FEDERAL COURT OF AUSTRALIA

Ross v Manpak Holdings Pty Ltd, in the matter of Manpak Holdings Pty Ltd [2018] FCA 1548

ORDERS

THE COURT DECLARES THAT:

1.    The Plaintiffs were lawfully entitled to realise the proceeds from the sale of assets owned by the Defendant in its capacity as trustee of the MP Unit Trust (Sale Proceeds).

2.    The Sale Proceeds form part of the Fund (as it is defined under the Deed of Company Arrangement executed by the Defendant and the Plaintiffs on or about 13 April 2017 (DOCA)).

3.    The Plaintiffs are lawfully entitled to proceed to distribute the Fund pursuant to the terms of the DOCA and in particular:

(a)    first, in payment of the remuneration, costs, disbursements and expenses of the Administrators, for acting in their capacity as the Administrators of the Company;

(b)    second, in payment of the remuneration, costs, disbursements and expenses of the Deed Administrators, for acting in their capacity as the Deed Administrators of the Company;

(c)    third, in accordance with clause 11.2 of the DOCA in payment in full to the Priority Creditors (as that term is defined in the DOCA) in respect of the Priority Creditors’ Claims (as that term is defined in the DOCA) other than the payment of unpaid wages, leave entitlements and termination/redundancy payment being ss 556(1)(e), 556(1)(g) and 556(1)(h) of the Corporations Act 2001 (Cth) for those employees employed by the Company as at the date of execution of the DOCA who do become employed by IGA (as that term is defined in the DOCA) pursuant to the terms of the Business Sale Agreement; and

(d)    finally, in respect of the remaining Fund, in payment of a dividend to the Participating Creditors (as that term is defined in the DOCA) to be distributed rateably among the Participating Creditors in accordance with the value of the Participating Creditors’ Claims (as that term is defined in the DOCA).

THE COURT ORDERS THAT:

1.    Costs of, and incidental to, this application be costs and expenses in the administration to be paid out of the assets of the Fund.

2.    There be liberty to apply.

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

REASONS FOR JUDGMENT

MCKERRACHER J:

INTRODUCTION

1    The plaintiffs are joint and several administrators of Manpak Holdings Pty Ltd (Subject to Deed of Company Arrangement) Pty Ltd ACN 130 706 642. Manpak operated as the trustee for the MP Unit Trust, which carried on the business of a product wholesaler including food, packaging, chemical, washroom and environmental products.

2    Although Manpak traded the business in its capacity as trustee of the Trust, some of the credit applications received from creditors during the administration had been executed by Manpak without reference to its role as trustee of the Trust. Consequently:

(a)    some of the assets and some of the liabilities have been acquired in Manpak’s role as trustee of the Trust and others ostensibly in its own right; and

(b)    some of the suppliers have secured their supplies by registration on the Personal Property Securities Register (PPSR) against Manpak’s Australian Company Number (ACN) and others against the Trust’s Australian Business Number (ABN).

3    Pursuant to the Trust Deed:

25.1    The Trustee is disqualified from holding office if it suffers an Event of Default.

4    Clause 16.1(11) of the Trust Deed relevantly provides that the appointment of an administrator under Pt 5.3A of the Corporations Act 2001 (Cth) constitutes an ‘Event of Default’.

BACKGROUND

5    On 3 March 2017, the plaintiffs issued the Initial Report to Creditors of Manpak in order to convene the first meeting of the creditors of Manpak. On 14 March 2017, the first meeting of creditors was held. On 6 April 2017, a second meeting of creditors was held and by resolution of Manpak’s creditors, a Deed of Company Arrangement (DOCA) was executed and the plaintiffs were appointed as the Deed Administrators.

6    On or about 13 April 2017, the plaintiffs entered into an agreement for the sale of Manpak’s business held in its own capacity and in its capacity as trustee for the Trust to a purchaser (the Business Sale Agreement).

7    The Business Sale Agreement provided for the purchase price of $100,000.00 (the Sale Proceeds) and the assumption of various liabilities (including employee entitlements and certain secured creditor debts) in consideration for the transfer of the business to the purchaser.

