//
[2015] WASC 162
General information, not legal advice.
Supreme Court of WA
2015-05-11
Original judgment source is linked above.
1 ACTING MASTER GETHING: On 27 January 2015, the Federal Court ordered that Winter Holdings (WA) Pty Ltd (Winter Holdings) be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth) (CA). Neil Raymond Cribb was appointed the liquidator. The winding up order was made on the petition of the Deputy Commissioner of Taxation (DCT). The order was made after Winter Holdings failed to pay a statutory demand issued by the DCT in respect of unpaid taxes in the amount of $278,893.94. At the time that the winding up order was made the sole director of Winter Holdings was Victoria Winter, who was also its secretary and the holder of one of its two issued shares.
2 Upon his appointment, Mr Cribb ascertained that Winter Holdings was acting as the trustee of the Laurus Arx Trust, a discretionary trust (the Trust). The Trust was established by deed dated 3 March 2009. The appointor and guardian of the Trust is Ms Winter. Winter Holdings was appointed as trustee pursuant to a deed dated 3 March 2009.
3 Mr Cribb also ascertained that Winter Holdings operated businesses in partnership on licensed premises at 83 ‑ 85 Rokeby Road, Subiaco (Premises). The businesses included those known as 'Club Kahuna' and the 'Sea of Gold Lounge' (Businesses). Mr Cribb has continued to operate the Businesses since his appointment. In particular, he sought and obtained a protection order under the Liquor Control Act 1988 (WA) s 87 entitling him to sell liquor and to carry on the business of the licensee. The protection order expires on 27 May 2015 (or earlier if the license is transferred). Hence there is a degree of urgency about this application.
4 Mr Cribb seeks the appointment of a receiver over the assets of the Trust in order to give effect to the equitable charge or lien which Winter Holdings has over the assets of the Trust to secure its right to be indemnified out of those assets for expenses incurred as trustee. He has filed affidavits sworn 17 March, 14 April and 23 April 2015 in support of the application.[1] He also relies on an affidavit sworn on 14 April 2015 by Nerida Jane Smith, a solicitor employed by Mr Cribb's lawyers.[2]
5 Ms Winter opposes the application, and filed two affidavits dated 13 April 2015 and 29 April 2015.[3] She also filed an affidavit of her accountant Mario Turco, sworn 14 April 2015.[4] In general terms, her position is that Mr Cribb has not placed sufficient evidence before the court to justify the appointment of a receiver. More specifically, she says that by reason of a deed of variation dated 1 July 2013, Gold Limousines Pty Ltd (Gold) replaced Winter Holdings as the trustee of the Trust. When the present application was commenced, she also asserted that the ATO debt incurred by Winter Holdings was a debt incurred in its own right, and not a debt which it incurred as trustee of the Trust. On her submissions, it followed that no right of indemnity exists, and therefore there is no entitlement to appoint a receiver.
6 For the purposes of the present application, Mr Cribb has conceded that the ATO debt was not one that Winter Holdings incurred as trustee of the Trust.[5] However, he says that Winter Holdings was validly wound up, and that as at the date of his appointment there were outstanding debts of around $100,000 which it did incur as trustee of the Trust. He has also incurred expenses in continuing to operate the Businesses. It is in relation to these debts that he asserts a right of indemnity out of the assets of the Trust. He further asserts that even if Winter Holdings ceased to be the trustee from 1 July 2013, it remained a partner in the Businesses and was a trustee de son tort.
7 In this context, the issues that arise for determination are:
Did Winter Holdings cease to be the trustee of the Trust from 1 July 2013?
8 Ms Winter's evidence is that by a document entitled 'Discretionary Trust Deed of Variation' Winter Holdings retired as the trustee of the Trust and Gold was appointed trustee (Deed of Variation).[6] It is dated 1 July 2013. The Deed of Variation is in evidence before me, along with the minutes of the meeting of the director of Gold on 1 July 2013.[7] Mr Turco witnessed Ms Winter's signatures.
9 There is no evidence before me to the effect that the Deed of Variation was not executed on 1 July 2013, or was otherwise a sham. Mr Cribb's application is to be determined on the basis that the Deed of Variation took effect according to its terms. Specifically, the application is to be determined on the basis that Winter Holdings retired as the trustee of the Trust with effect from 1 July 2013.
10 I do note that by cl 3.5, Gold as continuing trustee agreed to indemnify Winter Holdings as retiring trustee for all debts which it incurred and which were unpaid at the time of execution of the Deed of Variation.[8]
Did Winter Holdings remain a partner in the Businesses?
11 The Businesses are operated by a partnership. On 3 August 2011 the partnership interests became:
(a) 54% by Red Cee Pty Ltd as trustee for the J B Masel Family Trust and the GD Masel Family Trust; and
(b) 46% by Winter Holdings as trustee for the Trust.[9]
12 Ms Winter asserts that by operation of the Deed of Variation, this changed so that the partnership interest of the Trust was now held by Gold.
13 The liquidator asserts that regardless of the effect of the Deed of Variation, Winter Holdings remained a partner, and did so as the trustee de son tort of the Trust.
14 Dealing first with the partnership issue, there is no partnership deed in evidence before me. I therefore determine the application on the basis that the Partnership Act 1895 (WA) (PA) applies.
15 Before me in evidence there is an assignment agreement by which Red Cee agreed to assign a 13.5% interest in the 'partnership trading under the Business Name Club Red Sea' to Winter Holdings as trustee for the Trust.[10] This agreement was made on 3 May 2009. At this stage there was a third partner, White Dee Pty Ltd. The fact that Winter Holdings executed the agreement as trustee means that there is a separation of the legal and equitable ownership of the share of the business acquired: Winter Holdings is the partner at law; the Trust is beneficially entitled to the partnership interest in equity.
