FEDERAL COURT OF AUSTRALIA

Cremin, in the matter of Brimson Pty Ltd (in liq) [2019] FCA 1023

ORDERS

THE COURT ORDERS THAT:

1.    Compliance with r 2.8 of the Federal Court (Corporations) Rules 2000 be dispensed with.

2.    Pursuant to s 1318 of the Corporations Act 2001 (Cth), the first plaintiff, Shane Justin Cremin, in his capacity as liquidator of the second plaintiff and the fourth plaintiff, acted honestly and ought fairly to be excused for any breaches, failures, or omissions relating to the administration of the second plaintiff in dealing with the property of the Brimson Family Trust and relating to the administration of the fourth plaintiff in dealing with the property of the Teal Retail Group Family Trust.

3.    Pursuant to s 57(1) of the Federal Court of Australia Act 1976 (Cth), Mr Cremin, an official liquidator, be appointed without security as receiver and manager over the business and assets of:

(a)    the Brimson Family Trust;

(b)    the Kane Retail Group Family Trust; and

(c)    the Teal Retail Group Family Trust,

(the Receiver).

4.    The need for the Receiver to file a guarantee under r 14.21 and r 14.22 of the Federal Court Rules 2011 be dispensed with.

5.    The Receiver have, in respect of the business and assets of each trust referred to in paragraph 3, the powers that a receiver has in respect of the business and property of a company under s 420 of the Corporations Act (other than s 420(2)(s), (t), (u) and (w)) as if the reference in that section to “the corporation” were a reference to the trust including without limitation, the power to do all things necessary or convenient to:

(a)    carry on the business of the trust;

(b)    employ any person in connection with the business of the trust;

(c)    sell the assets of the trust;

(d)    pay the creditors of the trust from the proceeds of the assets, pursuant to the priorities prescribed under the provisions of the Corporations Act;

(e)    compromise any claim made against the second, third or fourth plaintiff in its capacity as trustee of the trust or against any of the trust property on any terms the Receiver sees fit;

(f)    bring any claim against any party on behalf of the trust; and

(g)    execute any tax returns, financial statements or other documents relating to the trust.

6.    The costs, expenses and remuneration incurred by Mr Cremin as liquidator of the second, third and fourth plaintiffs and as the Receiver, including the costs of this application, be paid in priority from the property of the trusts (including any proceeds from the sale of the businesses).

7.    There be liberty to apply to any person who can demonstrate sufficient interest to modify or discharge paragraphs 1 to 6 on not less than 48 hours’ written notice to the first plaintiff.

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

REASONS FOR JUDGMENT

MOSHINSKY J:

Introduction

1    The first plaintiff, Shane Justin Cremin (the Liquidator) is the liquidator of:

(a)    Brimson Pty Ltd (in liquidation) (Brimson);

(b)    The Kane Retail Group Pty Ltd (in liquidation) (Kane); and

(c)    The Teal Retail Group Pty Ltd (in liquidation) (Teal),

(together, the Companies).

2    Each of the Companies is, or was, the trustee of a trading trust. The relevant trusts were (respectively):

(a)    the Brimson Family Trust (the Brimson Trust);

(b)    the Kane Retail Group Family Trust (the Kane Trust); and

(c)    the Teal Retail Group Family Trust (the Teal Trust),

(together, the Trusts).

3    On 29 May 2019, the Liquidator was appointed liquidator of each of the Companies. With respect to the Brimson Trust and the Teal Trust, the trust deeds contain clauses (referred to in the submissions as “ipso facto clauses”) that operated to remove Brimson and Teal as trustees upon the company going into liquidation.

4    The Liquidator applies under ss 90-15 and 90-20 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act 2001 (Cth)), s 1318 of the Corporations Act 2001 (Cth), ss 63 and 67 of the Trustee Act 1958 (Vic), s 57 of the Federal Court of Australia Act 1976 (Cth) and the inherent jurisdiction of the Court for orders concerning the realisation of trust assets. In broad terms, the Liquidator seeks orders in relation to each Company and trust to the following effect:

(a)    Pursuant to s 63 of the Trustee Act, the Court confers on the Company nunc pro tunc the necessary powers to enable the Company to wind up the trust, including to:

(i)    carry on the business of the trust;

(ii)    employ any person in connection with the business of the trust;

(iii)    sell the assets of the trust;

(iv)    pay the creditors of the trust from the proceeds of the assets, pursuant to the priorities prescribed under the provisions of the Corporations Act;

(v)    compromise any claim made against the Company in its capacity as trustee of the trust, or against any of the trust property, on any terms the Company sees fit;

(vi)    bring any claim against any party on behalf of the trust; and

(vii)    execute any tax returns, financial statements or other documents relating to the trust.

