Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd

INTRODUCTION 1 The first plaintiff, Steven John Priest, was appointed as the liquidator of the second plaintiff, Brikar Nominees Pty Ltd (in liquidation) on 15 February 2023 following a general meeting of the members of Brikar under s 491 of the Corporations Act 2001(Cth). Brian Geoffrey Webb and Karen Ruth Webb are the Directors and shareholders of Brikar. Brikar a carried on business and held property solely in its capacity as Trustee of the BG & KR Webb Family Trust, which was registered on 24 June 2009. The BG & KR Webb Family Trust Discretionary Trust Deed dated 24 June 2009 provides that Brikar is the Trustee. The primary beneficiaries of the Trust are the Directors, their children and the remoter issue of each of them. 2 The plaintiffs seek an order under s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS), being Sch 2 to the Corporations Act, that Mr Priest was justified and acting honestly and reasonably in proceeding on the basis that Brikar held property and carried on business solely in its capacity as trustee of the Trust. 3 The plaintiffs next seek an order that Mr Priest be appointed pursuant to s 57(1) of the Federal Court of Australia Act 1976 (Cth) (FCA Act), nunc pro tunc, as receiver and manager over the business and assets of the Trust and related orders in relation to his powers as a receiver. 4 The plaintiffs next seek an order under s 1318(2) of the Corporations Act that Mr Priest be relived from any liability for dealing with the Trust property between the date of his appointment as liquidator of Brikar and the date of these Court orders. 5 Finally, the plaintiffs also seek that the remuneration, costs and disbursements (including legal costs) incurred by Mr Priest in his capacity as liquidator and receiver, including the costs of the application, be paid in priority from the property of the Trust (including any proceeds from the sale of the business of the Trust) on an indemnity basis. 6 The principal circumstances giving rise to this application is that by operation of an ipso facto clause in the Trust Deed, Brikar was rendered a bare trustee when it entered liquidation. As a consequence, Mr Priest in his capacity as liquidator does not have a power to sell the assets of the Trust. This is an impediment to Mr Priest performing his function as liquidator. To the extent that Mr Priest has already dealt with some limited assets of the Trust, he seeks relief from liability for doing so. 7 In these reasons, unless otherwise specified, references to Mr Priest are to Mr Priest in his capacity as liquidator of Brikar and references to Brikar are references to Brikar in its capacity as trustee of the Trust. 8 The creditors of Brikar, beneficiaries of the Trust, and the Australian Securities and Investments Commission (ASIC) have been notified of this application and the relief the plaintiffs seek. Mr Priest has not received notice from the creditors, beneficiaries, ASIC or anyone else seeking to oppose the relief sought in the originating process. When the matter came on for hearing there was no appearance by any person seeking leave to appear to oppose the application. Nevertheless, the orders sought by the plaintiffs provide that any person capable of demonstrating sufficient interest in varying any orders have liberty to apply to the Court on 48 hours' written notice to the plaintiffs. 9 At the hearing of this application, Ms Ng, of counsel, appeared for the plaintiffs and relied on comprehensive written submissions which were provided in advance of the oral hearing.

EVIDENCE 10 In support of the relief sought in the originating process, Mr Priest has sworn an affidavit in support on 17 July 2023 together with annexures SJP-1 to SJP-30. There is also an affidavit of Alison Rebecca Malek, the solicitor for Mr Priest, sworn 2 August 2023, regarding notice to ASIC (pursuant to r 2.8(3) of the Federal Court (Corporations) Rules 2000 (Cth)) and whether any notice opposing the application has been received since the application was filed.

