Shannon & Anor v JMA Accounting P/L

Hollingworth & Spencer for the respondent the Trustee of the Harland Investment Trust

Grants Lawyers for the respondents Havendeen Investments Pty Ltd, CD & PM Williams, The Deep Freeze Pty Ltd, Queensland Bricklaying Pty Ltd, Rajput & Co Pty Ltd, and David Pedersen

[1] WILSON J: This is an application by Glenn Michael Shannon and Jonathan Paul McLeod as joint and several liquidators of JMA Accounting Pty Ltd (in liq) ("JMA") and Entrepreneur Services Pty Ltd (in liq) ("ES") for directions pursuant to ss 96 and 97 of the Trusts Act 1973.

[2] Trevor John Schmierer and Jonathan Paul McLeod were the original liquidators of the companies. By order of the Supreme Court of New South Wales made on 9 May 2005 Mr Schmierer was removed as a liquidator of the companies, and Mr Shannon was appointed in his place. Accordingly, Mr Shannon should be substituted for Mr Schmierer as one of the applicants in this proceeding.

[3] JMA and ES carried on the business of accountancy, doing predominantly tax agency work. The businesses were known as "JMA Accounting - Sunnybank Hills" (operated by JMA) and "JMA Accounting - Brisbane City" (operated by ES). Messrs MB and AJ Beekmans were the directors of both companies. The companies went into voluntary administration on 18 August 2004, and on 14 September 2004 their respective creditors resolved to wind them up. Westpac Banking Corporation held fixed and floating charges over the assets and undertakings of both companies, which crystallised upon their winding up. There are no funds available for unsecured creditors of either company.

[4] When the companies were placed into voluntary administration employees of the administrators attended at their respective premises, which they found empty save for some minor items of little value. Despite their promises, the directors have not provided the liquidators with information about the whereabouts of plant, equipment, client files, debtors or work in progress records. JMA and ES maintained trust accounts with the National Australia Bank into which the Australian Taxation Office deposited clients' tax refunds. The administrators had "stop debits" placed on both accounts, opened accounts with Australia and New Zealand Banking Group, and arranged for the balance of moneys in the NAB accounts to be forwarded daily to the new ANZ accounts.

[5] On the appointment of the administrators there was a credit balance of $7,892-52 in the JMA account. Shortly thereafter an amount of $33,000-00 was deposited into JMA's account with NAB, the administrators receiving a notice from Blue Star Accounting Pty Ltd (which purported to have taken over the businesses) that it was a repayment of an amount debited by mistake. In September 2004 a further $7,438-19 was deposited by internet banking, one of the directors saying it was repayment of an amount overpaid to a client.

[6] Moneys continued to be received from the ATO into the JMA account with NAB, which were then paid into the ANZ account. The liquidators made some payments from the ANZ account to clients in respect of whom money was apparently received, but ceased doing so on legal advice. The liquidators ascertained that there had been some mixing of clients' moneys. They were faced with an absence of information as to the entitlements to money which continued to come into the account.

[7] There was a nil balance in ES's account with NAB when the administrators were appointed. An amount of $8,028-66 had been withdrawn the day before the administration. A number of substantial deposits were made into the account by the ATO which subsequently sought their repayment on the basis that they had been incorrectly deposited.

[8] Whilst some of the money in the ANZ accounts could be identified as having been paid in respect of ascertainable entities, there was a substantial amount which could not be accounted for amongst the clients. It was apparent that JMA and ES had been using funds held for clients to discharge debts owed to the companies by other clients; that is, their fees for preparing tax returns of one client had been taken out of moneys held on trust for other clients. But the costs of further investigating the entitlements and cross-entitlements to the sums in question were likely to absorb the funds available to those making claims.

[9] As the companies were prima facie trustees of the moneys in the trust accounts, the liquidators made an ex parte application for directions pursuant to s 97 of the Trusts Act, which came before Muir J on 18 January 2005. His Honour directed -

"1. That the liquidators of JMA Accounting Pty Ltd (in liq) advertise pursuant to the provisions of s. 67 of the Trusts Act for the purpose of identifying all persons who claim to be entitled to funds whether as creditor or beneficiary or otherwise which are held by the liquidators and which have been received by JMA Accounting Pty Ltd (in liq) from the Commissioner of Taxation as tax refunds.

