TRUSTS - Whether liquidator entitled to treat assets as trust assets - Whether distribution of property to be governed by parts 5.5 and 5.6 of the Corporations Act 2001 (Cth) - Commonwealth v Byrnes

COMPANIES - Winding Up - Application for orders under section 90-15 of Schedule 2 - Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) - Whether liquidator entitled to relief from liability under section 1318 of the Corporations Act 2001 (Cth) or section 67 of the Trustee Act 1958 (Vic) - Whether liquidator entitled to be paid their remuneration, costs and expenses under section 556(1) of the Corporations Act 2001 (Cth).

1 The plaintiff (Liquidator) is the liquidator of St. George's Development Company Pty Ltd (in liquidation) (Company). He seeks orders under the Corporations Act 2001 (Cth) (Act) and/or the Trustee Act 1958 (Vic) (Trustee Act) for the purpose of dealing with the assets of the Company, including to enable the winding up of the Company to be completed.

2 The Company was registered on 10 February 2011. Its sole director, secretary and member is Dr Maher Luka.

3 The Liquidator has been informed by Dr Luka, his advisors (solicitor and accountant); and the Company's solicitor that the Company has operated for the sole purpose of acting as trustee of the St. George's Development Unit Trust (SGD Trust). It did not operate, hold any assets, or incur any liabilities in any other capacity. This conclusion is also consistent with other objective evidence.

4 The SGD Trust was established for the purpose of purchasing and developing a block of land in Bulleen (Property). That Property was purchased, but, having remained undeveloped, was subsequently sold during the financial year 30 June 2017.

5 The Liquidator was appointed liquidator of the Company on 8 June 2018.

6 As at 8 June 2018 the Company had assets comprising $1,001,326.69 held in a term deposit account with Bendigo Bank in the name of 'Ferdinand Zito & Associates Pty Ltd (FZA) ATF the Ferdinand Zito & Associates Trust St Georges Development Company P/L' (Funds). These Funds were funds owed to the trustee of the SGD Trust representing the trust's share in the proceeds of the sale of the Property. Additionally there was $409.40 in a bank account held with Westpac.

7 In terms of liabilities, there were potential unsecured debt claims amounting to approximately $1,629,510.62, representing funds contributed to the Company by related parties. There was also a contingent liability relating to an indemnity claim in the amount of $5,000,000.00 by the Victorian Managed Insurance Authority (VMIA).

8 By letter of 8 June 2018, the Liquidator wrote to Mr Zito of FZA requesting the transfer of the Funds to the Company's liquidation account. The Liquidator also had further communications with Mr Zito between 8 June 2018 and 18 June 2018.

9 The Liquidator subsequently gained possession of the relevant trust deed of the SGD Trust on 21 June 2018 (Trust Deed).

10 In the Trust Deed, the Company is named as the trustee of the SGD Trust while the following two entities are named as unit holders:

(a) Luka Medical Centre Pty Ltd (ACN 075 686 403) as the trustee for Luka Family Trust; and

(b) Eliana Construction & Developing Group Pty Ltd (ACN 132 817 362) (this entity is now in liquidation).

11 Clause 79 provides for the trustee's right of indemnity against liabilities incurred in relation to the trust.

12 Clause 92 of the Trust Deed provides for the automatic removal of the trustee of the SGD Trust if the trustee enters liquidation. The Liquidator is not aware of any replacement trustee having been appointed. He also says that, even if there was a mechanism for appointing a replacement trustee (which does not appear to be the case where the office is vacated) that the circumstances pertaining to the company, including the strained relationships between relevant parties, would prevent the appointment of a replacement trustee.

13 As a consequence of the operation of cl 92 of the Trust Deed, the Company is a bare trustee of the Trust. Its duties, powers and rights are thereby limited to protecting trust assets.[1]

14 Following examination of the Trust Deed, the Liquidator did not contact Mr Zito further in relation to the Funds.

15 However, on 22 June 2018 the sum of $1,005,095.30 was received into the Company's liquidation account via transfer from FZA.

16 The Liquidator is concerned that, in the absence of orders that serve to confirm his ability to deal with the Company's assets (and specifically the Funds), creditor claims may not be able to assessed and met, nor will the liquidation of the Company readily be concluded.

17 The Company's creditors (including VMIA), the unit holders, and ASIC have all been provided with notice of the relief sought by the Liquidator. None of these parties appeared at the hearing with VMIA expressly indicating that it did not intend to appear.

18 A number of the orders were sought pursuant to s 90-15 of Schedule 2 of the Act.

(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.

