Ward, in the matter of PIC Lindfield 19 Pty Ltd (in liquidation) v Zhu

CHEESEMAN J: 1 By an originating process filed on 19 November 2021, the first plaintiffs, as liquidators of the second plaintiff, PIC Lindfield 19 Pty Ltd (in liquidation) (Company), seek urgent orders for their appointment as receivers and managers of the assets and undertakings of the PIC Lindfield 19 Unit Trust (PIC Trust) of which the Company was trustee until its liquidation on 12 November 2021 and various other orders. 2 The urgency of the application arises from the imminent public auction of five apartments held by the Company in its capacity as trustee. That auction is scheduled to occur on 8 December 2021. 3 The plaintiffs also seek confidentiality orders under section 37AF of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) in respect of a property valuation and the property sales contract until such time as the sales of the five apartments complete. 4 The first defendant, Mr Zhu, consents to the orders sought by the plaintiffs. A minute of consent order executed by the plaintiffs and the first defendant was tendered on the application. Mr Stack of Counsel appearing for the plaintiffs mentioned the appearance of Mr Zhu. 5 The second defendant, Moshav Custodians Pty Ltd, is a secured creditor and has indicated that it does not propose to appear and that it consents to the relief sought in the originating process insofar as that relief does not seek to disturb the priority of its mortgages over the property of the Company. 6 In support of their application, the plaintiffs relied on the affidavit of Mr Ward, one of the liquidators, affirmed 19 November 2021 and tendered the exhibits GW-1 and GW-2 to that affidavit. Exhibit GW-2 is the confidential exhibit over which orders are sought under section 37AF of the Federal Court Act. 7 The application is brought under: (1) clauses 6.2(a)(1) and (d) of the Unit Trust Deed; (2) section 57(1) of the Federal Court Act; (3) section 59(4) of the Trustee Act 1925 (NSW); (4) section 90-15 of the Insolvency Practice Schedule, being Schedule 2 to the Corporations Act 2001 (Cth); and (5) common law. 8 For the reasons that follow, I am satisfied that it is appropriate to make the orders sought by the plaintiffs, including the confidentiality orders.

background 9 The business of the Company, the establishment of the PIC Trust and the events leading up to the Company's liquidation are summarised in the liquidators' evidence.

The Company and the PIC Trust 10 The Company was incorporated on 20 May 2015 for the purpose of being appointed trustee of the PIC Trust. Mr Zhu was a director of the Company between 17 June 2015 and 28 August 2019. Mrs Qizhen Zhu was the sole director between 28 August 2019 and 8 October 2021. Mr Zheng is and has been the sole director since 8 October 2021. The Company has issued 100 ordinary shares, with 70 owned by Mr Zheng and 30 owned by Mrs Zhu. 11 On 21 May 2015 the PIC Trust was established and the Company was appointed as trustee. Mr Zhu was the sole unit holder of the unit trust. The Unit Trust Deed provided that the Company was entitled to be indemnified for all liabilities incurred in its capacity as trustee of the PIC Trust and that the Company would automatically cease to be trustee upon its liquidation. 12 The Company, in its capacity as trustee, operated a property development business which was concerned with the development of an apartment complex. The primary asset of the Company was real property situated at 15 to 19 Havilah Road, Lindfield and is presently five apartments located at that address. 13 Havilah Road was purchased by the Company, in its capacity as trustee, some time prior to 2018 in order for the Company, as trustee, to develop and construct a complex comprising 40 apartments. The development was completed in about February 2018 and thereafter the apartments were sold save five of the apartments which the Company still retains (retained apartments). Four of the retained apartments have been leased. They generate rental income. The remaining apartment sustained water damage and is yet to be repaired. It is not leased at present. 14 In April 2019, the Company, in its personal capacity and as trustee of the PIC Trust, entered into a loan agreement with Moshav to borrow $2.835 million which was to be used to discharge an existing loan facility granted by the National Australia Bank. The Moshav loan was secured by registered mortgages granted over the retained apartments. The Company defaulted under the terms of the Moshav loan and presently owes approximately $3.13 million to Moshav.