2. That the liquidators of Entrepreneur Services Pty Ltd (in liq) advertise pursuant to the provisions of s. 67 of the Trust Act for the purpose of identifying all persons who claim to be entitled to funds whether as creditor or beneficiary or otherwise which are held by the liquidators and which have been received by Entrepreneur Services Pty Ltd (in liq) from the Commissioner of Taxation as tax refunds.

3. That the liquidators take such other steps as are reasonable in the circumstances to ascertain the identity of persons or entities in respect of whom money may have been deposited or is deposited into the account maintained at the National Australia Bank by JMA Accounting Pty Ltd (in liq) and Entrepreneur Services Pty Ltd (in liq).

4. That the liquidators compile a list of all persons who claim to be entitled to funds whether as creditor or beneficiary or otherwise of JMA Accounting Pty Ltd (in liq) or of Entrepreneur Services Pty ltd (in liq) no earlier than six weeks after the date fixed by the notices of advertising made pursuant to directions 1 and 2 hereof.

5. That subsequent to the compilation of the lists referred to in direction 4 hereof, the liquidators send a circular to all persons claiming to be entitled whether as creditor or beneficiary or otherwise to the funds referred to in direction 1 and 2 hereof seeking their views on the disposal of funds collected in the liquidation within a period of 14 days.

6. That after the expiration of 14 days from the date of the sending of the last of the letters referred to in paragraph 5 hereof the liquidators make a further application to the Court for the final disposal of funds collected and advise any person who had claimed to be interested in the funds either as creditor or beneficiary or otherwise of:

(a) the intention of the making of the application;

(b) the date of the hearing of the application;

(c) advise that any persons who desires to be heard on the application should serve on the liquidator all material on which they rely for the purposes of the further hearing of this matter at least three clear days prior to the date on which the matter is to be further heard.

7. That the further hearing of this application be heard on the date on which the matter is re-listed in accordance with order 6 hereof.

8. That the liquidators be entitled to use the funds collected in the liquidation of JMA Accounting Pty Ltd (in liq) and of Entrepreneur Services Pty Ltd (in liq) from for the purposes of:-

(a) reimbursing themselves in relation to the cost of this application and the costs of complying with all and or any directions made on this application;

(b) paying for the liquidator's professional time, the professional time of his staff, servants and agents, and his outlays for investigating the matters set out above, at the rates applicable by Knights and Insolvency Administration which are set out in Exhibit JPM2 of the Affidavit of Jonathon McLeod sworn on 17 December 2004."

[10] Having complied with directions 1 - 5, the liquidators now come before the Court on the further application foreshadowed in direction 6.

[11] Between 18 August 2004 and 1 June 2005 moneys totalling $229,418-24 were paid into the JMA trust account; payments totalling $151,455-18 were made; leaving a cash balance as at 1 June 2005 of $77,963-06. The payments appear to include $76,706-46 for fees and expenses. There is also an anticipated GST refund of $3,710-67 to be received into that account, which will increase the cash balance of the JMA trust account to $81,673-73. (See pp 397-399 of exhibit JPM-2 to the affidavit of McLeod filed 8 June 2005.)

[12] Over the same period moneys totalling $55,786-74 were paid into the ES trust account; payments totalling $22,914-85 were made; leaving a cash balance of $32,871-89. The payments appear to include $22,416-44 for fees and expenses. There is also an anticipated GST refund of $1,137-19 to be received into that account, which will increase the cash balance of the ES trust account to $34,009-08. (See p 400 of exhibit JPM-2 to the affidavit of McLeod filed 8 June 2005.)

[13] Moneys have been deposited into the accounts which so far no one has claimed - amounts totalling $8,317-79 in the JMA account and $297-00 in the ES account.