BACKGROUND 11 A detailed overview of Brikar's business dealings, financial records, bank facilities, creditors, assets and reasons for its insolvency are set out in the plaintiffs' submissions at paragraphs [8] to [35] with cross-references to the evidence relied on. For the purpose of these reasons, it is sufficient to include the following by way of background. 12 As mentioned, Brikar was incorporated on 24 June 2009. Its principal place of business was also the residential address of the Directors. 13 Since July 2009, Brikar, in its capacity as trustee of the Trust, carried on a residential and commercial cleaning Business under the trading names "Delited Cleaning Services" and "Frank's Carpet Cleaning" in the Albury and Wodonga region. 14 Mr Priest's evidence is that Brikar operated the Business in its capacity as Trustee and did not operate in its own right. 15 Mr Priest deposes to being informed by Mr Webb that the Business continues to trade under the partnership of the Directors being the BG & KR Webb Partnership (ABN 33 232 530 982) and that 11 employees previously employed by Brikar transferred to the employment of the Webb Partnership continuing their roles in the Business. Mr Priest is presently investigating the transfer of the Business to the Webb Partnership. Mr Priest deposes that before his appointment, Brikar employed approximately 20 to 30 employees who were terminated by the Directors approximately one week prior to Mr Priest's appointment as liquidator on 15 February 2023 (Appointment Date). The Business ceased trading when Mr Priest was appointed. 16 The financial report for the Trust for the financial year ending 30 June 2020 is in the evidence before me. Mr Priest has requested but not yet obtained the financial reports for the years prior to 2018. He gives evidence that Brikar has not filed income tax returns for the financial years ending 30 June 2021, 2022 or 2023. 17 The financial report is consistent with the conclusion that Brikar operated solely as Trustee and in this capacity operated the Business. That conclusion is reinforced by the Trust's income tax return for the financial year ending 30 June 2020, which records its main business activity as "Cleaning Service". It also recorded as "Business and professional items" of the Trust, "Total salary and wages expenses" of $849,881 and "Trade debtors" of $368,978. 18 Mr Priest's investigations reveal that Brikar did not hold any bank facilities in its own name but did hold a bank account in its capacity as Trustee with National Australia Bank (NAB). All trading income and expenses of the Business were transacted through this account. 19 Brikar, in its capacity as Trustee, also held a Bartercard Credit Account, in the name of "Delited Cleaning Services" which was used for business expenses. 20 Mr Priest's investigations reveal that Brikar owed debts to both secured and unsecured creditors. The claims of those creditors are detailed in the evidence relied on for the purpose of this application. Mr Priest estimates that the total debt owing to secured creditors of Brikar is approximately $172,588.55. Mr Priest identifies that some of the employees of the Trust are priority creditors with claims in relation to superannuation and in relation to leave entitlements. The employee creditors' claims total approximately $60,046. 21 Mr Priest gives evidence based on Brikar's books and records that there is an outstanding superannuation guarantee charge owing to the Australian Taxation Office (ATO) in the sum of $107,268.11. Mr Priest estimates that nominal interest will accrue on this amount in the sum of approximately $10,566.87, together with an administrative component of approximately $3,760, giving an estimated total superannuation charge owing to the ATO of $121,594.98. Accordingly, the priority creditors' claims total approximately $181,641.40. 22 Although the Mr Priest's investigations are ongoing, at this stage he has identified the following unsecured creditors: (a) the ATO; (b) Victorian WorkCover Authority trading as Worksafe Victoria; (c) Secure Funding; and (d) State Revenue Office of Victoria (OSRV). 23 The ATO has lodged a proof of debt for $387,880.80 for a "Running Balance Account deficit debt" in respect of BAS amounts as at 15 February 2023. 24 WorkCover has lodged a proof of debt for $18,550.32 in respect of WorkCover insurance fees and late payment penalties as at 9 March 2023. WorkCover was one of the Business expenses recorded in the Profit and Loss statement for the Trust in its financial report for the year ended 30 June 2020. 25 Mr Priest has not received proofs of debt from Secure Funding (for the unsecured portion of its debt) but estimates that the unsecured portion owing to Secure Funding is $20,000. Mr Priest estimates the debt owing to OSRV is $29,312.60. 26 According to searches caused to be undertaken by Mr Priest, Brikar holds no real or personal property in Victoria or New South Wales in its own right. 27 Mr Priest deposes, based on the books and records of Brikar, that as at the Appointment Date the assets of the Trust had a book value of approximately $762,088.29 in total. 28 Since the Appointment Date and as at 11 May 2023, Mr Priest has recovered $115,257 from debtors and expects to potentially collect a further $50,000 before the end of July 2023, giving a total estimated recovery from debtors of $165,000. Mr Priest expects a small recovery in respect of the loan to the Webb Partnership, subject to Mr and Ms Webb substantiating payments said to have been made to reduce the loan. Finally, Mr Priest opines that the Bartercard Credit Account may have a nominal realisable value of about $10,000 if anything. 29 The Webbs informed Mr Priest that the failure of Brikar was principally the result of the following: (a) tough market conditions due to the COVID-19 pandemic; (b) insufficient sales volumes to meet liabilities including tax liabilities; (c) competition from larger cleaning businesses; (d) increases in employee award wages impacting profit margins; and (e) significant health issues suffered by each of them. 30 Mr Priest's preliminary view is that Brikar was insolvent at least two years prior to the Appointment Date, that is from 15 February 2021. Mr Priest's conclusion as to the timing of insolvency is based on the following: (a) As at 4 January 2021, Brikar's outstanding Running Balance Account with the ATO was $395,235.74 which by June 2022 had increased to $435,148.48. Brikar had not lodged its BAS for approximately 2.5 years and had the lodgements been up to date, the debt position for GST and PAYG would have, in Mr Priest's view been significantly worse; (b) Brikar could not collect its debts in a reasonable and timely manner and consistently had invoices outstanding for well over 90 days, affecting its cash position; and (c) Brikar's bank account during 2022 never held sufficient funds to meet the debts due to the ATO and Brikar's day to day operating costs.

