FEDERAL COURT OF AUSTRALIA

Parker, in the matter of Dengi Pty Limited (in liq) v Dengi Pty Limited (in liq) [2018] FCA 444

ORDERS

THE COURT DIRECTS THAT:

1.    The plaintiff is justified in treating the assets and liabilities incurred by Dengi Pty Limited (in liquidation) ACN 159 964 815 (Company) in the conduct of its business as assets and liabilities of the AI Trust.

2.    The plaintiff be allowed his reasonable remuneration in respect of the administration of the AI Trust from the AI Trust assets.

3.    The plaintiff would be justified in distributing the assets of the AI Trust as follows:

(a)    first, in respect of the expenses of the liquidation of the Company;

(b)    secondly, in payment of the costs of this proceeding;

(c)    thirdly, in payment of his reasonable remuneration; and

(d)    finally, as to the balance of the assets of the AI Trust, pari passu amongst the admitted creditors of the Company.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MARKOVIC J:

1    Gregory Jay Parker, the plaintiff, is the liquidator of Dengi Pty Limited (Dengi) (Liquidator). Dengi is the trustee of the AI Trust. As the facts set out below make plain, Dengi did not conduct any trading activities other than in its capacity as trustee.

2    The Liquidator seeks directions pursuant to s 511 of the Corporations Act 2001 (Cth) (Act) that he would be justified in treating the assets and liabilities incurred by Dengi in the conduct of its business as assets and liabilities of the AI Trust; for payment of his reasonable remuneration; and that he would be justified in distributing the assets of the AI Trust in the following manner:

    first, in respect of the expenses of the liquidation of Dengi;

    secondly, in payment of the costs of this proceeding;

    thirdly, in payment of the Liquidator’s reasonable remuneration; and

    fourthly, pari passu amongst the admitted creditors of Dengi.

background facts

3    Dengi was incorporated on 17 August 2012. By deed dated 24 August 2012 (Trust Deed) the AI Trust was established and Dengi was appointed as trustee. The AI Trust was a discretionary trust established for the benefit of the “General Beneficiaries” as defined. The General Beneficiaries were, relevantly, the “Specified Beneficiaries” as at the date of the deed. The term Specified Beneficiaries is defined to mean:

Ms Natalja Belimova and the children of Ms Natalja Belimova and remote beneficiaries are Pavel Belimovs and the children of Mr Pavel Belimovs and if deceased, the estate of the Specified Beneficiary;

4    Ms Belimova has one child, Alex Ikin. Mr Kirby Ikin, who is the sole director of Dengi, is Ms Belimova’s husband and Alex Ikin’s father.

5    The term “Appointor” is defined in the Trust Deed to mean Ms Belimova and upon, relevantly, the insolvency of “the last Appointor, if no other appointment has been made”, Mr Belimovs. The term “Trustee” is defined to mean Dengi “and any other trustee or trustees for the time being of the AI Trust, under this Deed”.

6    Clause 19(i) of the Trust Deed provides that the Appointor may remove any Trustee; appoint any additional trustees; and appoint a new trustee in place of any Trustee who for any reason ceases to be Trustee. Clause 19(v) relevantly provides that a Trustee will cease to so act if, among other things, he “is insolvent or wound up”.

7    On or about 7 September 2012 Dengi entered into a contract to acquire a property at 1C/10 Abbott Street, Cammeray (Cammeray Property) for $600,000. On or about 1 May 2013 Dengi became the registered proprietor of a property at 2B/94-96 Allison Road, Randwick (Randwick Property).

8    The Cammeray Property and the Randwick Property were treated in Dengi’s financial statements as assets of the AI Trust:

(1)    the balance sheets for the AI Trust for the years ended 30 June 2014 and 30 June 2015 each record that the trust had non-current assets comprising property, plant and equipment with a value of $1,264,650.52. In each case, the accounts show land and buildings at cost plus structural improvements at cost amounting to that value;

(2)    the balance sheets for Dengi as at 30 June 2015, 30 June 2016 and 30 June 2017 each record “property – Cammeray” and “property – Randwick” to have a combined value of $1,215,912.44; and

(3)    the profit and loss account for the year ended 30 June 2014 for the AI Trust records that the total income of the trust was $55,300.02, comprising of rent in the sum of $55,289.10 and interest income in the sum of $10.92. The expenses also appear to relate to property management, for example, body corporate fees, borrowing expenses, insurance, rates and repairs and maintenance. The profit and loss statements for the AI Trust for the years ended 30 June 2015 and 30 June 2016 and the tax returns for the AI Trust for the years ended 30 June 2014 and 30 June 2015 are to similar effect.

