

75 In such circumstances, I am satisfied that the liquidators ought fairly be excused from any negligence, default or breach pursuant to s 1318 of the Corporations Act or s 67 of the _Trustee Act (_to the extent it is necessary).

76 I am therefore satisfied that it is appropriate to make the declaration sought as follows:

a. the payment made by the Applicants on 17 July 2013 to the petitioning creditor, Graham Duckitt, in the amount of $10,000; and

b. the payments made by the Applicants on 18 February 2016 to the former employees, Wendy Duckitt and Graham Duckitt, in the amount of $1,500 each,

were paid honestly and reasonably and in the discharge of their duties as liquidators and the Applicants ought fairly to be excused by the Court pursuant to s 1318(2) of the Corporations Act 2001 (Cth) or alternatively s 67 of the Trustee Act 1958 (Vic) for any negligence, default or breach in connection with each of those payments.

Order 4: Priority between unsecured creditors and Unitholder beneficiaries

77 There are two issues here. First, whether, if s 556 applies, the payment to a Unitholder would be an 'expense' pursuant to s 556(1)(dd). Second, the appropriate order of priority whether s 556 applies or not.

78 Section 556(1)(dd) gives a priority to 'other expenses' properly incurred. 'Typical' expenses paid under s 556 have included the costs of recovering or realising assets, liabilities incurred during the winding up in carrying on the company's business, costs orders in respect of litigation brought, continued or defended by the liquidators, and tax liabilities on profits earned during the period when the business is carried on by the liquidators.[31]

79 However, although the concept of 'expenses' has been given a wide meaning, they are generally concerned with identifiable costs incurred in the course of the winding up. I therefore do not consider that an 'expense' would include a distribution to a Unitholder. Such a distribution does not arise from an identifiable cost incurred as part of the winding up process. Instead, it arises by reason of the entitlement of beneficiaries under the Trust Deed (only after both income and expenses are calculated).[32]

80 In terms of the priority question, s 556 is generally only concerned with the order of priority for specifically listed unsecured creditors and does not provide any priority to Unitholders. Moreover, for the reasons given below, the claims of the unsecured creditors should be preferred over the Unitholders regardless of whether s 556 applies or not.

81 Pursuant to the principles extracted in Octavo, above, the trustee's right of indemnity (to whom the creditors are subrogated) is preferred to the rights of the beneficiaries. The High Court in Chief Commissioner of Stamp Duties (NSW) v Buckle also stated that 'the entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them'.[33] This was also the approach of Brereton J in Re Independent.

82 In this case, given it appears that all the debts that the liquidators have admitted to proof were incurred by the Company in its capacity as Trustee and any distributions to be made to the Unitholders arise due to their entitlements as beneficiaries, it follows that the distributions are subordinate to the claims of trust creditors. Thus, the Unitholders will only be entitled to so much of the assets that remain after the trust creditors have been paid.

83 Such a conclusion is also consistent with the Trust Deed, given distributions to Unitholders should be calculated by reference to the Trust Fund's income which is to be determined only once expenses are accounted for.

84 I am therefore satisfied that it is appropriate to make the declaration sought as follows:

The Court directs the Applicants to pay any distribution of profit for the financial years ending on 30 June 2012 and/or 30 June 2014 to a beneficiary or Unitholder pursuant to the terms of the Trust Deed only if all admitted claims by unsecured creditors of the Company have been first paid in full.

(a) In Home Care Pty Ltd is also a debtor of the Company in an amount of $152,471 in respect of a loan made to it which originated in 2005 and which has been included as an asset in the financial accounts of the Company from 2007 (the In Home Care Loan);

(b) In Home Care Pty Ltd does not have the capacity to repay that loan amount.

86 Accordingly the applicants seek directions that the amount of the In Home Care Loan should be set off against the amount the applicants would otherwise be liable to pay to In Home Care by way of distribution as a Unitholder.