(b)    Pursuant to ss 90-15 and 90-20 of the Insolvency Practice Schedule (Corporations), the Liquidator is:

(viii)    justified in relying on his statutory powers as liquidator of the Company pursuant to s 477 of the Corporations Act to take all necessary steps to wind up the trust pursuant to (a) above; and

(ix)    justified in paying the following from the property of the trust:

(A)    the costs and expenses of the Liquidator and the Company in winding up the trust; and

(B)    the creditors of the trust.

5    In the alternative to the above, the Liquidator seeks an order (in respect of each trust) appointing him as receiver and manager to the assets and undertaking of the trust, with a power of sale for the purposes of converting assets into cash in order to satisfy the debts of the relevant Company that were incurred in its capacity as trustee of the trust.

6    Ancillary orders are also sought.

7    In support of the application, the Liquidator relies on:

(a)    an affidavit of the Liquidator dated 14 June 2019 (the Cremin Affidavit); and

(b)    an affidavit of Alexzandra Erskine, a solicitor, dated 20 June 2019.

8    The matter came before me as duty judge on 20 June 2019. On that occasion, I was not satisfied that sufficient notice had been given to potentially affected persons. Accordingly, I directed that the hearing be adjourned to 2.15 pm on 25 June 2019, and that the Liquidator give notice to each of the persons affected by the application of: (a) the form of orders sought; and (b) that the hearing of the application would take place at 2.15 pm on 25 June 2019.

9    A further affidavit of Ms Erskine, dated 25 June 2019, has been filed today, detailing the steps taken to give notice to each of the persons affected by the application.

10    No person has appeared today in opposition to the application.

Background

11    The background facts, as set out in the Cremin Affidavit, are as follows.

The Companies

12    The Companies were incorporated as follows:

(a)    Brimson on 17 August 2017;

(b)    Kane on 3 November 2010; and

(c)    Teal on 19 September 2013.

13    Prior to liquidation, each Company in its capacity as trustee of the relevant Trust, operated a retail business known as “Snooze” under a franchise agreement. The businesses were as follows:

(a)    Brimson as trustee for the Brimson Trust traded as Snooze Pakenham;

(b)    Kane as trustee for the Kane Trust traded as Snooze Fountain Gate; and

(c)    Teal as trustee for the Teal Trust traded as Snooze Dandenong,

(the Businesses).

14    On 22 May 2019, Snooze Sleep Well Pty Ltd (Snooze) issued breach notices to each of the Companies in accordance with the terms set out in the respective franchise agreements.

15    The sole director of the Companies is and was at all material times Neal Brimfield. Mr Brimfield and Kate Brimfield each hold 50% of the shares in Brimson and Teal, and Ms Brimfield holds 100% of the shares in Kane.

16    On 29 May 2019, the Liquidator was appointed liquidator of the Companies pursuant to s 491 of the Corporations Act.

The Trusts

17    The Companies were appointed trustees of the Trusts pursuant to declarations of trust as follows:

(a)    Brimson on 21 August 2017;

(b)    Kane on 5 November 2010; and

(c)    Teal on 19 September 2013.

18    Pursuant to the terms of the respective trust deeds, the appointors or principal of the Trusts are as follows:

(a)    Brimson Trust – Mr and Ms Brimfield;

(b)    Kane Trust – Mr Brimfield; and

(c)    Teal Trust – Mr and Ms Brimfield.

19    Based on his investigations to date, the Liquidator’s view is that each Company:

(a)    operated the relevant Business exclusively in its capacity as trustee of the relevant Trust;

(b)    did not undertake any activities or conduct any business in its own right; and

(c)    at all times held, and continues to hold, all property on trust for the relevant Trust.

Assets

20    Each Company as trustee of the relevant Trust holds the following assets:

(a)    cash at bank;

(b)    stock (inventory); and

(c)    plant and equipment (including office equipment).

