Wells v Wily

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2480/04 JONATHAN WELLS V HUGH WILY & ANOR JUDGMENT 1 HIS HONOUR: The plaintiffs (who are young children) have brought this proceeding by their tutor, Jonathan Wells (who is their father), for orders for the appointment of a new trustee in substitution for Galimore Holdings Pty Ltd (in liq) ("Galimore") as trustee of a trust called the Wells Family Trust. The plaintiffs seek the appointment of a well-known insolvency practitioner, Mr Martin Green. It is common ground that he would be a suitable person to act as trustee. The summons also seeks a vesting order in respect of all of the property of the trust. On 21 June 2004 I made an order granting leave to the plaintiffs, under s 500(2) of the Corporations Act 2001 (Cth), to proceed against Galimore in liquidation. 2 The case has been presented, on both sides, in a manner that is in some ways unsatisfactory. Part of the problem has been the failure, on the part of the plaintiffs, to comply with Part 70 rule 8 of the Supreme Court Rules, which requires that the evidence in support of an application for the appointment of a new trustee is to show, inter alia, the nature and value of the trust property and the person beneficially entitled. It has been necessary for me to assemble my account of the evidence from disorganised evidentiary materials. 3 The principal and perhaps the only remaining asset of the trust is a house and land at 81 Central Road, Avalon, New South Wales, which is mortgaged for approximately $450,000 to Magney Mortgages Ltd. It is, or has until recently been, occupied by Jonathan Wells and his family. The present proceeding appears to have arisen out of a decision by Galimore's liquidator, on the advice of a meeting of creditors held on 15 April 2004, to recover possession of the Avalon property in order to sell it and pay trust creditors. 4 There appears to be a second motivation for commencement and maintenance of the proceeding. By letter dated 18 June 2004, Magney Mortgages claimed that the loan facility granted by it to Galimore was in default and demanded clearance of the arrears by 11 June, otherwise it would issue a notice under s 57(2)(b) of the Real Property Act 1900 (NSW). Jonathan Wells has given evidence that he has made inquiries for alternative mortgage finance, but he says that the trust is unable to refinance the property while Galimore remains as trustee, because Galimore is in liquidation. 5 The orders for replacement of the trustee and for a vesting order are opposed by Galimore and its liquidator. The formation of the Wells Family Trust 6 The Wells Family Trust was established by a deed of settlement dated 15 March 1997, between Peter Wells (Jonathan's brother) as settlor and Galimore as trustee. Originally the beneficiaries were Jonathan Wells and his children. According to Jonathan Wells, the Trust was formed, following the death of his first wife, to provide benefits for the three children of Jonathan's marriage, who are three of the five plaintiffs. Jonathan Wells has subsequently remarried and has two children from his second marriage. They are the other two plaintiffs. 7 Jonathan Wells was originally a beneficiary of the trust and the appointor under the deed of settlement, but in December 2001 the deed a settlement was amended by deleting Jonathan Wells as appointor and as an eligible beneficiary, and substituting Charlotte Wells (his second wife) in those capacities. This may have been done as a result of Mr Wells' bankruptcy. The activities of Galimore and the Wells Family Trust 8 According to the evidence of Jonathan Wells, Galimore had two activities, one being to act as trustee of the Wells Family Trust, and the other being to carry on trading activity, which included lending money to Mothers Imports and Exports Trading Pty Ltd (Galimore's wholly-owned subsidiary) and Premier Pinballs Pty Ltd. He expresses the belief that when Galimore was under the management of his brother Peter in the period from 1997 to 2000, it lent substantial amounts to these two companies. 