Administration and liquidation of the Company 15 On 8 October 2021, Moshav appointed the liquidators as voluntary administrators pursuant to section 436C of the Corporations Act. The liquidators, as voluntary administrators, convened the first meeting of creditors on 20 October 2021 and later issued their second report on 4 November 2021. The second creditors' meeting was held on 12 November 2021. At that meeting, the creditors resolved to place the Company in liquidation and that the liquidators be appointed the Company's liquidators.

Proposed sale of retained apartments 16 Shortly after their appointment as administrators, the liquidators engaged a real estate agency to market and sell the retained apartments. The liquidators intend to allow the retained apartments to be sold at a public auction scheduled for the week commencing 6 December 2021. Mr Stack indicated that his instructions are that the auction will be held on 8 December 2021.

Appointment of a receiver 17 Section 57(1) of the Federal Court Act relevantly provides: The Court may, at any stage of a proceeding on such terms and conditions as the Court thinks fit, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just or convenient so to do. 18 In a recent decision of this Court, McKerracher J set out the principles applicable to an application for the appointment of a liquidator of a corporate trustee as receiver of trust property: Re Hughes (in their capacity as joint and several liquidators of Substar Holdings Pty Ltd (in liq)) and Anor [2020] FCA 1863; (2020) 149 ACSR 185 at [26] to [29]. I respectfully adopt his Honour's summary of the principles in Re Hughes and note the following principles which are drawn from the authorities cited by his Honour and are relevant in the current context: (1) the corporate trustee has a right of indemnity or exoneration out of trust assets secured by an equitable lien or charge over those assets. It follows that a liquidator of a corporate trustee is entitled to apply the assets of the trust to satisfy debts properly incurred by the company in the performance of its duties as trustee: Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 at [14] (Gordon J); (2) where a corporate trustee, as is the case in the present application, is removed by operation of a disqualification clause, the right of indemnity or exoneration persists as does the trustee's right to hold the assets: Re Brereton (in their capacities as joint and several voluntary administrators of MyHouse (Aust) Pty Ltd (admins apptd)) [2020] FCA 610 at [30] (Farrell J). However, the powers of the now bare trustee do not extend to a power of sale to realise its right of indemnity: Re Cremin (in his capacity as liquidator of Brimson Pty Ltd (in liq), Kane Retail Group Pty Ltd (in liq) and Teal Retail Group Pty Ltd (in liq)) [2019] FCA 1023; (2019) 136 ACSR 649 at [49] (Moshinsky J) and the cases cited therein; (3) in those circumstances, if a sale is necessary, the liquidator or administrator must obtain a court order permitting the sale or otherwise seek an order for the appointment of a receiver: In Amirbeaggi (in her capacity as liquidator of Simpkiss Pty Ltd (in liq)) v Simpkiss Pty Ltd (in liq) [2018] FCA 2121 at [28] (Markovic J); (4) the common course is to appoint the liquidators as receivers over all trust property for the purpose of realising the assets for the benefit of creditors: Re Hughes at [29] (McKerracher J) citing Cremin at [50] (Moshinsky J).

Confidentiality orders 19 The Court's approach to an application under section 37AF of the Federal Court Act was addressed by Abraham J in Clark v Digital Wallet Pty Ltd [2020] FCA 877, where her Honour observed, at [19] (citations omitted), that: The relevant principles in relation to the making of suppression or non-publication orders under s 37AF are well settled. The question in this instance is whether the making of a suppression or non-publication order is "necessary to prevent prejudice to the proper administration of justice". The word "necessary" in that context is a "strong word" …, although it is not to be given an unduly narrow construction … Once the court is satisfied that an order is necessary, it would be an error not to make it … There is no exercise of discretion or balancing exercise involved … The onus to persuade the court to make the order has been described as "a very heavy one" … 20 Abraham J further observed, at [21] to [22], that it is "well established that commercial in confidence or commercially sensitive information may form a sufficient basis for the grant of a confidentiality order" and that the question whether an order should be made is dependent on "the particular circumstances of the case". CONSIDERATION