21    Kane as trustee of the Kane Trust also holds two motor vehicles.

22    On 29 May 2019, the Liquidator received cash transfers representing the cash on hand for each of the Companies.

23    The remaining assets are valued as follows in the balance sheets for the Trusts:

24    On 29 May 2019, the Liquidator engaged Grays Asset Services Pty Ltd (Grays) to conduct a valuation of the assets (Grays Valuation).

Creditor position

25    The Liquidator has undertaken searches of the Personal Properties and Securities Register (PPSR) with respect to the Companies and the Trusts (PPSR Searches) in order to ascertain the secured creditor position of each of the Companies and the Trusts.

26    The PPSR searches confirm that certain parties have registered security interests against the Companies or the Trusts. These are set out at [21] of the Cremin Affidavit.

27    Details of the amounts owed to creditors who have registered security interests against the Companies or the Trusts are set out at [23] of the Cremin Affidavit.

28    On or about 5 June 2019, the Liquidator lodged a notice inviting formal proof of debt or claim.

29    The Liquidator’s investigations reveal that (excluding the debts owed to the secured creditors), the Companies have further creditors in the amount of approximately $1,398,962.39. Details of the amounts owed to these further creditors are set out in [25] of the Cremin Affidavit.

30    The Liquidator’s investigations reveal various loans between the Companies/Trusts and the director, which will need to be investigated in order to determine whether there are any claims or realisations to be made.

31    The Companies in their capacity as trustees of the Trusts employ the following staff:

(a)    Brimson – two full time staff and four casual staff;

(b)    Kane – one full time staff, one part time staff and two casual staff; and

(c)    Teal – three full time staff, one part time staff and three casual staff.

32    Based on the Grays Valuation and the Liquidator’s investigations and review of the Companies’ books and records located to date, the Liquidator expects there will be a deficiency of assets over liabilities before remuneration, costs and expenses as follows:

(a)    Brimson in the vicinity of $1 million;

(b)    Kane in the vicinity of $500,000; and

(c)    Teal in the vicinity of $800,000.

The trust deeds

33    As noted above, the trust deeds for the Brimson Trust and the Teal Trust contain clauses that operated to remove Brimson and Teal as trustees upon the company going into liquidation.

34    The Liquidator is not aware of any replacement trustee being appointed as trustee of either the Brimson Trust or the Teal Trust. By operation of the ipso facto clauses Brimson and Teal are bare trustees of the Brimson and Teal Trusts and have no powers under the trust deeds.

35    The trust deed for the Kane Trust does not contain a clause to the same effect. The trust deed for the Kane Trust permits the principal, Mr Brimfield, to:

(a)    remove a trustee; or

(b)    appoint a new or additional trustee.

36    Insofar as the Liquidator is aware, the principal has not exercised the power to replace Kane as trustee of the Kane Trust and it remains the trustee of the Kane Trust.

37    Each of the trust deeds confers on the relevant Company an express right to be indemnified out of the assets of the relevant Trust in respect of liabilities incurred by the Company as trustee.

38    The trust deeds confer various powers on the Companies to deal with property held on Trust. Amongst other things, the trust deeds empower the Companies to:

(a)    borrow and raise money from any person on such terms and conditions and for such purposes as the trustee in its absolutely discretion thinks fit in order to carry out the Trust; and

(b)    to pay out of trust all costs, charges and expenses incidental to the management of the trust or the exercise of any power, authority or discretion in the trust deed in order to carry out or perform the trust.

39    The trust deeds do not appear to permit the sale of trust property, save for the purpose of applying the proceeds of sale of that property for the benefit of the Trust’s beneficiaries.

The trading of the Businesses

40    The Liquidator’s view is that, in respect of each Company, all liabilities were incurred in its capacity as trustee for the relevant Trust and therefore the Company enjoys a right of indemnity from trust assets. The materials that the Liquidator has reviewed and that led him to form this view are set out in [40] of the Cremin Affidavit.

Tasks under since the Liquidator’s appointment

41    In the period since the Liquidator’s appointment, the Businesses have continued to operate with a view to:

(a)    preserving the value of the Businesses to enable a sale of the Businesses to be completed;

(b)    retaining the employment of the various employees; and

(c)    maximising the return to creditors.