16 Ms Winter's evidence is that on 3 August 2011, a further 32.5% interest was acquired by Winter Holdings on trust for the Trust.[11] She describes the partnership as 'trading as "Club Red Sea" and any other name such as Club Red C, Gold Bar, Club Kahuna Gold Bar, Sea of Gold Lounge, Club Kahuna, generally used in the operations of the nightclub business'.[12] She says that this interest was acquired on the same terms as the acquisition pursuant to the agreement dated 3 May 2009.[13] There is no written agreement in evidence relating to this acquisition. The position as at 3 August 2011 was that Winter Holdings remained the partner at law, holding its interest in the partnership on trust for the Trust.
17 The Deed of Variation does not according to its terms purport to assign the partnership interest held by Winter Holdings to Gold. Rather, it contemplates that transfer of legal ownership will occur subsequently. Clause 3.4 provides that:
3.4 The Retiring Trustee must give notice in writing to each person or entity owing moneys to the Retiring Trustee as trustee of the Trust and do all such things as may be necessary for the assignment to those Parties that are to be the trustee of the Trust after the execution of this Deed, of any debt or chose in action. The Retiring Trustee must do all things and sign all documents necessary to perfect the title of those parties that are to be the trustee of the Trust after the execution of this Deed to all assets of the Trust.
7.1 The parties must join in the giving of notice to all tenants, lessees, managing agents, or others in order that any rents on trust property will immediately be paid to the New Trustee or as the New Trustee may direct.
7.2 Each party to this Deed undertakes that it shall upon request, sign, execute and do all deeds, acts, documents and things as may reasonably be required by any other party to carry out and give full force and legal effect to the terms and intentions of this Deed.
19 The problem in the present case is that the transfer process contemplated in these clauses has not occurred.
20 The position is complicated further by Trustees Act 1962 (WA) (TA) s 10 which deals with the vesting of property upon a change in trustee. That section relevantly provides that where 'a new trustee is appointed, the execution of the instrument of appointment vests ... the trust property for which the new trustee is appointed in the persons who become and are the trustees, as joint tenants for the purposes of the trust, without any conveyance'. Relevantly to the present case where there is a lease, TA s 10(7) provides that for 'the purposes of a covenant against assignments, or against assignment without licence or consent, contained in any lease, underlease or agreement for a lease or underlease, a vesting under this section shall be deemed not to be an assignment'.
21 The effect of TA s 10 appears to be that the interest of Winter Holdings in the partnership by which the Businesses are operated passed to Gold by operation of the Deed of Variation.[14] However, for the purposes of determining the present application, it is not necessary for me to make a final determination on the interrelationship between the TA and the PA. This is because I am of the view that Winter Holdings has at least held itself out as being a partner in the Businesses. Section 21(1) of the PA deals with people who hold themselves out as partners:
(1) Everyone who by words spoken or written, or by conduct, represents himself, or who knowingly suffers himself to be represented as a partner in a particular firm, is liable as a partner to any one who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made.
'Person' in the PA includes as body corporate.[15]
22 Counsel for Mr Cribb points to seven facts which he says make it clear that Winter Holdings continued to be a partner in the Businesses.
23 The first fact is that the lease for the Premises was assigned to Winter Holdings in June 2009, and it continues to be the lessee.[16] Mr Cribb has made inquiries with the landlord of the Premises who was not aware of the alteration of the trust deed to change the trustee to Gold.[17] Ms Winter has not placed before the court any formal assignment of the lease from Winter Holdings to Gold, though her evidence is that the landlord would be open to this occurring.[18]
24 The second fact is that the business name 'Club Kahuna' is registered to Winter Holdings and Red Cee.[19] This business name was registered on 17 April 2014, after the date of the Deed of Variation. Mr Cribb has made inquiries with the directors of Red Cee who was not aware of the alteration of the trust deed to change the trustee to Gold.[20]
25 The third fact is that the liquor licences for the Premises are held jointly by Winter Holdings and Red Cee.[21] The protection order was granted to Winter Holdings and Red Cee.[22] It was not until 9 February 2015 that Gold notified the Director of Liquor Licensing that there had been a change of trustee of the Trust.[23] Ms Winter states that she thought her former accountants would have attended to this.[24]
26 The fourth fact is Winter Holdings' bank was not aware that there had been a change of trustee of the Trust.[25]
27 The fifth fact is Winter Holdings has been incurring debts in the course of running the Businesses. As at the date of Mr Cribb's appointment on 27 January 2015 it had aged payables of $108,054.22. The invoices annexed to Mr Cribb's second affidavit make it clear that the debts were incurred in the course of running the Businesses. At least one creditor of Club Red Sea was expressly dealing with the Businesses on the basis that it was a partnership comprising Red Cee and Winter Holdings, being the Australasian Performing Right Association Limited.[26] The others invoiced the Businesses (eg 'Club Red Sea', 'Club Kahuna').[27]
28 The sixth fact is that Mr Cribb and his staff proceeded to run the Businesses on appointment, something that would only have been possible had Winter Holdings been running the Businesses prior to his appointment. Specifically, Mr Cribb's evidence is:[28]
(a) had meetings with the directors of Red Cee;
>
> (b) dealt with the Director of Liquor and Licensing as described above;
>
> (c) identified as much as possible, the partnership documents and caused valuation of the Company's assets to be prepared;
>
> (d) arranged for the business at the Licensed Premises to be valued by employees at RSM Bird Cameron, however, given the confidentiality of that report I do not attach that to this affidavit;
>
> (e) reviewed the partnership's equity accounts ...;
>
> (f) held weekly management meetings with the directors of Red Cee;
>
> (g) reviewed and authorised payment of wages and creditor payments in relation to the operation of the business at the Licensed Premises and such like matters.
29 The final fact is that Ms Winter has not given evidence to the effect that the partnership complied with the requirement in PA s 47. That section provides (so far as is relevant):
(1) Where a person deals with a firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm, until he has notice of the change.