DECLARATIONS SOUGHT

8    Pursuant to s 90-15 and s 90-20 of the Insolvency Practice Schedule (Corporations), Sch 2 of the Act, or s 89 of the Trustees Act 1962 (WA) the plaintiffs seek the following declarations:

a)    The Plaintiffs [were lawfully entitled] to realise the proceeds from the sale of assets owned by the Defendant in its capacity as trustee of the MP Unit Trust.

b)    The Sale Proceeds form part of the Fund (as it is defined under the DOCA executed by the Defendant and the Plaintiffs on or about 13 April 2017).

c)    The Plaintiffs are [lawfully] entitled to proceed to distribute the Fund pursuant to the terms of the DOCA and in particular:

i.    first, in payment of the remuneration, costs, disbursements and expenses of the Administrators, for acting in their capacity as the Administrators of [Manpak];

ii.    second, in payment of the remuneration, costs, disbursements and expenses of the Deed Administrators, for acting in their capacity as the Deed Administrators of [Manpak];

iii.    third, in accordance with clause 11.2 of the DOCA in payment in full to the Priority Creditors (as that term is defined in the DOCA) in respect of the Priority Creditors’ Claims (as that term is defined in the DOCA) other than the payment of unpaid wages, leave entitlements and termination/redundancy payment being s 556(1)(e), 556(1)(g) and 556(1)(h) of the [Act] for those employees employed by [Manpak] as at the date of execution of the DOCA who do become employed by [the purchaser] (as that term is defined in the DOCA) pursuant to the terms of the Business Sale Agreement;

iv.    finally, in respect of the remaining Fund, in payment of a dividend to the Participating Creditors (as that term is defined in the DOCA) to be distributed rateably among the Participating Creditors in accordance with the value of the Participating Creditors’ Claims (as that term is defined in the DOCA).

9    There is no jurisdictional impediment which would prevent the Court making the orders sought. Under s 90-15(1) of the Insolvency Practice Schedule, the Court has the jurisdiction and power to make orders ‘as it thinks fit’ in relation to the external administration of a company, encompassing the declarations sought in the plaintiffs’ application (relevantly extracted above).

10    In addition to the declarations, the plaintiffs also seek that the Court orders that the costs of and incidental to this application be costs and expenses in the administration to be paid out of the assets of the Fund.

SUPPORT OF MAJOR SECURED CREDITOR

11    Mr Christopher Thornton is the director of the major secured creditor of Manpak. He confirms by affidavit his knowledge of the administrators’ appointment, the creditors meetings and the DOCA. He also confirms that he voted in favour of the DOCA. Mr Thornton has also expressed his support for the orders sought.

DISTRIBUTION OF TRUST ASSETS

12    Issues concerning the distribution of trust assets where affected by circumstances of corporate insolvency, and the relevance of Australia’s statutory priorities regime in the making of such distributions, have been a subject of discussion and controversy for decades since the High Court’s decision in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360. These issues have been the subject of recent judicial scrutiny in two particular decisions of note. The first is a decision of the Victorian Court of Appeal in Commonwealth v Byrnes (2018) 330 FLR 149 (Re Amerind). The other is a Full Court decision of this Court exercising original jurisdiction in Jones (in his capacity as liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (ACN 085 230 486) (in liq)) v Matrix Partners Pty Ltd (2018) 354 ALR 436.

13    In Re Amerind, the insolvent company was the trustee of a corporate trading trust, with the sole business of the trustee carrying on the business of the trust. One issue was whether receivers would be justified in distributing the receivership surplus in accordance with the priority regime in ss 433, 556 and 560 of the Act.

14    At first instance it was held that the right of indemnity of the trustee does not constitute property of the company and that, consequently, the priority regime did not apply to the receivership surplus. The primary judge held that the trustee’s right of indemnity and related lien could only be used to satisfy liabilities incurred on behalf the Trust. The five member bench of the Victorian Court of Appeal (Ferguson CJ, Whelan, Kyrou, McLeish and Dodds-Streeton JJA) took a different view, holding that the right of indemnity was property of the company and that the priority regime under the Act therefore applied to proceeds recovered pursuant to the rights of indemnity and exoneration.