9    In 2015 Chatswood ENT Pty Limited (Chatswood ENT) as trustee for the Chatswood ENT Trading Trust commenced proceeding no 2015/00235400 in the Supreme Court of New South Wales against Ms Belimova and Dengi (Supreme Court Proceeding). In a further amended statement of claim filed on 12 May 2016 Chatswood ENT alleged, in effect, that Ms Belimova was employed by it from about 20 March 2010 to 15 April 2013 and that she misappropriated funds belonging to Chatswood ENT in the sum of approximately $1.2 million, some of which was paid to Dengi. Among other things, Chatswood ENT sought a declaration that Dengi held its interest in the Randwick Property and in the Cammeray Property on constructive trust for it insofar as Chatswood ENT’s money had been used to acquire those interests.

10    On 15 December 2016 Ms Belimova was declared bankrupt. Thus, on and from that date, Mr Belimovs became the Appointor of the AI Trust (see [5] above).

11    On 17 March 2017 the Supreme Court Proceeding was settled on the basis that judgment was entered for Chatswood ENT against Dengi for $200,000. The terms of settlement required Dengi to list the Cammeray Property for sale and pay out of the proceeds of sale the costs of the sale, any moneys owing to the mortgagee, adjustments of water rates and council rates and the judgment sum of $200,000 plus interest, if any, thereon. As part of the settlement, Chatswood ENT released Dengi, including in its capacity as trustee of the AI Trust, from all claims or causes of action which Chatswood ENT had connected to the facts the subject of the proceeding.

12    By contract of sale dated 25 May 2017 Dengi agreed to sell the Cammeray Property for the sum of $925,000 with settlement to take place on 6 July 2017.

13    On 29 June 2017 the Liquidator was appointed. On that day, upon its winding up, Dengi ceased to act as trustee of the AI Trust.

14    The sale of the Cammeray Property completed on 8 July 2017. After deducting the selling costs and the amount payable to the mortgagee, Dengi received the sum of $185,913.01 which has been retained in a bank account under the control of the Liquidator. The Randwick property was sold prior to the Liquidator’s appointment.

15    Since his appointment the Liquidator has received proofs of debt from:

(1)    Chatswood ENT;

(2)    Eastern Commercial Lawyers, the solicitors acting for Dengi in the Supreme Court Proceeding;

(3)    Asia Pacific Aerospace Consultants Pty Limited (APA Consultants) for the provision of “litigation support services” signed by its managing director, Mr Ikin. The fees relate to management of the Supreme Court Proceeding in the period 31 December 2015 to 31 May 2017;

(4)    Mr Ikin in his personal capacity for invoices paid on behalf of Dengi as trustee of the AI Trust, principally in relation to invoices issued by Eastern Commercial Lawyers for their assistance in the Supreme Court Proceeding; and

(5)    Ms Belimova’s trustee in bankruptcy, Giles Woodgate for a loan to the AI Trust by Ms Belimova.

16    The Liquidator does not believe that Ms Belimova or her trustee in bankruptcy are creditors of Dengi or the AI Trust and is of the opinion that the AI Trust is a creditor of Ms Belimova’s bankrupt estate in the amount of $483,776.74. He has submitted a proof of debt in that amount to Ms Belimova’s trustee in bankruptcy.

Notice to interested parties

17    The evidence before me establishes that the originating process filed on 7 September 2017 together with the Liquidator’s first affidavit sworn on 6 September 2017 was served on each of the persons and entities who have lodged proofs of debt referred to in [15] above as well as:

(1)    the Australian Tax Office;

(2)    St George Bank;

(3)    Province Agents;

(4)    Holt and Holt Lawyers;

(5)    the Office of State Revenue;

(6)    TW Wells Chartered Accountant;

(7)    Mr Belimovs;

(8)    Alex Ikin’s legal guardians; and

(9)    Gabriela Belimova’s legal guardian.

18    The Liquidator has ascertained that while the Australian Tax Office, TW Wells Chartered Accountant, Holt and Holt Lawyers, Province Agents and the Office of State Revenue were listed as unsecured creditors in the report as to affairs dated 5 July 2017 lodged by Mr Ikin as director of Dengi:

(1)    the Australian Tax Office and TW Wells Chartered Accountant are not in fact creditors of Dengi or the AI Trust;

(2)    Holt and Holt Lawyers acted for Dengi on the sale of the Cammeray Property and Province Agents were the agents for the sale of that property. Both entities were paid on completion of that sale from the proceeds of sale; and

(3)    the Office of State Revenue was paid on completion of the sale of the Cammeray Property pursuant to its statutory charge.