(2) An advertisement in the 'Government Gazette' and in a Perth or local newspaper (if any) as to a firm whose principal place of business is in Western Australia shall be notice as to persons who had not dealings with the firm before the date of the dissolution or change so advertised.
30 I am satisfied that Winter Holdings is liable to persons dealing with it as a partner in the Businesses pursuant to PA s 21. More specifically, I am satisfied that Mr Cribb as liquidator of Winter Holdings could not refuse a proof of debt lodged by a creditor of the Businesses on the basis that Winter Holdings was not a partner in the Businesses; such debts are true liabilities of the company, enforceable against it.[29] Further, one consequence of Winter Holdings being a partner, or being liable as a partner pursuant to PA s 21, is that it is entitled to be indemnified by the partnership for liabilities incurred by it 'in the ordinary and proper conduct of the business of the firm; or ... in or about anything necessarily done for the preservation of the business or property of the firm'.[30]
Did Winter Holdings remain a trustee over the assets of the Trust?
31 Counsel for Mr Cribb identified four key assets Winter Holdings continues to own at law:
It is also clear that these assets were beneficially owned by the Trust.
32 Counsel for Mr Cribb then asserts that Winter Holdings is a trustee de son tort over the assets of the Trust. The circumstances in which a person will become a trustee de son tort were considered in some detail by the Victorian Court of Appeal in Nolan v Nolan, in particular by Ormiston JA.[31] After reviewing the authorities and leading texts, his Honour summarised the position as being that 'trustees de son tort intend, by their actions, to assume the role of trustees and, at least in the first place, to take control of trust property for the benefit of others rather than for themselves'.[32] The focus on the inquiry is on whether there was an intention to act in the role of trustee in relation to certain property.[33] The trustee must not act in their own interests, adversely to the interests of any beneficiary. Ormiston JA observed that to 'create an institutional constructive trust there must be some act which either directly displays such an intention in the supposed trustee or some acts or circumstances from which it may be inferred that he had an intention to act as a trustee or fiduciary or in some other role which imported an obligation to hold property as if he were a trustee'.[34]
33 However, a trustee de son tort is classically a stranger to the trust, someone who is not properly a trustee, and not an outgoing trustee.[35] I do not consider that Winter Holdings became a trustee de son tort over the assets of the Trust.
34 Where a corporate trustee ceases to hold office under the terms of the trust deed upon being placed into liquidation, it becomes a 'bare trustee' of the assets of the trust.[36] A 'bare trust' is 'a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them'.[37] The duties, powers and rights of a bare trustee are limited to protecting trust assets, and do not include the power to sell the assets of the trust.[38] The liquidator of a bare trustee can have no greater power than the trustee.[39]
35 The position in the present case is analogous. Upon being replaced by Gold, Winter Holdings became a bare trustee over the assets of the Trust. Those assets were taken to have been vested in Gold by TA s 10. Winter Holdings ceased to have the powers given to it under the deed constituting the Trust. It came under an obligation in the Deed of Variation to formally transfer the assets of the Trust to Gold.
Is Winter Holdings entitled to be indemnified for expenses it incurred as trustee of the Trust after 1 July 2013 and, if so, what right of indemnity does it have?
36 Winter Holdings is entitled to be indemnified for debts it incurred as trustee of the Trust after 1 July 2013. Trustees Act s 71 provides that a 'trustee may reimburse himself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers'. In equity the position is the same: a bare trustee is entitled to be indemnified for expenses and costs incurred in safeguarding the trust property.[40]
37 As to its right of indemnity, it is well established law that:
(a) a trustee may exercise its right of indemnity either by paying expenses directly out of trust property (right of exoneration) or by reimbursing itself for expenses which it paid directly (right of recoupment);[41]
(b) the right of indemnity arises when the liability is incurred;[42]
(c) the right of a trustee to be indemnified for both the right of exoneration and the right of recoupment is secured by an equitable lien or charge over the property of the trust;[43]
(d) the right of indemnity so secured confers on the trustee as proprietary interest in the trust property to the extent of the indemnity;[44]
(e) the trustee's equitable interest in the trust property to the extent of the right of indemnity takes priority over the beneficial interest of the beneficiaries;[45]
(f) the entitlement of the beneficiaries is confined to so much of the property of the trust as is available after the liability to the trustee has been discharged;[46]
(g) the right of indemnity, and the equitable lien which secures it, extends to the whole range of assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purposes of carrying on the business;[47]
(h) a trustee may have recourse to a trust fund to satisfy its right of indemnity without judicial intervention;[48]
(i) an equitable lien does not grant title to the property that the subject of the lien, and consequently does not carry with it a power of sale, it being necessary to enforce the lien either by judicial sale or the appointment of a receiver in order to deal with the property to create a fund from which the trustee may be indemnified; and [49]
(j) a trustee who is in possession of trust property may retain possession as against a beneficiary until its indemnity is exercised.[50]
38 In the present case, I am thus satisfied that Winter Holdings is entitled to be indemnified for the expenses which it incurred in operating the Businesses, even after the appointment of Gold.
39 Further, even as a bare trustee, Winter Holdings continues have an equitable charge or lien over the assets of the Trust securing its right of indemnity; however, it is a security which is enforceable only by judicial sale or the appointment of a receiver.[51]
Can Mr Cribb exercise any right of indemnity held by Winter Holdings and, if so, for what costs and expenses?