[14] The liquidators have separated the responses of clients to the circulars into 3 categories -

(i) clients claiming refunds for returns prepared by JMA - total $18,863-80;

(ii) clients claiming funds which they allege were deposited in error by ATO to JMA - total $124,037-70;

(iii) clients claiming funds deposited in error by ATO to ES - total $49,122-00.

[15] The claims on moneys in the JMA account total $142,901-50 and those on moneys in the ES account total $49,122-00.

[16] There is no basis to suggest that the funds deposited into JMA and ES's respective trust accounts should be regarded as constituting a single pooled fund.

[17] The liquidators accept that the claims in category (i) are properly made. The claimants in category (ii) contend that JMA was not authorised to receive the moneys into its trust account, and that the ATO erred in making the payments. (JMA may have authorised the ATO to do so, but without instructions from the clients.) The liquidators are proposing to pay the moneys in the JMA trust account minus their fees and expenses to the claimants in categories (i) and (ii) on a pari passu basis. There is only one party alleging that the ATO wrongly deposited funds in the ES trust account - Harland Investment Trust, and the liquidators propose paying the moneys in the ES trust account, minus their fees and expenses, to it.

[18] It is the issue of the liquidators' fees and expenses (including legal costs) which is the nub of the dispute with the clients and in relation to which the liquidators seek directions. The liquidators maintain that the amounts they are claiming have been calculated on the scale approved by Muir J, that they relate only to the administration of these trust accounts and do not include costs in managing the affairs of the companies in relation to secured and unsecured creditors. According to Mr McLeod, the fees and expenses claimed for administering the two trusts are as follows -

Professional fees and costs to 31 May 2005 $ 55,474-94

Estimated future costs and expenses (including legal fees) $ 31,000-00

(See para 20 of the affidavit of McLeod filed 8 June 2005.) As I understand the evidence, all but the $31,000-00 estimated future costs and expenses have already been withdrawn from the trust accounts. I have been unable to reconcile these figures with those referred to in paras 11 and 12 of these reasons for judgment. The liquidators propose deducting the future costs and expenses on a 50/50 basis from the 2 trust accounts. If they do this, then the JMA claimants can expect to receive 46.3 cents in the dollar of their claims, and the ES claimant (the Harland Investment Trust) can expect to receive 37.7 cents in the dollar.

[19] Both the trustee of the Harland Investment Trust and those claimants of JMA who appeared on the hearing of the application claim to have ascertained that their tax refunds had been paid into the companies' trust accounts by their own inquiries of the ATO, and not as a result of any circular from the liquidators or any advertisement placed by them. They all seek payment of their claims without any deduction for the liquidators' fees and expenses. They all challenge the amounts claimed by the liquidators for fees and expenses, and, if some payment is to be allowed, contend that there should be some independent review of the quantum.

[20] The liquidators were appointed by the creditors, and so are not acting as officers of the Court: Clutha Ltd (in liq) v Millar (No 5) [2002] NSWSC 833; (2002) 43 ACSR 295. Their remuneration for acting in the liquidation should have been fixed by the committee of inspection if there is one, or otherwise by the creditors, subject to review by the Court: Corporations Act 2001 ss 499(3), 504.

[21] The trustees of the trust funds are the companies which are now in liquidation. The liquidators have been doing work in the administration of those trusts, and Muir J directed that they may use trust funds to meet their fees and expenses. There are no reasons available for His Honour's decision, but it seems to have been an exercise of an inherent power of the Court to allow remuneration in connection with the administration of trust funds: see Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] 1 Ch 32 at 50 - 51; Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; [2003] 204 ALR 353 at 411 et seq; Re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297.