Matters that may be taken into account

(4) Without limiting the matters which the Court may take into account when making orders, the Court may take into account:

(a) whether the liquidator has faithfully performed, or is faithfully performing, the liquidator's duties; and

(b) whether an action or failure to act by the liquidator is in compliance with this Act and the Insolvency Practice Rules; and

(c) whether an action or failure to act by the liquidator is in compliance with an order of the Court; and

(d) whether the company or any other person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and

(e) the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group.

...

Section does not limit Court's power

(7) This section does not limit the Court's powers under any other provision of this Act, or under any other law.

An order pursuant to section 90-15 of Schedule 2 of the Corporations Act that the Liquidator is justified and acting reasonably in proceeding on the basis that:

(a) the Company carried on business in its capacity as trustee of the St. George's Development Unit Trust ABN 94 754 580 852 (Trust); and

(b) all assets of the Company are properly characterised as property held by the Company in its capacity as trustee of the Trust (Trust Property).

21 As indicated above, the Liquidator had been informed by Dr Luka and relevant advisors that the Company had operated for the sole purpose of acting as trustee and that it did not hold any assets other than in its capacity as trustee.

22 There was also objective evidence to support this position:

• a financial report for the year ended 30 June 2017 (which suggested that the Company was not doing anything in its own right consistent with it only having $2 in assets);

• bank statements in the name of 'St. George's Development Company Pty Ltd ATF St. George's Development Unit Trust' (being the only bank account held by the Company);

• that the Company did not have a registered ABN apart from the one relating specifically to the SGD Trust; and

• correspondence issued by the Company's solicitor in the name of the Company 'ATF the SGD Trust.'

23 It is therefore appropriate to make the first order sought.

An order pursuant to section 63 of the Trustee Act that the Company shall have the power to carry on the business of the Trust.

25 Section 63 of the Trustee Act provides:

Power of Court to authorize dealings with trust property

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

(2) The Court may from time to time rescind or vary any order made under this section, or may make any new or further order.

(3) An application to the Court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.

26 As indicated above the Company is a bare trustee with limited powers. There is also no replacement trustee appointed, or likely to be appointed, to the trust.

27 The Liquidator has given details of the tasks he has undertaken, and wishes to continue to undertake, following his appointment as follows:

(a) attending to general ASIC and ATO lodgments;

(b) investigation of the Company's affairs and reporting to ASIC on same;

(c) writing to all known and potential stake holders regarding various aspects of the liquidation, including to collect Company books and records or obtain information on the Company's position (for example to identify assets/ claims by writing to all major banks, the Child Support Agency, Sheriff, WorkCover and various other parties);

(d) preparation and lodgment of Liquidator's Statutory Reports to Creditors;

(e) adjudication of claims and distribution of surplus funds;

(f) responding to information and meeting requests as required; and

(g) other miscellaneous tasks that may be required, including pursuing voidable transactions or realizing assets that are not yet identified.

28 Although some of these tasks would not amount to the carrying on of the business, others might (e.g. (c) and (g)). It is therefore appropriate to make orders in the form sought, for the avoidance of doubt, so that the affairs of the SGD Trust may be finalized prospectively and efficiently without the need to return to Court.

An order pursuant to section 90-15 of Schedule 2 of the Corporations Act that the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that he can hold, apply and/or distribute the Trust Property in accordance with Parts 5.5 and 5.6 of the Corporations Act.

30 The Victorian Court of Appeal in Commonwealth v Byrnes (in their capacity as joint and several receivers and managers of Amerind Pty Ltd (recs & mgrs apptd) (in liq) (Amerind)[2] and the Full Federal Court in Jones (in his capacity as liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (in liq)) v Matrix Partners Pty Ltd (Killarnee)[3] has each held that a corporate trustee's right of indemnity out of the trust assets is property of the corporation and that the priority regime in the Act applies to the distribution of trust property in the winding up of the corporate trustee.[4]

31 This order is appropriate so that trust property can be dealt with on the basis that it is governed by Parts 5.5 and 5.6 of the Act. As highlighted already, given all of the Company's creditors were trust creditors there is also no suggestion that the trust property might thereby be available to creditors who are not trust creditors.[4]

An order pursuant to section 1318 of the Corporations Act and/or section 67 of the Trustee Act that the Liquidator be relieved from any liability for dealing with the Trust Property between the date of his appointment and the date of this order.

33 Section 67 of the Trustee Act provides:

Power to relieve trustee from personal liability

If it appears to the Court that a trustee, whether appointed by the Court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has 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, then the Court may relieve him either wholly or partly from personal liability for the same.

34 Subsections 1318(1) and (2) of the Act apply to liquidators (under s 1318(4)(d)) and provide:

(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.