40 A number of principles in relation to the liquidation of a corporate trustee are well established. Applying those principles, I make the following findings:
(a) upon liquidation, the right of indemnity vests in Mr Cribb as liquidator;[52]
(b) Mr Cribb as liquidator of Winter Holdings may have recourse to Trust assets to satisfy Trust liabilities in the course of the winding up;[53]
(c) to be payable out of the Trust assets, the Trust creditor's claim must relate to a liability incurred by Winter Holdings in its capacity as trustee of the Trust in respect of which the right of indemnity attaches;[54]
(d) Mr Cribb as liquidator has an entitlement to claim the costs and expenses incurred in winding up the affairs of Winter Holdings provided these relate to the performance of Trust duties and, in respect of any liability incurred, he has a right of indemnity against Trust assets;[55]
(e) more specifically, provided Mr Cribb as liquidator is acting reasonably he is entitled to be indemnified out of Trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify Trust assets; recovering or attempting to recover Trust assets; realising or attempting to realise Trust assets; protecting or attempting to protect Trust assets; distributing Trust assets to the persons beneficially entitled to them;[56]
(f) as the affairs of Winter Holdings involve both trust and non‑trust matters (in particular the ATO debt), Mr Cribb will be required to estimate those of his costs that are attributable to the administration of Trust property and only those costs will be charged against the Trust assets;[57]
(g) the right of Mr Cribb as liquidator of Winter Holdings to have recourse against Trust assets to satisfy creditors' claims and his costs of winding up when dealing with Trust assets continued after the removal of Winter Holdings as trustee of the Trust; and[58]
(h) if the Trust assets are transferred to Gold as new trustee, the equitable charge or lien survives and Gold takes subject to that interest.[59]
How does Winter Holdings enforce the equitable lien securing its indemnity?
41 There is a conflict in the authorities as to whether the equitable lien or charge held by the old trustee may be enforced by the old trustee retaining possession of the trust assets and obtaining a judicial order for sale, or whether it must be enforced by action against the new trustee.
42 A convenient stating point in the analysis is the decision of the Full Court of the Supreme Court of South Australia in Suco Gold.[60] King CJ, with whom Jacobs and Matheson JJ agreed on this point, was of the view that the old trustee is so entitled to possession. The Chief Justice stated:
The trustee's lien is an equitable lien which confers on him a charge over the trust property, whether in his possession or not, for the purpose of protecting and enforcing the right of indemnity. It also confers on the trustee a right to possession of the trust property for the purpose of protecting and enforcing the right of indemnity ... the right of possession of the trustee, until his right of indemnity is exercised, is superior to those of a new trustee or the cestuis que trust. The rights conferred by the lien passed to the liquidator. They would enable him to obtain and retain possession of the trust property until the right of indemnity has been exercised, and to realize the trust property in the course of exercising it.
(a) the old trustee's right of indemnity did not cease on its loss of office;
(b) the new trustee would not be permitted to retain possession and use of the trust assets (a number of aeroplanes) for the benefit of the trust, even on an interim basis until the extent of the need for indemnity was established (though there was a discretion to do so in an appropriate case);
(c) the new trustee should give up possession of the trust assets to the old trustee; and
(d) a receiver should be appointed over the assets of the trust for the purpose of realising the assets of the trust to satisfy the indemnity.
44 The decision in Suco Gold was also applied more recently by Gray J in Garra Water Investments. In that case a liquidator had been appointed to the plaintiff, the old trustee. The directors of the old trustee, Mr and Mrs Garra, continued to operate the business of the trust with the approval of the liquidator. The trust deed provided that the trustee was taken to have vacated its office upon its liquidation. A new trustee (the defendant) was appointed, but the liquidator was not notified about the appointment until some six weeks after the liquidator commenced. The liquidator continued to allow Mr and Mrs Garra to operate the business, though asserted a claim for an indemnity. Gray J held that the old trustee continued as a bare trustee from the date on which it was notified of the appointment of a new trustee.[63] As a bare trustee, it retained the right of indemnity and a lien over the assets of the trust.[64] Following Suco Gold His Honour held that:[65]
(a) the old trustee remained liable to meet the debts of the trust business as they existed on the date on which it was notified of the appointment of the new trustee;
(b) the old trustee had a lien over the assets of the trust to meet the indebtedness of the old trustee;
(c) the indemnity and supporting lien extended to the proper and reasonable costs and expenses of the liquidator prior to notification of the appointment of the new trustee (the trust assets being the only assets of the old trustee);
(d) the indemnity and supporting lien also extended to the proper and reasonable costs and expenses of the liquidator after notification of the appointment of the new trustee when it acted as a bare trustee;
(e) the old trustee is entitled to trace the assets the subject of the lien in support of its right of indemnity; and
(f) there was no need for the old trustee to seek an order pursuant to the relevant trustee legislation to authorise the sale of the assets of the trustee to meet its indemnity, the trustee having this right under general law.
45 The decision in Suco Gold was also recently followed by Corboy J in Prior [No 2]. Corboy J regarded himself bound by the decision in Suco Gold unless he concluded that the decision was clearly wrong, which he did not.[66] His Honour observed that the conclusion in Suco Gold is consistent with the decisions in Octavo Investments and Buckle that a trustee who is in possession of trust property may retain possession as against a beneficiary until its indemnity is exercised. In Prior [No 2] Corboy J had previously made an order that certain land be sold in order that a trustee's right of indemnity could be satisfied.[67] In the subsequent application, the trustee sought an order for delivery up of possession of the land by the beneficiaries so that it could lease the land pending sale. His Honour granted the order sought.
46 The decision in Suco Gold was followed by Finkelstein J in Apostolou v VA Corporation of Australia Pty Ltd.[68] His Honour pointed out that 'Stott v Milne (1884) 25 Ch Div 710, a decision of a powerful Court of Appeal presided over by the Lord Chancellor, states the rule in unqualified terms'.[69] His Honour declined to follow the decision Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd,[70] discussed below, in which Brereton J held that a retiring trustee cannot retain possession of trust property as against a new trustee. Finkelstein J observed that there is no 'principled distinction between a claim for possession by a beneficiary (whose claim is said to be defeated by the lien) and a claim for possession by a new trustee (whose claim is said to defeat the lien)', being the position in Lemery Holdings.[71]
47 In Apostolou Finkelstein J also held that the liquidator of a corporate trustee (even one replaced by a new trustee) could rely on the general right of sale in CA s 477(2)(c) to sell the assets of the trust to satisfy the trustee's right of indemnity, 'provided that the liquidator has the legal title to dispose of'.[72] In Kitay McKerracher J followed the decision of Finkelstein J and likewise held that the liquidator of the old trustee could utilise the power in CA s 477(2)(c) to sell the assets of the trust in order to satisfy its indemnity.[73] This position was the subject of strong contrary view by Brereton J in Stansfield. His Honour was of the view that 's 477(2)(c) does not empower a liquidator to sell the beneficial interest in property that the company holds on trust, even if the company has an equitable charge over it, because the property is not itself "property of the company"'.[74] As Mr Cribb has not sought to exercise this power, I do not need to express an opinion on the point.