19    St George Bank was not listed in the report as to affairs as an unsecured creditor. It had a first registered mortgage over the Cammeray Property and was paid out in full on completion of the sale.

20    On the first occasion that the proceeding was listed before the Court on 28 September 2017, leave was granted to Chatswood ENT to appear as a creditor of the defendant. Pursuant to r 2.13 of the Federal Court (Corporations) Rules 2000, an order was made requiring the Liquidator to serve on Chatswood ENT any additional evidence on which it intended to rely. At the hearing the solicitor for Chatswood ENT appeared but, on his application, was excused. No other creditor or interested party who was given notice of the proceeding appeared at the hearing.

statutory framework and legal principles

21    The Liquidator makes his application pursuant to s 511 of the Act which relevantly provides that a liquidator may apply to the Court to determine any question arising in the winding up of a company or to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court. Section 511 of the Act was repealed by Item 170 of the Insolvency Law Reform Act 2016 (Cth) (ILR Act). Regulation 10.25.02(3)(h), which was inserted in the Corporations Regulations 2001 (Cth) by the Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth), provides that, among others, the amendments made by Item 170 of the ILR Act apply in relation to external administrations on and after 1 September 2017.

22    Section 1617 of the Act applies to proceedings brought under the old Act in relation to the external administration of a company either before the commencement day or on or after the commencement day in accordance with a provision of Div 3 of Pt 10.25 of the Act. Section 1617(3) provides:

Subject to this Part, the old Act continues to apply on and after the commencement day in relation to the proceedings despite the amendments and repeals made by Schedule 2 to the Insolvency Law Reform Act 2016.

23    The term “commencement day” is defined in s 1551 of the Act as the date on which Pt 1 of Sch 2 of the ILR Act commences which is relevantly 1 September 2017.

24    This proceeding was commenced on 7 September 2017. That is after the commencement day. In my opinion, contrary to the submissions made by the Liquidator, s 511 of the Act does not apply. Rather s 90-15 of Sch 2 of the Act - Insolvency Practice Schedule (Corporations) applies to this application: cf In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [5] (per Black J).

25    Section 90-15(1) provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. Among other things, the Court can make an order determining any question in the external administration of the company: s 90-15(3)(a).

26    In Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486 at [41] Gleeson J noted that the question of whether to exercise the power in s 90-15 was “to be answered by reference to the principles that applied to the exercise of the discretions previously contained in s 479(3) and s 511 of the Act”.

27    At [35] and [38]-[40] her Honour summarised the principles relating to applications under ss 479(3) and 511 of the Act as follows:

35     In Re Ansett Australia Ltd and Korda [2002] FCA 90; 115 FCR 409, concerning s 479(3), Goldberg J explained at [44]:

When liquidators and administrators seek directions from the Court in relation to any decision they have made, or propose to make, or in relation to any conduct they have undertaken, or propose to undertake, they are not seeking to determine rights and liabilities arising out of particular transactions, but are rather seeking protection against claims that they have acted unreasonably or inappropriately or in breach of their duty in making the decision or undertaking the conduct. They can obtain that protection if they make full and fair disclosure of all relevant facts and circumstances to the Court. In Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674, McLelland J said at 679-680:

The historical antecedents of s 479(3) …, the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator’s application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitrary form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.

...

Modern Australian authority confirms the view that s 479(3) ‘does not enable the court to make binding orders in the nature of judgments’ and that the function of a liquidator’s application for directions ‘is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company’s transactions before the liquidation’: [cases cited omitted].

…

38    Generally speaking, applications under s 511 were treated in the same manner as applications for directions in a Court-ordered winding up under s 479(3): ICS Real Estate at [23], citing Dean-Willcocks v Soluble Solution Hydroponics (1997) 42 NSWLR 209 (“Soluble Solution Hydroponics”) at 212; Crawford v Oswald Park Pty Ltd (in liq) [2006] NSWSC 987 at [10]; S & D International (in liq) v MIG Property Services [2010] VSC 336; (2010) 79 ACSR 373 (“S & D International”) at [7]; Re Purchas as liquidator of Astarra Asset Management Pty Ltd (in liq) [2011] NSWSC 91 (“Re Purchas”) at [33]; Re 7 Steel Distribution Pty Limited (in liq) (recs and mgrs apptd) [2013] NSWSC 669 at [20].