9 Jonathan Wells has given evidence that Galimore acquired three properties, at Avalon, Maroubra and Warriewood, as trustee of the Wells Family Trust. However, searches carried out by David Sampson, an insolvency director at Mr Wily's firm with carriage of this matter, indicate that the only property still held by Galimore is the Avalon property, and that the others appear to have been sold. Mr Sampson says that it is not possible from his inspection of the company's accounts to determine how the proceeds of sale of the Maroubra and Warriewood properties were dealt with. 10 Jonathan Wells' evidence is that, in its capacity as trustee, Galimore acquired, and developed residential units on, the property in Maroubra, and acquired factory premises at Warriewood, as well as the Avalon property. He says that his second wife Charlotte Wells lent the proceeds of sale of a property in Clarence Street Sydney to the Trust, in her capacity as guardian for the children, and this money was used for the purchase of the Maroubra and Warriewood properties. He says that the residential units at Maroubra were sold in about the year 2000. Management and administration of Galimore 11 Peter Wells was initially the director of Galimore, but Jonathan Wells was a director of the company from July 1999 to July 2000, when he was declared bankrupt. The family accountant, Mr Alexandrou, was then appointed as director and according to Palmer J (Wells v Wily [2004] NSWSC 145 (27 February 2004), at [10]), he held his position "in a caretaker capacity". Jonathan Wells replaced Mr Alexandrou as director shortly after his discharge from bankruptcy in August 2003, and thereafter Mr Wells continued as the sole director of the company. 12 The company was placed in administration on 9 September 2003, by Jonathan Wells as its director. It was placed in liquidation by resolution of its creditors passed on 29 October 2003, at a meeting held under s 439A of the Corporations Act, and liquidators were appointed. As from 18 June 2004, the sole liquidator has been Andrew Wily. 13 Late in 2003 Jonathan Wells took proceedings to set aside the creditors' resolutions for the winding up of Galimore and for the appointment of liquidators. He challenged the decision of the administrators to accept certain proofs of debt and to reject others. He contended that the administrators should have placed before creditors his proposal for a deed of company arrangement, and sought orders to compel them to do so. The case was heard by Palmer J on 20 and 27 February 2004. His Honour dismissed the proceedings and ordered Mr Wells to pay the defendants' costs on an indemnity basis. The accounting records of Galimore, and creditors' claims 14 At the hearing before me, much attention was given to the findings of fact by Palmer J in his reasons for judgment delivered on 27 February 2004, concerning the accounting records of Galimore and the Trust. The defendants sought to rely on specified parts of the transcript of the proceedings before his Honour, exhibited to an affidavit made by their solicitor. Pressure of time necessitated that I defer ruling on the admissibility of that material until now. I have decided, after considering further submissions from the defendants, to allow the specified parts of the transcript into evidence in the present proceeding, and to reject the plaintiffs' objections. 15 In the course of his judgment, Palmer J made some observations and findings that are relevant now. He found (at [2]) that although Galimore was registered in November 1996 and became trustee of the Wells Family Trust in March 1997, and engaged in substantial real estate transactions and other financial dealings until it was placed in voluntary administration in September 2003, its financial records and the records of the Wells Family Trust did not exist in any meaningful sense until they were brought into existence by the accountant, Mr Alexandrou, after voluntary administrators had been appointed and at their insistence. He noted (at [15]) some vague evidence by Mr Alexandrou as to whether a substantial sum of money paid to Galimore and shown in the accounts of the Trust as owing to Charlotte Wells, was in fact owing to her beneficially or to her as trustee for her children. He held that the voluntary administrators were right to reject a proof of debt lodged on behalf of Charlotte Wells. 16 Palmer J also agreed with the administrators in their rejection of a proof of debt lodged on behalf of the Wells Family Trust. He referred (at [21]) to the evidence of Mr Alexandrou, that he had endeavoured to "reconstruct" the company's and the Trust's financial and accounting records. He said the accounts that had been prepared, both for the company and the Trust, were unreliable. He gave some examples of inconsistencies between the accounts and other evidence. He thought it probable (at [24]) that Galimore received loan monies in its capacity as trustee rather than personally. He concluded (at [26]) that what he called a "serious defect in the accounting records of the Trust" undermined any confidence that anyone could legitimately have in the accuracy of the Trust's accounting records and in the way in which Mr Alexandrou had prepared the reconstructed accounts of the Trust and the company. 