(2) 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.

35 It is not evident that the Liquidator has undertaken actions beyond his power. However, given there is some doubt as to the powers of a bare trustee, the order sought is appropriate.

36 I am satisfied that the Liquidator has acted honestly and reasonably in dealing with the trust property with the result that the order will be made.

An order pursuant to section 90-15 of Schedule 2 of the Corporations Act that the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that:

(a) the Liquidator is entitled to be paid his remuneration, costs and expenses properly incurred in preserving, realizing or getting in the Trust Property, or in carrying on the business of the Trust, or in conducting the winding up of the Company (Remuneration and Expenses) from the Trust Property; and

(b) the Remuneration and Expenses including the remuneration, costs and expenses of and incidental to this application and are to be paid in accordance with the priority specified in section 556(1) of the Corporations Act.

38 In Killarnee the Chief Justice agreed with the approach of King CJ in Re Suco Gold Pty Ltd (in liq)[5] that a liquidator's costs were payable out of the trustee's right of indemnity.[6] Although he also said that each provision in s 556 must be examined for its meaning, this ought to be a relatively straightforward exercise where there was (like here) only one activity of the trust and it was a voluntary winding up.

39 As highlighted already, Amerind also found that the priority regime in the Act generally applies to the distribution of trust property.

40 In this respect, s 556(1)(a) provides:

Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:

(a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realizing or getting in property of the company, or in carrying on the company's business.

41 Section 556 will therefore now regulate a liquidator's entitlement and it is unnecessary to have regard to the 'salvage principles' cited in earlier cases.[7]

1 Pursuant to s 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) (Act) the plaintiff (Liquidator) is justified and acting reasonably in proceeding on the basis that:

(a) St. George's Development Company Pty Ltd (ACN 149 242 955) (In Liquidation) (Company) carried on business in its capacity as trustee of the St. George's Development Unit Trust (ABN 94 754 580 852) (SGD Trust); and

(b) all assets of the Company are properly characterised as property held by the Company in its capacity as trustee of the SGD Trust (Trust Property).

2 Pursuant to s 63 of the Trustee Act 1958 (Vic) (Trustee Act) the Company shall have the power to carry on the business of the Trust.

3 Pursuant to s 90-15 of Schedule 2 of the Act the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that he can hold, apply and/or distribute the Trust Property in accordance with Parts 5.5 and 5.6 of the Act_._

4 Pursuant to s 1318 of the Act and/or s 67 of the Trustee Act the Liquidator be relieved from any liability for dealing with the Trust Property between the date of his appointment and the date of this order.

5 Pursuant to s 90-15 of Schedule 2 of the Act the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that:

(a) the Liquidator is entitled to be paid his remuneration, costs and expenses properly incurred in preserving, realising or getting in the Trust Property, or in carrying on the business of the Trust, or in conducting the winding up of the Company (Remuneration and Expenses) from the Trust Property; and

(b) the Remuneration and Expenses include the remuneration, costs and expenses of and incidental to this application and are to be paid in accordance with the priority specified in s 556(1) of the Act.

44 There is liberty to apply for the plaintiff and any person who can demonstrate a sufficient interest to modify these directions and orders, on not less than 48 hours' notice to the plaintiff.

[1] CGU Insurance Ltd v One. Tel Ltd (in liq) [2010] HCA 26; (2010) 242 CLR 174, 182 [36] (French CJ, Heydon, Crennan, Kiefel and Bell JJ); FCT v Bruton Holdings Pty Ltd (in liq) [2008] FCAFC 184; (2008) 173 FCR 472, 498 [79] (Ryan, Mansfield and Dowsett JJ).

[2] [2018] VSCA 41; (2018) 354 ALR 789.

[3] [2018] FCAFC 40; (2018) 354 ALR 436.

[4] See also Re Matthew Forbes Pty Ltd (in liq) (Forbes) [2018] VSC 331 [20] and Re Darwin Joinery Pty Ltd [2018] FCA 753 [15].

[4] This matter was left undecided in Amerind. In Killarnee, Allsop CJ expressly said that Re Enhill Pty Ltd [1983] VicRp 52; [1983] 1 VR 561 was wrong in holding that the right of exoneration was available to all creditors at [30], with Farrell J agreeing at [197].

[5] (1983) 33 SASR 99.

[6] [2018] FCAFC 40; (2018) 354 ALR 436, 461-2 [104]-[108].

[7] For example see Re Mackie Group Pty Ltd (in liq) (in its capacity as trustee of the Jupelina Unit Trust) (2017) 122 ACSR 537, 546 [60] and cases cited therein.