39    Under s 511(2), the power under s 511 was only to be exercised if the determination of the relevant question or the exercise of power sought “will be just and beneficial”: Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ASCR 18 at [46]. The Court could exercise the discretion where the relief sought by the liquidator is “of advantage to the liquidation”: Re Purchas at [34], citing Soluble Solution Hydroponics at 212 and S & D International at [7].

40    In Soluble Solution Hydroponics at 213, Young J saw no reason why, in a proper case, the Court could not exercise its powers under s 511 on an ex parte application.

treatment of the assets and liabilities of Dengi

28    The first direction sought by the Liquidator is that he would be justified in treating the assets and liabilities of Dengi as assets and liabilities of the AI Trust.

29    Upon the appointment of the Liquidator to Dengi, by operation of cl 19(v) of the Trust Deed, it ceased to be the trustee of the AI Trust. No other trustee has been appointed in its place and there does not seem to be any prospect of that occurring.

30    From the time of the appointment of the Liquidator, Dengi became a bare trustee. In that capacity it can continue to hold the assets of the AI Trust but its duties, rights and powers are limited to the protection of those assets. As bare trustee Dengi retains the rights of indemnity and exoneration over the assets of the AI Trust and an equitable lien to secure those rights over the assets of the AI Trust. Creditors of a corporate trustee are entitled to claim in the winding up of the corporate trustee and to rank on the basis of any provable claim they have against the corporate trustee. Their claims will be met by the corporate trustee out of the trust assets through the trustee’s right of indemnity: see Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 (Caterpillar Financial) at [13]-[26].

31    The Liquidator submitted, and I accept, that this case concerns the exercise of the right of exoneration from liability rather than recoupment. The issue that arises for the Court is whether the Liquidator is justified in treating the assets and liabilities of Dengi as assets and liabilities of the AI Trust such that the Liquidator is then entitled to exercise the right of indemnity and/or exoneration – a right which is not lost when a corporate trustee is wound up in insolvency. In order for trust creditors’ claims to be payable out of trust assets, they must relate to liabilities incurred by the trustee, Dengi, in its capacity as trustee of the AI Trust in respect of which the right of indemnity or exoneration exists.

32    Based on his investigations, the Liquidator is of the opinion that Dengi did not conduct any trading activities other than in its capacity as trustee of the AI Trust. That conclusion is supported by the evidence that is before me. That being so it follows that prima facie the assets held by Dengi, which on the evidence comprises the money held in the Liquidator’s account, are assets of the AI Trust; that its liabilities were incurred in its capacity as trustee of the AI Trust; and that it is entitled to be indemnified out of the trust assets in respect of those liabilities: see Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No2) (2016) 305 FLR 222; [2016] NSWSC 106 at [19].

33    The Liquidator submitted that the presumption could be displaced where, for example, the trustee acted beyond power. There is nothing in this case that would lead me to such a conclusion. The facts support a contrary conclusion. As I have already observed the evidence discloses that Dengi operated solely in its capacity as trustee of the AI Trust and did not trade in its own right. No interested party has contended to the contrary. Further, on the evidence before me, it appears that Dengi’s liabilities are all liabilities of the AI Trust. Those liabilities relate principally to the Supreme Court Proceeding in which the settlement sum was to be paid out of the Cammeray Property sale proceeds and where the terms of settlement provided for a release of Dengi, including in its capacity as trustee of the AI trust.

34    I am satisfied that I should make the first direction sought by the Liquidator.

the liquidator’s remuneration

35    The second direction sought by the Liquidator is that he be allowed his reasonable remuneration in respect of the administration of the AI Trust from the trust assets.

36    Where non-trust assets are available, a liquidator’s remuneration and expenses in relation to work done for the purpose of winding up a company’s affairs should be paid out of that property. But, where non-trust assets are not available and a liquidator would not otherwise be required to undertake that work, it would normally be appropriate for the cost of the work to be paid from trust assets: see Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583 (Bell Hire) at [22] (per Farrell J) citing Re AAA Financial Intelligence Ltd (in liq ACN 093 616 445) [2014] NSWSC 1004 at [13].

37    Here the only assets available are trust assets; there are no non-trust assets. The Liquidator can thus look to the trust assets for payment of his remuneration and expenses. In that regard the Liquidator will be entitled to payment of his “reasonable remuneration” out of trust assets: Bell Hire at [23].