17 In his evidence Mr Sampson provides a list of proofs of debt received by him up the time of the meeting of creditors. There are nine, not including the Wells Family Trust. Palmer J upheld Mr Wily's decision to reject five of those proofs, for voting purposes, and Mr Sampson says that Mr Wily has not admitted any of those five proofs to rank for a dividend. Therefore the only proofs of debt ranking for a dividend, as at the time of the meeting, were proofs by Peter Wells (Jonathan's brother) for over $341,000, Mother's Imports and Exports Trading Pty Ltd (in liq) for over $273,000, a firm of solicitors for $1,000 and another creditor for $3,300. Since then, Mr Sampson has received a proof of debt from the Office of State Revenue in respect of land tax for about $15,000 on the Avalon property, apparently a liability of the trust. 18 It is unclear whether the claim by Peter Wells, arising out of a loan he made to Galimore, is a claim against the Trust or against Galimore independently of the Trust, although Palmer J expressed the opinion (at [24]), on balance, that Galimore did not receive money from any member of the family in its own right, but only as trustee. The claim by Mother's Imports appears to be for recovery of an unfair preference, which Mr Wily has allowed after making an estimate for the purposes of voting (Palmer J's judgment, at [17]). It is not clear from the evidence whether any verdict for recovery obtained by Mother's Imports would be a liability of the Trust or of the company independently of the Trust (see, generally, Re Coastline Distributors Pty Ltd (1979) 4 ACLR 203). Jonathan Wells wishes to assert that neither Peter Wells nor Mother's Imports are trust creditors, so that the only true trust liability of any substance is the liability to Magney Mortgages (and now, one presumes, the liability to pay land tax as well). The issues between the parties 19 The plaintiffs invite the court to exercise its power under s 70(3) of the Trustee Act 1925 (NSW). The relevant parts of s 70 are as follows: "70 (1) The Court may make an order for the appointment of a new trustee or new trustees either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee. (2) The appointment may be made whenever it is expedient to appoint a new trustee or new trustees, and it is inexpedient difficult or impracticable so to do without the assistance of the Court. (3) In particular and without prejudice to the generality of any other provision of this section, the Court may make an order for the appointment of a new trustee in substitution for a trustee who is convicted of a serious indictable offence, or is a bankrupt, or being a corporation is in liquidation or is dissolved." 20 The standing of the plaintiffs to seek such an order arises out of their position as discretionary beneficiaries under the deed of settlement for the Wells Family Trust. Paragraph 1.07 defines "the beneficiaries" to include "the children", defined in turn to mean the children of Jonathan Wells. Although one of the pages has been omitted from the copy of the trust deed in evidence, it appears that there are discretionary trusts of income and capital for "the beneficiaries". 21 The court's power under s 70(3) is a discretionary power, exercised having regard to the wishes of the settlor (if they are available), in a manner designed to promote rather than impede the execution of the trust, in the interests of the beneficiaries as a whole rather than for the benefit of one group in opposition to the interests of others: Re Tempest (1866) LR 1 Ch App 485; Letterstedt v Broers (1884) 9 App Cas 371; Re Estate of Roberts (1983) 20 NTR 13; Saul v Tsung Chen Lin (No 2) [2004] NSWSC 332. In the present case the exercise of the discretion depends, to a large degree, on the court's attitude to a number of specific issues that have been raised. 22 This case touches upon the liability of a trustee for debts incurred by it in the performance of the trust. A trustee is personally liable to the creditors with which it trades: Vacuum Oil Co Pty Ltd v Wiltshire (1975) 72 CLR 319, 324 per Latham CJ. But the trustee has a right of indemnity and recoupment out of the trust assets, supported by an equitable lien: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Re Coastline Distributors Pty Ltd (supra); Jennings v Mather [1901] 1 KB 108. The last of these cases is authority for the proposition that the trustee's lien may be maintained until the assets and liabilities of the trust have been ascertained, for only then can be established whether there is anything in respect of which the trustee needs to be indemnified. A similar point can be found in the Coastline Distributors case, where Hoare J said (at 207) that "retention of the property is necessary to give effect to the right of indemnity," and consequently the right to retain the trust property, like the rights of indemnity and lien which are supported by that right, vests in the trustee in bankruptcy of a bankrupt trustee 23 