48 The court also has the power, in an appropriate case, to order that trust property be delivered into the hands of the new trustee on terms by which the old trustee's indemnity is fully protected.[75] Thus in Hillig v Darkinjung Local Aboriginal Land Council[76] Barrett J ordered that the old trustee was to transfer all the trust assets to the new trustee except for a specified sum which was to be paid into court pending resolution of the old trustee's claim to indemnity and upon resolution and satisfaction of those claims to the new trustee. Consistent with the general principles set out above, the old trustee is entitled to retain only sufficient to cover its indemnity and not more.[77]
49 A convenient starting point for the line of authority to that a retiring trustee cannot retain possession of trust property as against a new trustee is the decision of the Thomas JA, Shepherdson and Jones JJ in Belar. This decision is authority that where there has been a change in trustee such that the old trustee ceases to be entitled to possession of the trust assets, the proper way in which to enforce the lien is by action against the new trustee. Specifically, their Honours stated:[78]
In conducting the business of the trust, the trustee becomes personally liable for debts incurred.
'However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets.' [Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 367]
That is a reference to trust assets in the trustee's possession. When there is a change of trustee with the trust assets being vested in the new trustee, the former trustee no longer has direct access to such assets, and should make the necessary claim for indemnity against the trustee who represents the trust.
The trustee's right of indemnity out of the trust assets is in the nature of a charge or lien in favour of the trustee and as such takes preference or priority over claims by the cestuis que trust. But of course when the assets have passed out of a trustee's possession the necessary claim for a trustee's indemnity should be made against the new trustee. An unco-operative new trustee who declined to exercise the powers to recover trust property in the hands of the beneficiaries could be made a defendant, and orders could be made which would in effect permit the former trustee to exercise such powers by subrogation.
There is ultimately a right to proceed directly against the beneficiaries but that right depends upon exhaustion of any remedy against the personal representative.
50 This passage was expressly approved by Spigelman CJ in Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd[79] and by Barrett J in Ronori Pty Ltd v ACN 101 071 998 Pty Ltd.[80] In Ronori the defendant company was the trustee of a unit trust. The defendant went into liquidation. By operation of the trust deed, from the date of appointment of the liquidator, the defendant was not qualified or entitled to exercise the office of trustee of the unit trust. The unitholders exercised their power under the trust deed to appoint a new trustee, the plaintiff. The plaintiff sought and obtained a declaration that it was the sole trustee of the unit trust in place of the defendant. It also sought orders vesting the trust assets in the new trustee. The trust deed provided that a trustee shall on retirement or the termination and vacation of the office of trustee 'take such action as is necessary to vest the trust fund or cause it to be vested in any new trustee or trustees and shall deliver to such new trustee or trustees all books, documents, records and other property relating to the trust fund'. Barrett J observed that it 'is incumbent upon the defendant to give effect to and obey' this clause. However, the liquidator of the defendant was reluctant to do so because of concerns about his ability to recover and recoup out of the trust property amounts due to the defendant as former trustee.
It is axiomatic that a trustee has a right to be indemnified out of trust assets against personal liabilities incurred in the due and proper performance of the trust. Furthermore, the trustee has a beneficial interest in the trust assets to the extent of that right. The interest is a proprietary interest. ...
In the present case, therefore, the former trustee continues to enjoy a beneficial interest in the trust property commensurate with its right of indemnity out of that property. Although the trustee's right to resort to trust property is sometimes described as a lien, it is not essential for the enjoyment and effectuation of the right that possession of the trust property be retained. The right entails, as I have said, a beneficial interest in the property. It is not in the nature of a possessory security.
Where there is a change of trustee, the former trustee's interest remains enforceable against the trust property. ... [His Honour then cited the passage from Belar quoted above]
...
It is thus clear that, even though the trust assets have passed out of the former trustee's possession, the vindication of that person's beneficial interest remains available by way of an appropriately constituted claim against the new trustee. There need therefore be no concern on the part of the court about recognising immediately the right of the new trustee to have the trust property vested in it.
52 Thus his Honour was not prepared to allow the liquidator of the old trustee to oppose the vesting of assets in the new trustee because of the concern about his ability to exercise his indemnity for costs out of the assets of the trust. Barrett J did not address the decision in Suco Gold.
53 In Lemery Holdings Brereton J declined to follow the decision in Suco Gold, regarding these observations as being obiter and referring to first instance decisions in New South Wales to the contrary, in particular Ronori and Hillig.[83] In that case the old trustee ceased to hold office under the terms of the trust deed upon being placed in liquidation. A new trustee was appointed. The old trustee had commenced proceedings seeking to recover certain loans. The new trustee sought a declaration that it had been appointed trustee of the trust and that the loans were assets of the trust which ought to be vested in it. The old trustee argued that it was entitled to retain the loans in its possession as security for its right of indemnity against the trust assets. Brereton J found in favour of the new trustee. Specifically, his Honour held that the 'former trustee does not have a right to retain, as against a new trustee, the trust assets as security for an accrued right of indemnity, though the former trustee is entitled to ensure the new trustee does not take steps which will destroy, diminish or jeopardise the old trustee's right of security, which subsists in the trust assets after their transfer to the new trustee'.[84]
54 The issue of the power of an old trustee to enforce its indemnity was considered by Gordon J in Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd.[85] In that case the defendant company (old trustee) was placed in liquidation. Its only business was as trustee of a trust, and its only assets and liabilities were of the trust. Under the trust deed it ceased to hold office upon being placed into liquidation. No replacement trustee was appointed. Her Honour permitted the liquidator to sell the assets of the trust pursuant to Trustee Act 1958 (Vic) s 63, with the proceeds being dealt with by the liquidator as assets in the winding up of the company. The costs of realising the assets and the costs of the proceedings were to be costs in the winding up.