38    The Liquidator provided evidence of his costs incurred in the period 29 June 2017 to 18 October 2017 in the amount of $49,017.90 plus GST and an estimate of future costs from 19 October 2017 to the end of the liquidation of $15,000 plus GST.

39    The Liquidator accepts that he bears the onus of establishing that his costs are reasonable. It would then be the function of the Court to determine the remuneration having regard to the material provided and bringing an independent mind to bear on the relevant issues: see Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr (2017) 93 NSWLR 459 at [54].

40    The Liquidator submitted that his costs were reasonable having regard to the following matters:

(1)    the first meeting of creditors of Dengi approved initial remuneration of up to $35,000 at the hourly rates applied by the Liquidator’s firm;

(2)    the size of the fund available to creditors;

(3)    immediately upon his appointment it was necessary for the Liquidator to consider the appropriateness of the contract for sale of the Cammeray Property which had been entered into and which was to settle imminently; and

(4)    it was also necessary for the Liquidator to:

(a)    prepare a report to creditors and attend the creditors’ meeting on 17 July 2017;

(b)    understand the Supreme Court Proceeding and the impact of the bankruptcy of Ms Belimova and of the liquidation on Dengi, the AI Trust and on his powers and duties as liquidator;

(c)    understand the inter-relationships between Dengi, the AI Trust, Alex Ikin, Mr Ikin, Ms Belimova, Mr Belimovs, Eastern Commercial Lawyers and APA Consultants; and

(d)    consider whether to accept the proofs of debt lodged by creditors and the priority in which they should be paid.

41    At the hearing counsel appearing for the Liquidator confirmed that the Liquidator seeks a direction that he be allowed his reasonable remuneration and not an order for quantified costs. That is, despite the evidence provided and the submissions made, the Court is not asked to determine the issue of whether the remuneration claimed is in fact reasonable and to give a direction or make an order in a quantified amount. Accordingly I will not make such an order.

42    The Liquidator is entitled to his reasonable remuneration in respect of the administration of the AI Trust from the trust assets. Despite notice of the application being given to all interested parties, no party has appeared in opposition. I am satisfied that a direction in the terms sought should be made.

distribution of trust assets

43    The Liquidator seeks a direction that he is justified in distributing the assets of the AI Trust: first, in payment of the expenses of the liquidation of Dengi; secondly, in payment of the costs of this proceeding; thirdly, in payment of his reasonable remuneration; and fourthly, as to the balance, pari passu amongst the admitted creditors of Dengi.

44    This aspect of the Liquidator’s application raises the issue of whether s 556 of the Act applies in the present circumstances. While the class of expenses and creditors are limited in this case, the order of distribution proposed by the Liquidator reflects the order of priority in ss 555 and 556. Since the hearing of the application, two judgments have been handed down which address this issue. First, the Victorian Court of Appeal handed down judgment in Commonwealth v Byrnes and Hewitt [2018] VSCA 41 (Byrnes) in which it overturned the decision in Re Amerind Pty Ltd (2017) 121 ACSR 206; [2017] VSC 127. In Byrnes the Victorian Court of Appeal relevantly held that a trustee’s right of exoneration and the proceeds of its exercise were property of the insolvent trustee company within the meaning of ss 433, 555 and 556 of the Act and that the provisions of the Act and in particular ss 433, 555 and 556 must apply to its distribution: at [273]; [276]-[282].

45    Shortly thereafter, a Full Court of this Court sitting in the original jurisdiction of the Court handed down judgment in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40. Two members of the Full Court, Allsop CJ and Farrell J agreed, albeit for different reasons, that the proceeds of realisation of the trust assets should be applied by the plaintiff in that case in accordance with the priority regime established by ss 555, 556, 560 and 561 of the Act. There, like here, the plaintiff carried on the business as trustee of a trust and all of its assets were held on terms of that trust.

46    Insofar as the direction includes payment of the costs of this proceeding, where a trustee acts reasonably and in good faith, the general rule is that the trust assets bear the cost of a trustee’s application for advice and directions either directly or under the trustee’s indemnity: see Bell Hire at [24]. In the circumstances of this case, involving an insolvent trust, it was reasonable and appropriate for the Liquidator to approach the Court for directions and thus he would be justified in paying the costs of the proceeding from the assets of the AI Trust.

47    It follows from the matters set out above that a direction in the terms sought by the Liquidator should be made.

conclusion

48    I will make the directions sought by the Liquidator.

Associate:

Dated:    4 April 2018