There are questions raised by this case consequential upon these basic propositions. The issues for particular determination are: (1) whether it is permissible and desirable for a company to remain in office as trustee after the winding up of the company has commenced and a liquidator has been appointed; (2) whether the trustee should be replaced on the ground that its liquidator is in a position of conflict between his duty to administer the trust on behalf of the trustee, and his duty as liquidator of the trust; (3) whether the court should replace the trustee in circumstances where it remains unclear whether some substantial creditors of the company are trust creditors or non-trust creditors; (4) whether the court should decline to replace the trustee, or decline to make a vesting order, on the ground that the replacement might jeopardise the trustee's right of indemnity out of trust assets for the payment trust debts. Company in liquidation continuing as trustee 24 Where the existing trustee is an individual rather than a company, the court will remove him or her as trustee almost as a matter of course: Miller v Cameron (1936) 54 CLR 572, 575 per Latham CJ. But there is room for debating whether the position is the same in the case of a corporate trustee in liquidation. There are obvious differences between the position of liquidator of a trustee company, and trustee of a bankrupt's estate. In particular, the property of a bankrupt, except (relevantly) property held in trust (Bankruptcy Act 1966 (Cth), s 116(2)(a)) vests in the bankrupt's trustee in bankruptcy; in contrast, nothing vests in the liquidator of a corporate trustee, but the liquidator has the power to administer any trust of which the company was trustee. 25 The learned authors of Jacobs' Law of Trusts in Australia (6th ed, 1997), para [1550], say: "The position of a company trustee which was in liquidation, although not dissolved, was considered by Needham J in Re Crest Realty Pty Ltd (in liq) [1977] 1 NSWLR 664, where his Honour held that since the trust property was not affected by the liquidation, nor the operations of the trust terminated by the cessation of the company's business, the company remained trustee until new trustees were appointed by the court, the liquidator in the company's name having all the powers and duties in the interim which the Trustee Act (and presumably any trust instrument) invested the trustee with. What his Honour did not had to deal with was the question whether the company should be removed from the trusteeship and new trustees appointed. Bearing in mind that the law is that 'a trustee who becomes bankrupt is removed almost as of course', as Latham CJ said in Miller v Cameron (1936) 54 CLR 572, 575, it would seem that such an application to appoint new trustees would be almost certainly assured of success." 26 One can understand that, once a certain stage has been reached in the liquidator's administration of the affairs of a corporate trustee in liquidation, the company has come so close to dissolution that it is inevitably necessary to replace it as trustee, at any rate where the trust is to continue and not itself be wound up. Where, however, the liquidation of the corporate trustee has just commenced, and particularly where it seems likely that it will be necessary to realise the trust assets in order to pay trust creditors, there may be good reasons to leave the administration of the trust, for the time being, in the hands of the liquidator - unless to do so would give rise to a conflict between the liquidator's duties of a liquidator and his or her duties as trustee. To that limited extent, I respectfully disagree with the learned authors of Jacobs. I prefer the view of a HAJ Ford, M Bryan and WA Lee, Principles of the Law of Trusts (looseleaf), at [14110], that in some cases it may be appropriate for a new trustee to be appointed where the corporate trustee is in liquidation, but in other cases it may be better to allow the liquidator to administer the trust and the liquidation, for a time, concurrently. 27 A liquidator, taking office in respect of a corporate trustee, is invested with the trustee's power to administer the trust: Crest Realty, at 668 per Needham J. In his Honour's view, the source of this power, in the case of a creditors' voluntary winding up, is the provision that is now s 499(1) of the Corporations Act, which refers to the nomination of a person to be liquidator "for the purpose of winding up the affairs and distributing the property of the company", when that provision is read together with s 499(4), which states that the powers of the directors cease. Where the winding up is ordered by the court, it appears that the power derives from what is now s 477(2)(m), namely the power to "do all such other things as are necessary for winding up the affairs of the company and distributing its property": Crest Realty, at 668. 