Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd

REASONS FOR JUDGMENT 1 This is an application by interlocutory process dated 2 May 2011 by Mr Stephen Glen James and Mr John Maxwell Morgan in their capacities as joint and several liquidators of the defendant, Ewens Glen Pty Ltd, for orders that they be appointed joint and several receivers and managers of the property of the Nelson Family Trust. The liquidators also seek an order concerning the position of the defendant under the deed of settlement which established the Nelson Family Trust. 2 The background to the application is that on 23 March 2011 the District Registrar made an order that the defendant be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth) ("Corporations Act") and an order that Mr James and Mr Morgan, official liquidators, be appointed joint and several liquidators of the defendant. The orders were made on the application of the plaintiff, Sapphire (SA) Pty Ltd Trading as River City Grain Co. 3 The evidence before the Court on the present application establishes the following matters. The defendant was incorporated on 26 November 2001. The present director of the defendant is Mr Andrew Robert Nelson who became a director on 8 September 2010. Two previous directors of the defendant were Mrs Colleen Patricia Nelson (Mrs Nelson) who was a director from 26 November 2001 to 8 September 2010 and Mr Bruce Andrew Nelson (Mr Nelson) who was a director from 26 November 2001 to 12 January 2010. The two shareholders of the defendant are Mr and Mrs Nelson who each hold one $1.00 share. 4 The defendant is the trustee of the Nelson Family Trust ("the trust") which operates a dairy farm located at 120 Smokey Point Road, Port Campbell in the State of Victoria. As I understand it, on a day to day basis the farm is operated by Mrs Nelson and her daughter, Donna Nelson. The defendant does not trade and has not traded at any time, other than in its capacity as trustee of the trust. It has no assets in its own right and all of its liabilities have been incurred by it in its capacity as trustee of the trust in the course of operating the dairy farm. The defendant did not keep any financial records. 5 The major assets of the trust are approximately 510 head of cattle and various items of plant and equipment and the major liabilities are a debt to the National Australia Bank Limited which is secured by a fixed and floating charge over all the assets of the defendant, debts owed to Mr and Mrs Nelson and debts owed to unsecured creditors. 6 The liquidators have continued to operate the dairy farm in order to preserve the assets of the trust and with a view to exercising the right to reimbursement which the defendant claims over the assets of the trust in order to satisfy the liabilities of the trust incurred by the defendant on behalf of the trust. 7 Mr Nelson was made bankrupt on 17 August 2009 and Mrs Nelson was made bankrupt on 5 July 2010. Mr Gess Rambaldi and Mr Andrew Yeo are joint and several trustees of each of the bankrupt estates. 8 The trust was established by a deed of settlement executed by the settlor (Mr Edwin Duncan Morris) and the trustee (the defendant) on 1 December 2001 ("the trust deed"). The primary beneficiaries under the trust are Mr and Mrs Nelson; there are other classes of beneficiaries under the trust but it is not necessary for me to set out the details. Of present relevance are the provisions dealing with the disqualification or removal of the trustee and the disqualification of the appointors. As to the former, clauses 7(7) and 7(8) of the trust deed are relevant and provide as follows: 7(7) Resignation Any Trustee may at any time resign as Trustee on giving not less than 30 days written notice to the Appointor for the time being, but if no Appointor is in office, a Trustee must not resign until it has appointed a new or additional Trustee by exercising its power under sub-clause 7.6. 7(8) Vacation of office Subject to paragraph 7(6)(b), the office of a Trustee must be terminated and vacated if the Trustee: … (c) being a company, enters into administration, receivership or liquidation (whether compulsory or voluntary, not being merely a voluntary liquidation for the purposes of amalgamation or reconstruction). 9 As to the disqualification of the appointors clauses 7(1), 7(2) and 7(6) are relevant and provide as follows: 7(1) Power of appointment The power to appoint a new trustee in the place of an existing Trustee or in addition to and jointly with an existing Trustee and the power to remove a Trustee will, subject to the following provisions of this clause, be vested in, successively: (a) [Bruce Andrew Nelson and Colleen Patricia Nelson] during his, her or their lifetimes ("First Appointor"); (b) on and from the death of the First Appointor, in the legal personal representative of the First Appointor or such person or persons as the First Appointor may by deed or will nominate (or, if more than one First Appointor, in the legal personal representative of the last of the First Appointors to die, or such person or persons as the last of the First Appointors to die may by deed or will nominate) ("Second Appointor"); (c) on and from the death of the Second Appointor, in the legal personal representative of the Second Appointor or such person or persons as the Second Appointor may by deed or will nominate (or, if more than one Second Appointor, in the legal personal representative of the last of the Second Appointors to die, or such person or persons as the last of the Second Appointors to die may by deed or will nominate); or (d) on and from the death of the Second Appointor (or, if more than one Second Appointor, the last of the Second Appointors to die), with no legal personal representative or nomination having been made under paragraph (c), or such legal personal representative or nominee having died or ceasing to be in existence or unwilling to act as Appointor of this Trust, in the Trustee for the time being. 