55 Her Honour referred to the decisions in Suco Gold, Lemery Holdings and Ronori. In relation to the decision in Lemery Holdings her Honour reframed the outcome in terms of the old trustee being a bare trustee:[86]
In general terms, the court concluded that the old trustee held the assets as a bare trustee and that, as a bare trustee, it did not have the power to retain and sell those assets as against any new trustee. The court made orders declaring that the new trustee was trustee of the trust in place of the old trustee but noting the entitlement of the old trustee to enforce its right of indemnity and right of exoneration against the assets of the trust in the hands of the new trustee. That is not surprising. There was a new trustee with all of the necessary powers including the power of sale.
As bare trustee, the Company has limited powers to deal with the assets of the Trust. The rights of exoneration and indemnity are not otherwise affected and the creditors' rights of recourse against the assets of the Trust remain unaffected.
The Liquidator formed the view that the appropriate course is for the Liquidator on behalf of the Company as bare trustee to be given powers necessary to deal with the assets of the Company the subject of the Trust so as to realise those assets and otherwise account for those assets in the ordinary course of the winding up of the Company as corporate trustee.
Interestingly, there is a conflict in the authorities about the position of a corporate trustee in a winding up where the trustee is removed as trustee consequent upon the winding up, by virtue of a disqualification clause in a trust deed. In addition, the orders are sought because of the limited powers of a bare trustee to deal with trust assets. This impacts on the Liquidator's position consequent upon the winding up of the bare trustee.
57 As I have already noted, the consequences of the finding that the company was a bare trustee were that its duties, powers and rights were limited to protecting the trust assets, and did not include a power to sell the assets of the trust.[89]
58 The power to sell was, however, found in Trustee Act 1958 (Vic) s 63. Her Honour's reasons for granting the power to sell pursuant to this section were:[90]
The Company became a bare trustee of the assets of the Trust immediately upon the winding up of the Company and the appointment of the Liquidator ... . Next, the Company acted only as trustee of the Trust and in no other capacity and all assets owned by the Company are held by it as trustee of the Trust and all liabilities incurred by the Company were incurred by it in its capacity as trustee of the Trust...Thirdly, where, as has occurred here, the appointor is unwilling for whatever reason to appoint a new trustee, it is appropriate for the Court to confer upon the Company the power of sale of the assets of the Trust pursuant to s 63 of the Trustee Act subject, of course, to the duties prescribed by that Act.
59 The approach in Caterpillar of granting a statutory power of sale to the old trustee who became a bare trustee on being placed into liquidation was also used in Pleash,[91] Fletcher[92] and Theobald, In the Matter of Finplas Pty Ltd.[93] In each of these cases, no replacement trustee was appointed.
60 In Neeeat Holdings (in liq)[94] a trustee of three trusts was placed in liquidation, with the effect that under each trust deed it ceased to hold office. The beneficiaries of each trust duly appointed new trustees. The liquidator sought directions pursuant to CA s 479(3) to be able to sell the assets of trusts in the course of the winding up. Kenny J made the orders sought. Following Caterpillar, the application proceeded on the basis that the new trustees were bare trustees who did not have a power to sell the assets. Her Honour also followed the decision in Apostolou. The power of sale was found in Trustee Act 1958 (Vic) s 63 and/or its equivalent in TA s 89(1). Kenny J concluded:[95]
Is it appropriate for the liquidator to be permitted to sell this trust asset (whether of the family trust alone or of the family trust and the super fund trust) notwithstanding the appointment of a new trustee or trustees? In the circumstances disclosed to the Court, it is appropriate that the liquidator should be enabled to sell the property. The new trustee (or trustees) has (or have) taken no relevant steps with respect to the ... property and has (or have) given no indication that they would take such steps in the future. There will not be sufficient funds to meet the claims of creditors and the costs of the liquidation unless the liquidator is permitted to sell the ... property. Accordingly I would make the order with respect to this property, as sought by the liquidator.
61 Her Honour also ordered that the costs of the liquidator be paid out of the sale proceeds of the property, along with the costs of the proceedings.[96]
62 In the present case, is not necessary for me to resolve the differences in the authorities as on either line of authority I would make the same decision.
63 Starting with the decision in Suco Gold, on that line of authority Winter Holdings has the right to possession of the property of the Trust for the purpose of protecting and enforcing its right of indemnity. This right may be enforced against both the beneficiaries of the Trust and Gold. The present case is an appropriate one in which to order the sale of sufficient of the assets of the Trust to satisfy the right of indemnity. It is similar to Coates and Garra Water Investments.
64 In relation to the line of authority reflected in Belar and Lemery Holdings, the decisions in Pleash, Fletcher, Finplas, Caterpillar and Neeeat Holdings make it clear that the court may empower a bare trustee in appropriate circumstances to sell trust assets pursuant to a statutory power. In Neeeat Holdings the power of sale was granted notwithstanding the appointment of a new trustee. The relevant statutory power for present purposes is TA s 89(1). In the present case, I am of the view that the sale of sufficient of the assets of the Trust to satisfy the right of indemnity is 'expedient in the management or administration of any property vested in a trustee' pursuant to TA s 89(1). Unlike the factual situation which arose in both Ronori and Lemery Holdings, Gold as the new trustee has until now only played a passive role in the affairs of the Trust. Gold has allowed Winter Holdings to continue to manage the Businesses for some 18 months after the Deed of Variation. Subject to the comments which follow, I do not consider it to be expedient or appropriate to simply allow Gold to commence to manage the Businesses and leave Winter Holdings to enforce its indemnity by commencing litigation against Gold.