42    In addition, the Liquidator and his staff have been working on a number of tasks as part of the liquidation of the Companies including:

(a)    valuing the assets;

(b)    conducting interviews and discussions with the director;

(c)    taking control of the businesses and assets;

(d)    conducting a review of the books and records;

(e)    attending to day-to-day trading issues;

(f)    searching the PPSR;

(g)    corresponding with creditors, including secured creditors and the franchisor;

(h)    negotiating a sale of the businesses and the assets;

(i)    commencing preliminary investigations into the affairs of the Companies;

(j)    liaising with the Liquidator’s solicitors with respect to the liquidation of the Companies and this application;

(k)    attending to statutory obligations to the Australian Securities and Investments Commission (ASIC); and

(l)    sending a circular to creditors, including a Declaration of Independence, Relevant Relationships and Indemnities.

43    On 30 May 2019, the Liquidator received an offer from Snooze for the purchase of the businesses.

44    The Liquidator has entered into a heads of agreement with Snooze with a view to executing a sale agreement.

45    The Liquidator considers that the sale to Snooze will enhance the estimated return to creditors of the Companies/Trusts.

46    Taking into account the Snooze sale, the Liquidator expects the position with respect to the deficiency of assets over liabilities before remuneration, costs and expenses to be improved by the following approximate amounts:

(a)    Brimson – $100,000;

(b)    Kane – $100,000;

(c)    Teal – $200,000.

Reasons for orders sought

47    The Liquidator’s reasons for bringing this application are as follows:

(a)    with respect to the Brimson Trust and the Teal Trust:

(i)    the trust deeds contain clauses that operated to remove Brimson and Teal as trustees of the Brimson Trust and the Teal Trust respectively, at the date of liquidation. Accordingly, Brimson and Teal are holding the trust assets as bare trustees; and

(ii)    in these circumstances, the Liquidator does not have power to sell the assets and wind up the respective trusts.

(b)    with respect to the Kane Trust, although the trust deed does not contain a clause that operates to remove Kane from its position as trustee upon its liquidation, the trust deed permits the principal to remove a trustee or appoint a trustee; and

(c)    the trust deeds for each of the Trusts do not appear to give the trustee the power to sell the assets, save for the purpose of applying the proceeds of sale of that property for the benefit of the Trust’s beneficiaries.

Applicable principles

48    A company that is the trustee of a trading trust has a right of indemnity to resort to the trust assets to vindicate its right to be exonerated from a liability that it has incurred in the course of carrying out trust business. In circumstances where such a company goes into liquidation, its right of indemnity and accompanying equitable lien over the trust assets endures, notwithstanding that the company has been removed as trustee of the trust and only holds the trust assets as a bare trustee: see Jones v Matrix Partner Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018) 260 FCR 310 (Jones & Matrix) at [85], [142], [198].

49    There has, until recently, been a difference of opinion as to whether, in such circumstances, the liquidator’s power to sell the “property of the company” in s 477(2)(c) of the Corporations Act permits him or her to sell trust assets: see Aced Kang Investments Pty Ltd (in liq), in the matter of Aced Kang Investments Pty Ltd (in liq) [2017] FCA 476 at [12]. It is now settled that the liquidator of an insolvent (former) corporate trustee cannot sell the trust’s property without order of the Court, or by appointment of a receiver over the trust assets: see Jones & Matrix at [44] per Allsop CJ (Farrell J agreeing at [196]); Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17 at [10]; Apostolou v VA Corporation of Aust Pty Ltd [2011] FCAFC 103 at [45]. The rationale for this position is that, on a proper understanding, the trust assets are not the “property of the company”, but are instead trust property in which the corporate trustee has a proprietary interest by way of lien or charge to secure its right of exoneration: see Jones & Matrix at [89]. Thus, to the extent that the subject of a sale is the whole of a trust asset, rather than merely the company’s lien or charge in respect of that asset, it is not authorised by the power of sale in s 477(2)(c).

50    The courts are generally willing, upon an appropriate application, to make orders permitting the liquidator of a (former) corporate trustee to sell trust assets. In situations where the property of the trust will be exhausted following its sale and subsequent distribution to creditors, it may be appropriate merely to give the liquidator a power of sale: see Jones & Matrix at [91]. The more common course is, however, for the liquidator of the insolvent (former) corporate trustee to apply to be appointed a receiver for the purpose of selling the trust assets and distributing the proceeds among trust creditors: see Jones & Matrix at [142] per Siopis J; Amirbeaggi, in the matter of Simpkiss Pty Ltd (in liq) [2018] FCA 2121 (Amirbeaggi); Taylor v CJ & KL Bond Super Pty Ltd, in the matter of CJ & KL Bond Pty Ltd (in liq) [2018] FCA 1430 (Taylor v CJ & KL Bond Super Pty Ltd); Staatz v Berry, in the matter of Wollumbin Horizons Pty Ltd (in liq) (No 3) [2019] FCA 924. Orders appointing a liquidator as a receiver for this purpose may be made nunc pro tunc to authorise sales of trust assets that have already occurred: Jones & Matrix at [91], [152], [198].