Appointment of receivers 21 Mr Ward has deposed to the investigations conducted by the liquidators in his affidavit of 19 November 2021. Those investigations establish that other than its functions as a trustee of the PIC Trust, the Company did not otherwise conduct or carry out any business in its own right. 22 Mr Ward's evidence also set outs, in detail, the Company's assets and liabilities. The Company's assets comprise the retained apartments, a small amount of cash of approximately $8,000 and a loan totalling $2.52 million made to Primo Investment Corporation Pty Ltd, a company controlled by Mr Zhu. These assets are held by the Company in its capacity as trustee of the PIC Trust. 23 The Company has both secured and unsecured liabilities. The secured liability comprises the liability of the Company in its own right, and as trustee of the PIC Trust, under the Moshav loan for approximately $3.13 million. The unsecured liabilities consist of a number of creditors who have lodged proofs of debt. Those proofs of debt total approximately $11.21 million, with $10.5 million of that sum being claimed by Mr Zheng, the director at the time the liquidators were appointed as administrators, and the majority shareholder of the Company. The liquidators have not ruled on those proofs of debt but rely on evidence given by Mr Ward of his belief that if the Company is liable for the sums claimed, those liabilities were incurred by the Company in its capacity as trustee. 24 As a consequence of the operation of the Unit Trust Deed, the Company became a bare trustee on and from the date of liquidators' appointment: cl 6.4(a)(2). In circumstances where the liabilities incurred by the Company arose in the exercise of its duties as trustee of the PIC Trust, the Company retains its right, pursuant to general principle, to be indemnified out of and exonerated from the assets of the trust: Caterpillar Financial at [22] - [28]. The Company can only enforce its rights through the Court by either appointment of a receiver with a power of sale or by a judicial sale. 25 I am satisfied having regard to the evidence of Mr Ward and the principles set out at paragraph 18 above that the appropriate course of action is for the liquidators to be appointed receivers and managers of the property, assets and undertakings of the PIC Trust, so that the charge and/or lien which belongs to the Company can be enforced against the assets of the PIC Trust. I am also persuaded that an order is appropriate in the present case given that neither the registered mortgagee of the primary asset of the Company, nor the sole unitholder of the PIC Trust have opposed the relief sought by the plaintiffs. Indeed Mr Zhu has signed consent orders. Moshav, the secured creditor, has similarly consented to the relief sought in the originating process on the proviso that no order is sought to disturb the priority under its mortgages over the retained apartments. The orders I will make do not depart from the relief sought in the originating process in this respect. 26 Accordingly, I grant the relief sought under section 57(1) of the Federal Court Act. Having done so, I do not regard it necessary to consider the alternative bases on which the relief is sought, including for the plaintiffs to be appointed as the new trustees of the PIC Trust. I am also satisfied I should make the balance of the orders associated with the appointment of the receivers, noting that the receivers are also the liquidators and were previously the administrators of the Company.

Confidentiality orders 27 The plaintiffs have sought confidentiality orders restricted to only exhibit GW-2 to Mr Ward's affidavit of 19 November 2021. That exhibit comprises valuation and selling agreements entered into by the liquidators, in their capacities as administrators, for the purpose of marketing and selling the retained apartments and include estimates of their value. Confidentiality orders are sought on the basis that the agreements contain commercially sensitive information which, if disclosed, may prejudice the sale of the retained apartments. Having regard to the nature of the information in Exhibit GW-2, I am readily satisfied that it is appropriate to make an order that exhibit GW-2 be kept confidential until such time as the sale of the retained apartments has been completed. 28 Accordingly, I will make orders substantially in the form sought by the plaintiffs. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.