65 On either scenario, I am also of the view that it is just or convenient to appoint a receiver to manage the Businesses in the interim and facilitate the sale pursuant to Supreme Court Act 1935 (WA) s 25(9). There is a clear need to appoint a receiver over the assets of the Trust least on an interim basis. The Businesses may only operate if there is a liquor licence. The liquor licence is in the names of Winter Holdings and Red Cee, hence the protection order was given to them. Mr Cribb is running the Businesses. Gold has taken minimal steps practically to transfer the assets of the Trust to it, though it is entitled for that to occur. Practical considerations dictate that Mr Cribb is the appropriate receiver so that the present arrangements may continue.
66 What follows are my preliminary views as to how to give effect to these findings.
67 Mr Cribb should be appointed the receiver over the property of the Trust on an interim basis, my preliminary view of which is 90 days. The powers proposed by Mr Cribb in the application both as to management and sale are appropriate. For example, the powers are wide enough to allow the partnership interest, including the legal interest in the lease, business name and liquor licence, to be sold to either Red Cee or transferred to Gold for appropriate consideration so as to satisfy the indemnity.
68 There should also be a declaration Winter Holdings is entitled to be indemnified out of the assets of the Trust in respect of liabilities incurred whilst trustee of the Trust and in that capacity.[97] This should reflect my findings in [40] above. In the present case, Winter Holdings has debts that are not trust debts, in particular the ATO debt. Mr Cribb will need to determine which of his costs and expenses relate to the affairs of Winter Holdings in its own right and which relate to the affairs of Winter Holdings as trustee. Expenses incurred in operating the Businesses clearly relate to the affairs of the Trust. My preliminary view is that the expenses incurred in placing Winter Holdings into liquidation are not Trust expenses, as it has been conceded that the ATO debt was incurred by Winter Holdings in its own right.
69 However, Winter Holdings as the old trustee is entitled to retain only sufficient assets to cover its indemnity and not more. I am not aware of the value of the Businesses, nor of the likely final amount of the indemnity. In the present case, my preliminary view is that the balance of the risk of injustice lies in allowing the new trustee, Gold, an opportunity to satisfy the right of indemnity held by Winter Holdings; hence the 90 day interim appointment of a receiver. If Gold is able to satisfy the indemnity within this time, then Winter Holdings should honour its obligations in the Deed of Variation and do all that is necessary to transfer legal title to the assets of the Trust to Gold.
70 In order to facilitate Gold satisfying the indemnity, within 10 days of the date of final orders being made, Mr Cribb should provide Gold's lawyers with an estimate of the amount required to satisfy the indemnity to the end of the interim receivership. The estimate should be in sufficient detail to allow Gold's solicitors to form a view as to whether or not the expenses are properly expenses of the Trust. The parties should have liberty to apply in this action in the event of a conflict in the characterisation.
71 If Gold is not able to satisfy the indemnity within 90 days, then Mr Cribb should be given the power to sell sufficient of the assets of the Trust (including its interest in the partnership) to indemnify Winter Holdings. There should be a specific order that any residual assets of the Trust be paid to Gold.
72 The orders should be structured in such a way that they are self‑executing at the end of the 90 day period.
73 I am conscious that these orders may be perceived by Ms Winter to operate unfairly towards her and Gold. However, for a number of reasons, this outcome is appropriate. Ms Winter is in many respects the author of the present situation. If she had contested the ATO's assessment of Winter Holdings' tax liabilities through the taxation review mechanisms, it may be that no liquidator would have been appointed to Winter Holdings, or at least that it would have been clear from the outset that the ATO debt was not a Trust debt. Further, prior to the commencement of this action Ms Winter took no steps to transfer the legal ownership of the assets of the trust from Winter Holdings to Gold, in particular the lease, the business name, the partnership interest and the liquor licence. She was a director of both companies. The failure to do so had two consequences. First, Winter Holdings continued to incur liabilities as a partner in managing the Businesses after it became a bare trustee. Second, upon the appointment of Mr Cribb it was a necessary and reasonable decision for him to take over the running of the partnership Businesses. This distinguishes the present case from those in which the court has declined to empower the old trustee,[98] as a bare trustee, to sell the assets of the trust to satisfy the indemnity.
74 I will hear from counsel on my preliminary view as to the form of the final orders. I will also hear from counsel on costs.
[1] Which I will refer to as the 'First Cribb Affidavit', 'Second Cribb Affidavit' and 'Third Cribb Affidavit' respectively.
[2] Which I will refer to as the 'Smith Affidavit'.
[3] Which I will refer to as the 'First Winter Affidavit' and the 'Second Winter Affidavit' respectively.
[4] Which I will refer to as the 'Turco Affidavit'.
[5] Plaintiff's additional outline of submissions, 24 April 2015 [3].
[7] First Winter Affidavit VW‑2 (12-19); First Cribb Affidavit NC‑8 (56 ‑ 62).
[9] First Winter Affidavit [19]; First Cribb Affidavit [11].
[10] First Winter Affidavit VW‑1 (9 ‑ 11).
[12] Which as I have noted I will refer to as the 'Businesses'.
[14] Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550.
[16] First Cribb Affidavit (71 ‑ 89); First Winter Affidavit [21].
[19] First Cribb Affidavit NC‑13 (118).
[21] Second Winter Affidavit [19]; First Cribb Affidavit (65).
[23] First Cribb Affidavit NC‑12 (115 ‑ 116).
[25] First Cribb Affidavit NC‑12 (115 ‑ 116).