87 The applicants raised three bases for the set-off: s 553C of the Corporations Act; Rule 13.14 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (Supreme Court Rules); and the rule in Cherry v Boultbee.[34]

88 There may be some doubt in this case as to whether s 553C is applicable, given that it forms part of the same statutory regime as s 556 of the Corporations Act. The set-off available under Rule 13.14 of the Supreme Court Rules also only applies if In Home Care actually issued a proceeding against the liquidators.[35]

89 However, regardless of these options (or any other equitable basis for a set off), the rule in Cherry v Boultbee appears to apply.

90 In Re Peruvian Railway Construction Co Ltd,[36] Sargant J stated the rule from Cherry v Boultbee as being:

Where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute.[37]

91 As noted by Judd J in Pyrenees Vineyard Management v Frajman:

The principle underlying the rule in Cherry is that the person controlling a fund, whether as trustee, liquidator or in some other capacity, may deduct from the entitlement of a beneficiary any amount the beneficiary is obliged to contribute to the fund.[38]

92 In this case, In Home Care is entitled to participate in the Trust Fund which may be a 'fund' for the purposes of the principles.[39] However, it is also bound to make a contribution by paying back its loan to that fund (which loan has been owing since 2005 and remains outstanding).

93 No other disqualifying features apply such that the applicants are entitled to an order that:

For the purpose of distributing any entitlement to In Home Care Pty Ltd in its capacity as a Unitholder of the Trust, the Court directs that it would be appropriate for the Applicants to deduct the amount of the debt of $152,471 payable by In Home Care Pty Ltd to the Company from the amount that the Applicants would otherwise be liable to pay to In Home Care Pty Ltd.

1. The Applicants have leave to file the Further Amended Interlocutory Process in the form contained in exhibit CAB-3 to the affidavit of service of Catherine Ann Ballantyne dated 14 August 2017 with service dispensed with.

a. the Applicants are entitled to have recourse to the assets of the Trust (Trust Property) for remuneration and general expenses reasonably incurred in administering the trust and in respect of the winding up (collectively the Applicants' Remuneration and Costs);

b. the Applicants' Remuneration and Costs are to be paid from the Trust Property in priority to the claims of unsecured creditors, Unitholders in the Trust and members of the Company; and

c. the costs of the Applicants in this application are to form part of the Applicants' Remuneration and Costs.

a. the payment made by the Applicants on 17 July 2013 to the petitioning creditor, Graham Duckitt, in the amount of $10,000; and

b. the payments made by the Applicants on 18 February 2016 to the former employees, Wendy Duckitt and Graham Duckitt, in the amount of $1,500 each,

were paid honestly and reasonably and in the discharge of their duties as liquidators and the Applicants ought fairly to be excused by the Court pursuant to s 1318(2) of the Corporations Act 2001 (Cth) or alternatively s 67 of the Trustee Act 1958 (Vic) for any negligence, default or breach in connection with each of those payments.

4. The Court directs the Applicants to pay any distribution of profit for the financial years ending on 30 June 2012 and/or 30 June 2014 to a beneficiary or Unitholder pursuant to the terms of the Trust Deed only if all admitted claims by unsecured creditors of the Company have been first paid in full.

5. For the purpose of distributing any entitlement to In Home Care Pty Ltd in its capacity as a Unitholder of the Trust, the Court directs that it would be appropriate for the Applicants to deduct the amount of the debt of $152,471 payable by In Home Care Pty Ltd to the Company from the amount that the Applicants would otherwise be liable to pay to In Home Care Pty Ltd.

[1] See for example, Re Enhill Pty Ltd [1983] VicRp 52; [1983] 1 VR 561 and Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, where it was held that the predecessor to s 556 applied versus the views in Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222, where Brereton J held that distributions of trust property were not subject to the relevant priority regime in the Corporations Act. These varying views are as discussed in Re Amerind Pty Ltd (receivers and managers apptd) (in liq) [2017] VSC 127.

[2] Cth v Matthew James Byrnes and Andrew Stewart Reed Hewitt in their Capacity as Joint and

Several Receivers and Managers of Amerind Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (ACN 005 224 331) & Ors (S APCI 2017 0051) heard by Whelan, Kyrou, Ferguson, McLeish, and Dodds-Streeton JJA on 8 August 2017.