28 After considering English and Canadian authorities, Needham J reached the conclusion (at 672) that the predecessor of s 499(1) of the Corporations Act implies a duty upon the liquidator to act "in a responsible way in the administration of the trust in the name of the company". He observed (at 672) that the liquidator's duty to administer the trust is "subject, of course, to the desirability of making application to the court either for directions or for the appointment of a new trustee in cases where that is expedient". He added: "In respect of some cases, it would be unsuitable for the company to continue to act as trustee, but nothing appears in the present case to indicate that that stage has yet been reached". 29 The issue before Needham J arose in an application by a liquidator for directions, principally as to whether he was entitled to operate the company's bank trust account. Needham J gave an affirmative answer to that question, and (significantly for present purposes) also gave a direction (at 673) that "at present, there does not appear to be any reason why a new trustee should be appointed, but that circumstances may alter in such a way as to make it desirable for the company to be removed and another trustee appointed". 30 I therefore regard Crest Realty as authority supporting the proposition that there may be circumstances in which the court, in the exercise of its discretion, will decline to replace a corporate trustee in liquidation. That view is supported by Irvine v Australian Sharetrading and Underwriting Ltd (in liq) (1996) 22 ACSR 765, where Mandie J said that, in an appropriate case, and subject to the liquidator not being liable to incur expense in the winding up where there is insufficient available property, the liquidator should attend to certain specified tasks, including the tasks of ascertaining the nature and value of the trust assets and liabilities and identifying the trust's creditors and beneficiaries. In Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd (1983) 7 ACLR 540, McLelland J appears to have assumed that it was appropriate for the corporate trustee to remain as trustee, although it was in liquidation and insolvent, at least for the purpose of answering questions raised by the liquidator in the course of the administration. 31 My conclusion is that the court will not replace a corporate trustee in insolvent liquidation as a matter of course, but rather will approach the question with an open mind, and assess where the balance of interest lies, in the exercise its discretion. Conflicts of interest 32 The plaintiffs' contention seems to be that there is a conflict of interest (more precisely, it seems, a conflict of duties) between the office of liquidator and the office of agent administering the trust, which should be resolved by the appointment of a new trustee. Counsel for the plaintiffs submits that because of this conflict, the liquidator has preferred the interests of creditors to the interests of the beneficiaries of the trust, in deciding to sell the Avalon property without yet having resolved the acceptance of proofs of debt and the accounting and prudential basis for selling the trust property. 33 In my opinion the plaintiffs' submission rests upon a misconception. It cannot be contended that the interests of the trust creditors and the beneficiaries are interests at the same level. If the trustee has acted properly and within its authority in incurring debts on behalf of the trust, the trustee has a right of indemnity or recoupment and an equitable lien, giving it priority to the interests of the beneficiaries, and the creditors are entitled to be subrogated to those rights. 34 The plaintiffs' contention is that the duty to administer the trust, recognised by Needham J in the Crest Realty case, is fundamentally incompatible with the liquidator's primary obligation to get in and distribute the assets of the company and wind up the company for the benefit of creditors. In my opinion the two duties are not necessarily incompatible, although in particular situations problems may arise as to which the liquidator may need to obtain judicial advice. The factual matters which are likely to bear upon the question of conflict of duties include whether the trust is to continue after the winding up of the corporate trustee or be wound up to meet the claims of trust creditors, and whether there are issues as to the existence and quantum of the corporate trustee's claim to recoupment or indemnity out of the trust assets. In a case such as the present, where it appears likely that the trust assets will need to be realised to meet the claims of trust