[27] Second Cribb Affidavit [4]; NC‑20 (81 ‑ 125).
[29] Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332, 341 (Brennan & Dawson JJ).
[31] Nolan v Nolan [2004] VSCA 109 (Chernov & Eames JJA agreed with Ormiston J on this issue). See generally: Mara v Browne [1895] UKLawRpCh 191; [1896] 1 Ch 199, 209 (Smith LJ); Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48; [2003] 2 AC 366, 403 (Lord Millett, Lords Hutton & Hobhouse agreeing); Horwood v Davenport [2014] WASC 436 [80] ‑ [86] (Gething AM).
[34] Nolan [80], see also [76] ‑ [77].
[35] Barnes v Addy [1874] UKLawRpCh 20; (1874) LR 9 Ch App 244, 251 ‑252 (Lord Selborne LC).
[36] Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 [7] (Gordon J); Garra Water Investments Pty Ltd (in liq) v Ourback Yard Nursery Pty Ltd [2012] SASC 44 [37] ‑ [48] (Gray J); Fletcher, in the matter of Starrit Pty Ltd (in liq) [2012] FCA 803 [34] (Collier J); Re Neeeat Holdings (in liq) [2013] FCA 61 [19] (Kenny J).
[37] Herdegen v Federal Commissioner of Taxation [1988] FCA 419; (1988) 84 ALR 271, 281 (Gummow J).
[38] Kitay, in the matter of South West Kitchens (WA) Pty Ltd [2014] FCA 670 [14]; Re Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 1484 [10] (Brereton J); Fletcher [34]; Caterpillar [7]; Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) [2008] FCAFC 184 [79] (Judgment of the Court) (Bruton Holdings); Herdegen (281 ‑ 282).
[40] Herdegen (282); Caterpillar [18]; Re Pleash as joint and several liquidator of Suncoast Restoration Pty Ltd (in liq) [2013] FCA 355; (2013) 93 ACSR 606 [27 ] (Reeves J).
[41] Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226, 245 (Brennan CJ, Toohey, Gaudron, McHugh & Gummow JJ) (Buckle); Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42, 52 (Owen J, with whom Malcom CJ & Walsh J agreed); Prior v Simeon [2010] WASC 382 [21] Corboy J.
[42] Custom Credit (52); Southern Wine Corporation Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236 [30] (McLure JA, with whom Wheeler JA agreed).
[43] Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360, 369 ‑ 370 (Stephen, Mason, Aickin & Wilson JJ); Custom Credit (52 ‑ 53); Southern Wine [30]; Prior [21].
[44] Octavo Investments (369 ‑ 370); Buckle (246 ‑ 247); Southern Wine [30], [62] (Pullin JA); Prior [21].
[45] Octavo Investments (367); Buckle (246); Prior [21];
[46] Buckle (226, 246 ‑ 247); Prior [21];
[49] Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, 663 (Deane J); Buckle (247); Southern Wine [29], [62]; Prior [21].
[50] Octavo Investments (369 ‑ 370); Custom Credit (52 ‑ 53); Prior v Simeon [No 2] [2011] WASC 61 [12] (Corboy J) (Prior [No 2]).
[51] Stansfield [10]; Kitay [14]; Caterpillar [26] ‑ [30]; Apostolou v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84 [46].
[52] Neeeat Holdings [17]; Pleash [27]; Caterpillar [16], [27]; Belar Pty Ltd (in liq) v Mahaffey [1999] QCA 2; [2000] 1 Qd R 477, 488 (Judgment of the Court); Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 105 (King CJ, with whom Jacobs & Matheson JJ agreed).
[53] Kitay [13]; Neeeat Holdings [17]; Pleash [27]; Caterpillar [14]; Suco Gold (104).
[54] Neeeat Holdings[17]; Pleash [27]; Caterpillar [16].
[55] Neeeat Holdings[17]; Pleash [27]; Caterpillar [17].
[56] Neeeat Holdings [24]; 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144 [34] (Finkelstein J).
[57] Neeeat Holdings [24]; 13 Coromandel Place [35].
[58] Pleash [27]; Re Dalewon Pty Ltd (in liq) [2010] QSC 311 [8] (McMurdo J); Caterpillar [27]; Southern Wine [30], [62]; Coates v McInerney (1992) 7 WAR 537, 538 ‑ 539 (Anderson J).
[59] Caterpillar [27]; Dalewon [8]; Ronori Pty Ltd v ACN 101 071 998 Pty Ltd [2008] NSWSC 246 [16] (Barrett J); Belar (488).
[61] Coates v McInerney (538 ‑ 539). Suco Gold was cited in argument, though does not appear in the decision.
[65] Garra Water Investments [25], [38] ‑ [50].
[69] Apostolou [50]; Stott v Milne (1884) 25 Ch Div 710, 715 (Earl Selborne LC, with whom Cotton & Lindley LJJ agreed). However, their Lordships did not consider the position which arises if a new trustee is appointed.
[70] Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344.
[75] Apostolou [51]; Global Funds Management (NSW) Ltd v Burns Philp Trustee Co Ltd (in prov liq) (1990) 3 ACSR 183.
[76] Hillig v Darkinjung Local Aboriginal Land Council [2006] NSWSC 1371 [17] ‑ [19].
[79] Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] NSWCA 29; (2002) ATPR 41‑864 [2].
[85] Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677.
[93] Theobald, In the Matter of Finplas Pty Ltd [2014] FCA 31 [19] ‑ [28] (Siopis J).
[94] Re Neeeat Holding (in liq) [2013] FCA 61.
[97] Orders were made to this effect in Coates.
[98] In particular Ronori and Lemery Holdings.
(1988) 84 ALR 271
(1979) 144 CLR 360
(2008) 74 NSWLR 550
(1990) 169 CLR 332
(1998) 192 CLR 226
(1992) 8 WAR 42
(1983) 149 CLR 639
(1983) 33 SASR 99
(1992) 7 WAR 537