[3] In the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (WAD181/2016), heard by Allsop CJ, Siopis and Farrell JJ on 10 & 11 August 2017.

[4] Pursuant to Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth), r 10.25.01(1), references to 'commencement day' in Divisions 3 and 5 of Part 10.25 of Chapter 10 of that Act are a reference to 1 September 2017. Section 1617 is contained in Division 3.

[7] Written Submissions of the Applicants dated 26 July 2017, [75].

[8] Section 556(1)(a) provides that expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business are paid first in priority to all other unsecured debts and claims.

[9] [1979] HCA 61; (1979) 144 CLR 360.

[11] Section 36(2) provides that '[a] trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers'.

[12] [1983] VicRp 52; [1983] 1 VR 561.

[13] [1933] HCA 2; (1933) 48 CLR 171.

[14] (1983) 33 SASR 99.

[17] See, for example, Re AAA Financial Intelligence Ltd (in liq) [2014] NSWSC 1004; Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd (1983) 7 ACLR 540; Bastion v Gideon Investments Pty Ltd (in liq) [2000] NSWSC 939; (2000) 35 ACSR 466; Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583; In the matter of French Caledonia Travel Service Pty Ltd [2002] NSWSC 641; c.f. Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394 and Re Byrne Australia Pty Ltd (No 2) [1981] 2 NSWLR 364.

[18] [2016] NSWSC 106; (2016) 305 FLR 222.

[20] Kite v Mooney, in the matter of Mooney's Contractors Pty Ltd (in liq) (No 2) [2017] FCA 653; Re Mamounia Pty Ltd (in liq) [2017] VSC 230; Re Enhill Pty Ltd [1983] VicRp 52; [1983] 1 VR 561, 572 (Lush J); Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 110 (King CJ).

[21] [2016] VSC 181.

[23] And see the discussion in Freelance Global Ltd (in liq) v Bensted [2016] VSC 181, [60].

[24] Written Submissions of the Applicants dated 26 July 2017, [87].

[25] Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222, [31]-[32].

[26] Section 556(1)(b) provides that in a Court ordered winding up, the costs in respect of the application for the order are paid in priority to all other unsecured debts and claims.

[27] Section 556(1)(g) provides that all amounts due (on or before the relevant date) to employees of the company because of an industrial instrument in respect of leave of absence are given priority over other unsecured debts and claims.

[28] Mr Graham Duckitt and Mrs Wendy Duckitt are 'excluded employees' within the definition set out in s 556 of the Corporations Act. Mr Duckitt was a director of the Company that controlled the Trust. The definition of 'excluded employee' also includes an employee who is the spouse of a director of the company, being Mrs Duckitt.

[29] [2016] NSWSC 106; (2016) 305 FLR 222.

[30] Re Amerind Pty Ltd (receivers and managers apptd) (in liq) [2017] VSC 127.

[31] Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd [2012] VSC 112; (2012) 265 FLR 33, 52 [86].

[32] See also the Australian Accounting Standards Board's (AASB) Framework for the Preparation and Presentation of Financial Statements, prepared 11 September 2009, which identifies (at [70]) the 'essential features' of expenses in their definition: 'Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants'.

[33] [1998] HCA 4; (1998) 192 CLR 226, 246 [48].

[34] [1839] EngR 1099; (1839) 4 Myl & Cr 442; (1839) 41 ER 171.

[35] Rule 13.14 of the Supreme Court Rules provides that '[w]here a defendant has a claim against a plaintiff for the recovery of a debt or damages, the claim may be relied on as a defence to the whole or part of a claim made by the plaintiff for the recovery of a debt or damages and may be included in the defence and set off against the plaintiff's claim, whether or not the defendant also counterclaims for that debt or damages'.

[36] [1915] 2 Ch 144.

[38] [2008] VSC 552, [39].

[39] J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015) 1118 [39-120].