THE TRUST DEED 31 Clause 17.2 of the Trust Deed provides that the office of a Trustee will be vacated if that Trustee is a corporation and an order is made, or a resolution is passed, which has the effect of winding up the corporation. 32 Mr Priest is not aware of any replacement trustee being appointed and has been informed by the Webbs that they have not appointed, and do not intend to appoint, a new trustee to the Trust. 33 Clause 13 of the Trust Deed confers on the trustee of the Trust broad discretionary powers to deal with and exercise powers over the property of the Trust as if it were the sole, absolute and beneficial owner. As Birkar is in liquidation, Brikar (and therefore Mr Priest) is unable to exercise any of the powers conferred by the Trust Deed, because Brikar has been reduced in status to a bare trustee. 34 Clause 14.2 of the Trust Deed provides that a trustee acting in good faith will be entitled to be indemnified out of the Trust Fund in respect of all liabilities incurred in executing any powers, duties, authorities or discretions vested in the Trustee by the Trust Deed and all actions, proceedings, costs, claims and demands in relation to any matter or thing done or omitted to be done concerning the Trust Fund.

Relief under s 90-15 of the IPS 35 The Liquidator seeks an order pursuant to s 90-15 of the IPS confirming that he is justified and acting reasonably in proceeding on the basis that: (a) Brikar carried on business solely in its capacity as trustee of the Trust; (b) all of the assets of Brikar are properly characterised as property held by it as trustee of the Trust; and (c) the creditors of Brikar are creditors whose debts have been incurred by Brikar in its capacity as trustee of the Trust. 36 Section 90-15 of the IPS relevantly provides: 90‑15 Court may make orders in relation to external administration Court may make orders (1) The Court may make such orders as it thinks fit in relation to the external administration of a company. … Examples of orders that may be made (3) Without limiting subsection (1), those orders may include any one or more of the following: (a) an order determining any question arising in the external administration of the company; (b) an order that a person cease to be the external administrator of the company; (c) an order that another registered liquidator be appointed as the external administrator of the company; (d) an order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company; (e) an order in relation to any loss that the company has sustained because of a breach of duty by the external administrator; (f) an order in relation to remuneration, including an order requiring a person to repay to a company, or the creditors of a company, remuneration paid to the person as external administrator of the company. … 37 The Court may exercise the power under s 90-15 of the IPS on its own initiative or on an application under s 90-20: s 90-15(2). The Court has a broad discretion, which must be exercised judicially, in all of the relevant circumstances: Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd (in liq) (Final Orders) [2023] FCAFC 119 at [63]. 38 Pursuant to r 2.8 of the Federal Court (Corporations) Rules 2000 (Cth), an application under s 90-20 of the IPS for relief under s 90-15 of the IPS must be notified to ASIC.

Appointment as receiver 39 Pursuant to s 57(1) of the FCA Act, the Court may, at any stage of the proceeding, appoint a receiver on such terms and conditions as it thinks fit if it is just and convenient to do so. 40 The settled principles are collected and considered by Moshinsky J in Re Cremin, Brimson Pty Ltd (in liquidation) [2019] FCA 1023; 136 ACSR 649 at [48] to [51]. It is not necessary to repeat the principles here. I adopt and apply those principles.

Section 1318 of the Corporations Act 41 Mr Priest seeks an order under s 1318(2) of the Corporations Act excusing him from liability for any breaches, failure or admissions in dealing with the property of the trust, including the sale of the plant and equipment to the Webbs in April 2023 in his capacity as liquidator. 42 Section 1318(2) of the Corporations Act provides: Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought. 43 Mr Priest, in his capacity as liquidator, has standing under s 1318(4)(d) to apply for relief under s 1318(2). 44 The Court has the power pursuant to s 1318(2) of the Corporations Act to excuse a liquidator who inadvertently sells trust assets when he or she does not have the power to do so: Re Amirbeaggi, in the matter of Simpkiss Pty Ltd (in liq) [2018] FCA 2121 at [46] and the authorities cited therein. To obtain relief under s 1318(2) of the Corporations Act, a liquidator must show that: (a) he or she has reason to apprehend that a claim would, or might, be made against him or her; (b) such a claim is in respect of any negligence, default, breach of trust or breach of duty in his or her capacity as liquidator; and (c) he or she acted honestly. : Simpkiss at [47].