7(2) Legal disability of First Appointor If the First Appointor becomes subject to a legal disability including being declared bankrupt or an order being made for the sequestration of the estate of the First Appointor, then from the time of such disability and during the continuance of that disability, the power of appointment and removal vested in the First Appointor will vest in the Second Appointor. If the Second Appointor is not then living, such power will vest in the Trustee. On the First Appointor ceasing to be subject to a disability including the sequestration order ceasing to have effect, then the power of appointment and removal previously referred to will revest in the First Appointor. … 7(6) Default power of appointment If at any time no person has the power to appoint a new trustee or an additional trustee or the Appointors are unable to reach a majority decision as to the appointment of a new, additional or replacement Trustee, the power will be vested in the Trustee or Trustees for the time being of the Trust, and if the Trustee: … (b) is a company and goes into receivership, liquidation (whether voluntary or involuntary) or external administration the power of appointment may be exercised by the receiver, liquidator or administrator. 10 The effect of these clauses appears to be that on the bankruptcy of Mr and Mrs Nelson (which has occurred) and there being no second appointor (which is the case) the power of appointment under the trust deed vested in the defendant. Upon the liquidation of the defendant the power of appointment may be exercised by the liquidators. On the face of the relevant provisions of the trust deed, some act is required before the defendant loses the office of trustee. It is most likely that the defendant's office as trustee will come to an end when the liquidators exercise the power of appointment given to them and appoint a new trustee. 11 The substantive orders sought by the liquidators in the interlocutory process are as follows: 1. The defendant remain trustee of the Nelson Family Trust ("Trust"), notwithstanding that it is currently in liquidation. 2. The liquidators of the defendant, Stephen Glen James and John Maxwell Morgan, of Bentleys Corporate Recovery (SA) Pty Ltd, 64 Greenhill Road, Wayville in the State of South Australia be appointed joint and several receivers and managers of the property of the Trust ("Trust Property"). 3. The receivers and managers ("Receivers") be authorised to take possession of, preserve, maintain and sell the assets comprising the Trust Property. 4. The Receivers will have the following powers: 4.1 The power to do, in Australia and elsewhere, all things necessary or convenient to be done for or in connection with, or as incidental to the attainment of the objectives for which the Receivers are appointed; 4.2 The general and specific powers referred to in section 420(2) of the Act, provided that wherever in section 420 the word "corporation" appears it shall be taken that those powers extend to the Trust; and 4.3 The power to require, by request in writing, the Trust and any employee, agent, banker, solicitor, stockbroker or accountant of, or consultant or other professionally qualified person who has provided assistance to the Trust, to provide such reasonable assistance to the Receivers as may be required from time to time. 5. The Receivers shall be paid remuneration on a time basis at a reasonable fee according to the hours for which they, or any employee of the firm Bentleys Corporate Recovery (SA) Pty Ltd, are engaged in work necessary for and relevant to the purpose of the receivership, such remuneration to be calculated at the standard rates of Bentleys Corporate Recovery (SA) Pty Ltd from time to time for work of that nature, together with all reasonable out of pocket expenses. 12 The grounds upon which the above orders are sought are set out in the affidavit of Mr James sworn on 2 May 2011: 17. It is not clear from the Trust Deed whether the defendant is still the trustee of the Trust now that it is in liquidation. The Trust Deed does not provide for the automatic termination of the trustee's appointment in the event of liquidation. Nor does the Trust Deed make clear who the trustee of the Trust should be, now that the defendant is in liquidation. Provision now needs to be made for the management of the Dairy Farm. 18. Given that the role of the First Appointor under the Trust Deed is fulfilled by Mr Nelson and Ms Nelson (who are beneficiaries of the Trust and shareholders and former directors of the defendant), in my opinion it is not in the best interests of creditors of the Trust and the defendant for Mr Nelson and Ms Nelson to appoint a new trustee. 19. I am also concerned that if the defendant remains the trustee of the Trust, and Mr Morgan and I are not appointed receivers and managers of the property of Trust: 19.1 We may have difficulty satisfying potential purchasers of the Trust property that the defendant has good title to Trust property and that Mr Morgan and myself as liquidators of the defendant are entitled to sell it and are able to pass title to the purchaser; and 19.2 Any sale of Trust property by the defendant may not extinguish any rights that the beneficiaries may presently have in the Trust property. 20. In the absence of an order appointing Mr Morgan and myself as joint and several receivers and managers of the Trust property, I am concerned that we will not be able to effectively carry out our professional duties by realising the assets of the Trust and recovering monies for the benefit of the creditors of the defendant. The defendant is entitled to a right of reimbursement against the assets of the Trust for all of its liabilities, which liabilities it incurred solely in its capacity as Trustee of the Trust, and for the sole benefit of the Trust. The assets of the Trust need to be sold to realise sufficient funds to discharge the liabilities of the defendant. 