15    In Killarnee, the Full Court (Allsop CJ, Siopis and Farrell JJ) was asked to answer a number of questions including, relevantly:

(a)    whether the assets of the trust at the time of the resolution to wind up the company (including the proceeds of sale of the assets) were assets in the winding up of the company so that the liquidator had the power under s 477 of the Act to sell the trust assets;

(b)    whether the proceeds of the sale of the trust assets were to be applied in accordance with the priority regime set out in the Act; and

(c)    whether the liquidators should be directed under s 511 of the Act that the proceeds be distributed to unsecured creditors of the trust on a pari passu basis after providing for the costs of administration only.

16    The Full Court held, relevantly, that:

(a)    liquidators must obtain direction from the Courts with respect to the sale of trust property;

(b)    the trustee’s right to recover trust assets and its right of exoneration are property of the company; and

(c)    liquidators’ costs and remuneration are afforded priority over claims of other creditors to funds realised through distribution of trust property, including a trustee’s right of exoneration.

17    These decisions provide guidance as to how external administrators, not just liquidators, are to deal with assets held on trust and how proceeds of such assets may be utilised.

18    It is necessary to note that on 22 August 2018, the High Court granted special leave to appeal from the decision in Re Amerind: Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth & Ors [2018] HCA Trans 156, Case M137/2018. While the reasons and conclusion in both Re Amerind and Killarnee largely accord on the issue of whether the proceeds of the sale of trust assets are to be applied in accordance with the statutory priority regime, the Court of Appeal diverged in holding that the right of exoneration and the proceeds of its exercise were property of the company. It appears from argument on the special leave application and the submissions so far filed that this divergence (amongst other issues) will be an issue ventilated before the High Court shortly.

19    In light of Case M137/2018, to the extent to which the conclusions in Re Amerind accord with Killarnee, I consider it is appropriate to refer to the Court of Appeal’s decision. Beyond that, I draw from the Full Court’s thorough and detailed reasoning in Killarnee. While Killarnee may well be the subject of consideration by the High Court in Case M137/2018, it remains the only Full Court decision of this Court on the subject and one which is not the subject of special leave.

20    After the decisions in Re Amerind and Killarnee, it is now settled that the trustee’s right of indemnity, supported by its equitable lien to enforce that right, is ‘property of the company’ within the meaning of s 9 of the Act. However, such ‘property’ (being the right of indemnity) may only be used to satisfy those debts the trustee has incurred in administering the trust (that is, to pay ‘trust creditors’). In other words, while the trustee may apply trust assets to payment of its creditors, the right by which the trustee has to do so may only be exercised in such a way as to extinguish the debts of creditors of the trust.

21    The question becomes the manner in which those trust creditors are to share in the proceeds of the sale of the trust assets. The plurality in Killarnee (Siopis J dissenting) held that such proceeds are to be distributed to trust creditors in accordance with the priority regime set out in the Act. While Siopis J considered the statutory priorities regime has no application to trust monies held by the liquidator from the sale of trust assets, his Honour qualified this observation by noting it would be open to the Court to give direction for proceeds to be distributed other than pari passu.

22    The practical consequences of Killarnee are that:

(a)    if a liquidator is appointed to a company that vacated its office as trustee (whether upon appointment of the liquidator or for some other reason), then the liquidator’s usual power of sale does not extend to sale of trust assets. The liquidator must seek orders for appointment of a receiver to do so. There is no reason why (in ordinary circumstances) the liquidator ought not be appointed as such;

(b)    in such circumstances, a liquidator cannot acquire power to sell trust assets the subject of the trustee’s indemnity and lien within the ambit of ss 477(2)(c) and (m) of the Act. This is a further reason why it will be necessary for a liquidator to approach the Court seeking to appoint himself or herself (or where appropriate, another) as a receiver of those assets or alternatively, seek to rely upon the power of sale found in each jurisdiction’s legislation dealing with trustees and trusts (in Western Australia, by s 89 of the Trustees Act);

(c)    however, if a trust asset need not be sold in order to be realised (for example cash at bank, as in the present case), then the liquidator does not need the Court’s intervention to call in that asset;