[22] Although His Honour's direction should probably be classified as advice to persons involved in the administration of the trusts rather than as a binding order in the nature of a judgment (see Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 676 - 680 in relation to directions to a liquidator) and so as subject to ongoing review, in my respectful opinion there is no reason in principle to depart from it. In so far as the fees and expenses claimed relate solely to work in the administration of the trusts, the Court may allow the liquidators recourse to the trust funds. In Re GB Nathan & Co Pty Ltd (in liq) McLelland J said at 689 -

"Where work done by a liquidator in relation to trust assets may properly be considered as having been done for the purpose of 'winding up the affairs of the company', it is I think consistent with general principle that any remuneration and expenses attributable to that work be paid out of the (non-trust) property of the company in accordance with s 556 of the Corporations Law, to the extent that there is such property available. To the extent that there is not sufficient available property, bearing in mind that generally speaking 'a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property' (s 545) it would normally be appropriate to apply the principle referred to by Deputy Judge Nugee QC in the passage quoted earlier from Re Berkeley Applegate (Investment Consultants) Ltd (in liq) and make allowance to the liquidator out of the trust assets."

[23] In Re French Caledonia Travel Service Pty Ltd (in liq) Campbell J said at 413 - 414 -

"To the extent that the liquidator does work which would entitle him both to remuneration as liquidator, and also to payment in accordance with the principle recognised in Berkeley Applegate, there is a situation where two funds - the distributable property of the company, and the trust assets - are each liable to bear that expense. If two funds are both liable to meet an expense, principle ordinarily requires that there be contribution between the two funds in meeting that expense. As this is a case where there are no assets of the company available to meet the liquidator's general expenses it is not necessary to decide whether, if there were both trust assets, and other assets of the company, available to meet expenses of the liquidator which fell into this 'overlap' area, there is any reason to deny the application of contribution in the case of the liquidator of a corporate trustee............Whether or not contribution is available in cases where there are both trust assets and non-trust assets available to meet a liquidator's expense in the 'overlap' area, the equitable lien recognised in Berkeley Applegate means that all costs of the liquidator attributable to the administration of the trust assets can be paid from the trust assets.....

However in no circumstances will the liquidator be able to recover from the trust assets the expense of doing any work which could not be fairly categorised as administering the trusts. Further, as Finkelstein J noted in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377 (at 586) if a liquidator is administering, through the company of which he is liquidator, more than one trust:

'... the liquidator is not entitled to charge the beneficiaries of one trust with the costs and expenses incurred in relation to the other trust. Accordingly, it will be necessary for the liquidator to estimate the costs and expenses incurred insofar as they relate to each trust and charge those costs to the trust on whose behalf the work was performed. If that estimate is not possible then a pari passu distribution of the costs and expenses will be in order as was envisaged by King CJ in Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99.....'"

[24] Here there are no funds available in the general liquidations. As I understand the liquidators' position, they intend paying the moneys in the trust accounts to the claimants subject only to the deduction of their fees and expenses. In principle, there is no reason why they should not be authorised to do so. The extent to which, in principle, they may deduct such fees and expenses is clearly stated in the authorities I have cited.

[25] In these circumstances, I do not find it necessary to rule upon the arguments put on behalf of the respondents that the liquidators should prima facie pay them the full amounts of their claims on the footing that as officers of the Court they should not hold on to moneys paid by mistake: Ex parte James (1874) LR 9 Ch App 609; Hypec Electronics Pty Ltd (in liq) v Mead [2003] NSWSC 934; (2003) 202 ALR 688 at 716 et seq. It may be arguable that that principle does not apply to liquidators appointed by creditors rather than by the Court, but it is not necessary for me to determine this.

[26] There is no reason to interfere with Muir J's direction 8(b) in so far as it approves rates at which the liquidators may claim fees. However, the quantum of fees and expenses claimed seems very high, and the respondents have, in a general way, challenged the items to which the rates have been applied. I cannot determine the propriety of the competing claims on this application. As the authority for the deduction of fees and expenses is a direction of the Court, the Court can exercise an ongoing supervisory power in relation to such fees and expenses. If necessary it may refer the detail of the remuneration to the Registrar for examination and assessment of what is proper and reasonable (on the understanding that the Registrar applies the scale approved by Muir J in making his assessment). See generally Sutherland at 302.

[27] I shall hear the parties on the form of directions appropriate in the light of these conclusions.