13 The evidence before me establishes that the plaintiff, the trustees of the bankrupt estates of Mr and Mrs Nelson, and Mr and Mrs Nelson themselves, have been given adequate and proper notice of this application. None of those parties appeared or sought leave to appear on the hearing of the application. The plaintiff does not oppose the application and the trustees of the bankrupt estates of Mr and Mrs Nelson support the appointment of the liquidators as joint and several receivers and managers of the property of the Nelson Family Trust. Mr and Mrs Nelson have not responded to the application. 14 I start with the orders relating to the appointment of receivers and managers of the property of the Nelson Family Trust. 15 The power of this Court to appoint a receiver is contained in s 57 of the Federal Court of Australia Act 1976 (Cth) ("Federal Court of Australia Act") (see also Order 26 of the Federal Court Rules) and is conditioned on whether it appears to the Court to be just or convenient to do so. The power is not confined to a closed class of circumstances. Ultimately, the general ground upon which a Court appoints a receiver is, as has been said in many cases, the protection or preservation of property for the benefit of persons who have an interest in it: see, for example, Martyniuk v King [2000] VSC 319 at [14] per Warren J; University of Western Australia v Gray (No 6) [2006] FCA 1825 at [71]-[72] per French J (as his Honour then was). 16 The liquidators of the defendant wish to preserve the property of the trust, which includes the ongoing management of the dairy farm and, at an appropriate time, to realise the assets of the trust so that the liabilities incurred by the defendant in the performance of the trust can be met, or met as far as possible. The evidence establishes that it is likely that all of the trust assets will have to be realised in this process. 17 In the present circumstances the liquidators are faced with three possible courses of action. First, they can proceed on the basis that the defendant remains the trustee of the trust and they can continue to rely on the powers in the trust deed or the powers they have under the Corporations Act or both. The difficulty with this course of action is that there is uncertainty about the defendant's position as trustee under the trust deed. Although it may be that the liquidators have sufficient powers under the Corporations Act (Apostolou (as trustee of the Vasiliou Family Trust) v VA Corp Aust Pty Ltd (2010) 77 ACSR 84) it has to be said that the position is not entirely clear. Furthermore, there is sufficient doubt attending this course of action to suggest that potential purchasers may be dissuaded from dealing in the assets (see Bastion v Gideon Investments Pty Ltd (in liq) (2000) 35 ACSR 466 ("Bastion") at 479 [65] per Austin J). 18 The second course of action which the liquidators may adopt is to exercise the power of appointment in clauses 7(2) and 7(6) of the trust deed to appoint a new trustee. There are a number of difficulties with this course of action. First, it seems that the new trustee would be appointed to do no more than realise the assets and manage and preserve them in the interim. This would involve additional time and costs in circumstances where the liquidators have already expended time and money in taking steps to manage and preserve the assets with a view to their ultimate realisation. Secondly, there is no obvious person or entity who could be appointed as the new trustee of the trust. The trustees of the bankrupt estates of Mr and Mrs Nelson do not suggest that they should be appointed and they have indicated that they agree with the proposal that the liquidators be appointed joint and several receivers and managers of the property of the Nelson Family Trust. Furthermore, even if Mr and Mrs Nelson could as a matter of law be appointed that would hardly seem appropriate in the circumstances. 19 The third course of action is that the liquidators be appointed as joint and several receivers and managers of the property of the Nelson Family Trust and it seems to me that that is the appropriate course in the circumstances. It is just and convenient that such an order be made because it will ensure the protection of the trust property. There is nothing to suggest that there is any potential for conflict if the liquidators are also appointed receivers and managers of the trust property (Bastion at 479-480 [68]). 20 I am disposed to make the orders sought in paragraphs two to eight of the draft minutes of order but before doing so I wish to hear from counsel as to whether there are other orders (reporting to the Court, provision of security or undertaking) which should be made. 21 I turn now to deal with the order sought in paragraph one. I have some difficulties with the order. Initially I was concerned about the power to make the order under s 479(3) of the Corporations Act. However, on reviewing Re G B Nathan & Co Pty Ltd (1991) 5 ACSR 673 and Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 I think there is power to make the order. Nevertheless, the order is unlimited as to time and the effect of the order is not clear. In those circumstances I am not prepared to make the order. 22 There may be an order more directly related to what the liquidators can and should do which is appropriate. It may be appropriate to make an order about whether the liquidators should cause the defendant to take any action under the trust deed and whether they should exercise the power of appointment apparently vested in them. I will give counsel for the liquidators the opportunity to make further submissions if so requested. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.