51    The proceeds from an exercise of a corporate trustee’s right of exoneration may only be applied in satisfaction of the trust liabilities to which that right relates: see Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 (Carter Holt) at [40] per Kiefel CJ, Keane and Edelman JJ; at [92] per Bell, Gageler and Nettle JJ; at [106] per Gordon J. Thus, the liquidator of a (former) corporate trustee may only apply the proceeds of a sale of trust assets to satisfy debts owed to trust creditors (as opposed to general creditors). This includes the costs of the liquidation (including the liquidator’s remuneration) because such costs constitute debts incurred by the company in discharging the duties imposed by the trust: Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 110 per King CJ; Jones v Matrix at [105]-[106]. In circumstances where a company has only ever acted as a trustee of one trust and that has been the totality of its affairs, no issue arises as to the application of trust assets to general creditors because all of the company’s creditors are trust creditors. In this situation, the proceeds from the exercise of the right of exoneration are to be distributed to the trust creditors in accordance with the order of priority prescribed by the Corporations Act: Jones & Matrix at [100]-[108] per Allsop CJ; see also Carter Holt at [93]-[96] per Bell, Gageler and Nettle JJ; at [111], [156]-[158] per Gordon J.

Consideration

52    In relation to each trust, the Company is entitled to a right of indemnity (a right of exoneration) with respect to the debts owed to creditors of the Trust. As set out above, each Company acted solely as trustee of the relevant Trust, and this was the totality of its affairs. All of the creditors of each Company are, therefore, trust creditors and no issue arises concerning the application of trust assets to general creditors (as distinct from trust creditors). In these circumstances, it is appropriate to make orders to facilitate the sale of the trust assets and the application of the proceeds in favour of the trust creditors.

53    The Liquidator seeks orders pursuant to s 63 of the Trustee Act conferring on each Company the necessary powers to wind up the Trust, including power to carry on the business of the Trust and to sell the assets of the Trust. Counsel for the Liquidator referred to cases where orders to this effect have been made. In the circumstances of the present case, including where the trust deeds for two of the Trusts have operated to remove the Company as trustee, and where it is proposed that the business may continue to trade (at least for a short period of time), I consider it preferable to make orders appointing the Liquidator as receiver and manager of the assets and undertaking of each Trust. Orders to this effect were made by Markovic J in Amirbeaggi and by White J in Taylor v CJ & KL Bond Super Pty Ltd.

54    I consider it appropriate to make an order to the effect that the liquidator has, in respect of the business and assets of each Trust, the powers that a receiver has in respect of the business and property of a company under s 420 of the Corporations Act (other than s 420(2)(s), (t), (u) and (w)) as if the reference in that section to “the corporation” were a reference to the trust. Further, I consider it appropriate to make orders granting the Liquidator relief from any liability for dealing with the property of the Brimson Trust and the Teal Trust since his appointment, and providing that the costs, expenses and remuneration of Mr Cremin, both as Liquidator and as receiver, be paid in priority from the property of the trusts.

55    As this application is made pursuant to s 90-20 of the Insolvency Practice Schedule (Corporations), r 2.8 of the Federal Court (Corporations) Rules 2000 is applicable. Rule 2.8 provides that, unless the Court otherwise orders, the person making the application must serve on ASIC, a reasonable time before the hearing of the application, a copy of the originating process, or interlocutory process, and supporting affidavit. While these documents have been served on ASIC, service only occurred this morning. As detailed in Ms Erskine’s second affidavit, she has since been informed by ASIC that: it has no view on the orders sought; ASIC does not ordinarily seek to be heard with respect to such applications; and ASIC would need at least two weeks to consider the matter before forming a view. In the circumstances of this case, as detailed above, and taking into account ASIC’s usual position on such applications (i.e. that it does not ordinarily seek to be heard), I consider it appropriate to make an order dispensing with the requirements of r 2.8.

56    I will hear from counsel on the precise form of the orders.

Associate:

Dated:    28 June 2019

SCHEDULE OF PARTIES