creditors, the principal duties of the liquidator will be to identify the trust creditors, and then to realise the assets and distribute them to trust creditors entitled to receive distributions and thereafter, to the beneficiaries, while in the meantime attending to the administration of the trust so as to preserve the value of the trust assets. There is no more a necessary conflict of duties here than there is in the case of a liquidator of a non-trustee company, who has duties to both creditors and contributories. Lack of clarity as to financial position of trust, and identity of trust creditors 35 It is submitted that the liquidator should not be left in a position where he can proceed to realise trust assets, when he has not yet ascertained whether there are any trust creditors other than Magney Mortgages (and the Office of State Revenue). 36 In my opinion, a strong discretionary reason for declining to intervene at this stage is that the liquidator, in his present capacity and previously (with his father) as administrator, has made real progress towards clarifying the financial position of the company and the Trust, whose financial statements for five years did not even exist until the administrators insisted that they be created. It seems to me important to allow the liquidator to continue this work. There is a pressing need to ascertain whether the two large claims, by Peter Wells and Mother's Trading respectively, are claims against the trust or against Galimore in its non-trust capacity. 37 I do not suggest that Mr Green would perform the tasks any less efficiently or even differently from Mr Wily. But Mr Wily has already familiarised himself with the financial affairs of the entities and has had dealings with the persons concerned, and to appoint Mr Green would involve some duplication of this work. 38 It seems to me that there is no good practical reason to replace the trustee at this stage, and the practicalities point towards retaining the company in office so that its liquidator can continue his work. Apart from the cost of duplication to which I have referred, to replace the trustee would delay the efficient administration of the affairs of the trust, contrary to the interests of such creditors as it has, and also to the legitimate interests of the beneficiaries in realisation and distribution of the fund. Protecting the right of indemnity and lien 39 In Global Funds Management (NSW) Ltd v Burns Philp Trustee Co Ltd (1990) 3 ACSR 183, Rolfe J expressed the opinion (at 186) that the vesting of property in a new trustee does not cause the old trustee to lose its right of indemnity, and its position can be protected by the making of appropriate orders or the proffering of appropriate undertakings to ensure that the trust assets are not diminished, other than in carrying on the ordinary business of the trust, or that the trust liabilities are not increased save in the same way. 40 Here, there appears to be only one asset value in the trust, and the application is made for the purpose of refinancing rather than realisation of that asset. It may be feasible to make appropriate orders to protect the right of indemnity and lien, but the implementation of those orders would involve some cost which, it seems to me, will be avoided if Galimore remains the trustee and Mr Wily remains responsible for the administration and winding up of the Trust. 41 It appears from the evidence of Jonathan Wells that he wishes to persuade the new trustee, after his appointment, to consent to refinancing loans secured over the Avalon property, so that the threat by the present secured lender to obtain possession and sell the property is averted. This strategy seems to assume either that there are no substantial trust creditors, or that the new trustee will be persuaded not to realise the principal trust assets for their benefit. It seems to me that the assumptions are questionable, and the only certain outcome of the appointment of the new trustee will be to delay what is likely to be the inevitable sale of the Avalon property. It is better, in my view, to let the liquidator of the existing trustee move forward to discharge his responsibilities as cheaply and efficiently as the circumstances allow. Conclusions 42 Before disposing of the amended summons, I shall make an order formally correcting it. At present the first defendant is Hugh Wily, but as from 18 June 2004 the liquidator of Galimore is his son, Andrew Wily. I shall substitute Andrew Wily as first defendant. 43 For the reasons I have given, the application for replacement of Galimore as trustee should fail and the amended summons should be dismissed. I shall hear the submissions of the parties with respect to costs. **********

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