CONSIDERATION 45 Based on the investigations undertaken by Mr Priest, including his review of the company records and the information provided by the Webbs, and where there is no evidence to the contrary, I am satisfied that Brikar held its assets and operated its Business in its capacity as Trustee of the Trust, and not in its own right. I will make an order under s 90-15 of the IPS as sought by the plaintiffs. In doing so, I note that ASIC has been notified of the application. 46 I next turn to the application by Mr Priest for an order that pursuant to s 57(1) of the FCA Act, to be appointed, nunc pro tunc, without security as receiver and manager over the business and assets of the Trust. 47 I am satisfied it is appropriate to make orders as sought for Mr Priest's appointment as Receiver and to confirm the scope of his powers in that capacity. If Mr Priest is not appointed as Receiver, he will be frustrated in the performance of his statutory functions as liquidator of Brikar. The inevitable consequence of this would be to diminish any potential return to Brikar's creditors. 48 I next turn to consider the application for relief under s 1318(2). 49 In the present circumstances I am satisfied that the plaintiffs have demonstrated that there is an objective basis for believing that a claim might be made against Mr Priest: see Simpkiss at [48]. 50 If the order sought under s 1318 is not made, Mr Priest may be liable for breaches of trust in respect of actions taken since the Appointment Date. Relevantly, the conduct of Mr Priest, which may give rise to him being liable is as follows. Mr Priest became aware of the need for him to make this application in order to authorise his dealings with the assets of the Trust on or about 2 March 2023. He then instructed his solicitors to prepare an application. He says that the application took some time to prepare, and, in the interim, Mr Priest had already taken steps to sell some minor items of plant and equipment to the Webbs. Mr Priest in his evidence says that he did not appreciate that he did not have the power to deal with Trust assets before his application to be appointed as Receiver was determined. That was because he erroneously believed that he was entitled to sell the plant and equipment for the benefit of creditors in his capacity as liquidator. Information provided by Mr Priest in his report to creditors about this application is consistent with him not having appreciated the relevant limitation on his power as a liquidator in the circumstance where the company was a bare trustee. He now recognises that this was an error on his part. He acknowledges that the sale in April 2023 was completed when Brikar was a bare trustee and had no power of sale. 51 I am satisfied that Mr Priest's mistake was honestly made and his conduct was not tainted by any dishonesty on his part. 52 Although it is unlikely that the Webbs as beneficiaries of the Trust will pursue a claim in relation to the April 2023 sale it cannot be excluded as a future possibility. For example, such a claim may be made in response to any future proceeding instituted Mr Priest against the Webbs in relation to the transfer of the Business to the Webb Partnership for nil consideration or in respect of a claim for insolvent trading by them as directors of Brikar. In the circumstances, I am satisfied that there is an objective basis that there is a real, rather than a fanciful or remote, possibility that a claim might be made against Mr Priest for breach of trust in relation to his conduct since the Appointment Date. 53 Finally, I turn to the orders sought in respect of Mr Priest's remuneration. 54 Mr Priest has provided detailed evidence in respect of the tasks he has undertaken as liquidator and the tasks he anticipates being required to complete the liquidation. Relevantly, this includes investigation of potential insolvent trading claims, including preference claims and uncommercial or voidable transactions against the Directors and third parties. 55 Approval of the quantum of Mr Priest's remuneration by creditors is pending. The ATO has indicated that it approves the proposed remuneration as detailed in the Report to Creditors dated 11 May 2023. 56 Mr Priest is unable to draw remuneration from the property of the Trust without an order of the Court. He has in the interest of efficiency and with a view to minimising costs, sought an order permitting him to draw remuneration and expenses from the property of the Trust once his remuneration is approved by creditors under s 60-15 of the IPS in the ordinary course. 57 On this basis, and for these reasons, I am satisfied that it is appropriate to make the order sought by the plaintiffs in relation to the remuneration and expenses.

CONCLUSION 58 For these reasons, I made orders substantially in the form proposed by the plaintiffs during the hearing. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.