(d)    once trust assets are realised, the liquidator may distribute the proceeds of the liquidation in the usual way (that is, pursuant to the priority regime under the Act);

(e)    in a case where a company has acted both as trustee and in its own right, or as trustee of multiple trusts, the liquidator must deal with creditors of each body separately, including by only applying the assets of each body to its respective creditors. (Siopis J expressed the view (obiter) that trust creditors who do not receive 100c in the dollar from the proceeds of sale of the trust assets are then entitled to prove again among the general body of creditors of the company for their shortfall); and

(f)    in such cases as those described in (c) above, the liquidator needs to decide how to divide remuneration claims as between those pools of funds created by the sale of trust assets (and if more than one trust, then between each), and that pool of assets owned by the company in its own right.

23    The real question raised by the current application is whether there is any appreciable difference between liquidation and deed administration insofar as it relates to dealing with assets held on trust and utilising any proceeds thereof for the benefit of creditors. In this case, the priority of payments in under the DOCA is not dissimilar to the priority set out in s 556 of the Act (and specifically incorporates certain sub-paragraphs of that section). Clause 11.1 and cl 11.2 of the DOCA provide:

11.1    The Deed Administrators are to apply the Fund in the following order of priority:

(a)    first, in payment of the remuneration, costs, disbursements and expenses of the Administrators, for acting in their capacity as the Administrators of the Company;

(b)    second, in payment of the remuneration, costs, disbursements and expenses of the Deed Administrators, for acting in their capacity as the Deed Administrators of the Company:

(c)    third, in accordance with clause 11.2 in payment in full to the Priority Creditors in respect of the Priority Creditors' Claims other than the payment of unpaid wages, leave entitlements and termination/redundancy payment being s.556(1)(e)(g) and (h) of the Act for those employees employed by the Company as at the date of execution of the DOCA who do become employed by IGA pursuant to the terms of the Business Sale Agreement.

(d)    finally, in respect of the remaining Fund, in payment of a dividend to the Participating Creditors to be distributed rateably among the Participating Creditors in accordance with the value of the Participating Creditors' Claims.

11.2    The Deed Administrators are to make payment to the Priority Creditors in respect of the Priority Creditors' Claims in the order of priority under s.556(1), s.559 and s.560 of the Act as if the Company had been wound up with the Relevant Date being the day on which the winding up was taken to have begun.

…

24    The question is whether the Court should approve the ability of an external administrator to utilise the proceeds of sale from trust assets for the benefit of creditors of a company in external administration. In this case, if the orders were not be granted, the return to the creditors would be prejudiced.

25    Subject to the proviso that the relief is sought with respect to a company in administration rather than in liquidation, the relief sought is consistent with the principles set out in, and flowing from, Killarnee. As noted in oral submissions, much of Allsop CJ’s reasoning in Killarnee was not couched in the confined language of ‘liquidations’, but rather his Honour’s reasons were prefaced by speaking of the ‘operation of the statutory insolvency regime’ generally. There is, in my view, no relevant distinction to be drawn in this instance from the status of Manpak being in administration rather than in liquidation. In either event, the Act regulates the actions of those in control. The relief accords with the wishes of creditors and is in their interest. It should be granted.

COSTS

26    The plaintiffs should have those costs reasonably incurred in acting as administrators. The nature and extent of costs are in evidence.

27    As to the costs of the application, in Kite v Mooney (No 2) (2017) 121 ACSR 158, on an application for directions made by the administrators under s 424 and s 511 of the Act, Markovic J said (at [152]):

The final issue is the question of the costs of this proceeding. As Farrell J observed in [Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583] at [24], where a trustee acts reasonably and in good faith, the general rule is that the trust assets bear the costs of the trustee’s application for advice and directions either directly or under the trustee’s indemnity. Given the circumstances in which Messrs Kite and Hutchins found themselves, the fact that the matter involves an insolvent trustee of a trust and the conflict in the authorities, it was appropriate for Messrs Kite and Hutchins to approach the Court for directions and other relief as they did. They are justified in paying the costs of the proceeding from Trust assets.

28    I respectfully agree with her Honour’s approach and will make the same order.

Associate:

Dated:    16 October 2018