FEDERAL COURT OF AUSTRALIA

Mutton (Liquidator), in the matter of Balsub Pty Ltd (In Liquidation) [2020] FCA 741

ORDERS

THE COURT DECLARES THAT:

1.    Pursuant to s 1318 of the Corporations Act 2001 (Cth) and s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS) being schedule 2 to the Corporations Act, the Liquidator is justified and acting reasonably in proceeding on the basis that:

(a)    Balsub Pty Ltd carried on business in its capacity as trustee of the ‘BF Trust’ (as defined in the reasons for judgment whose definitions have been adopted in these orders and are notated by inverted commas), subject to employing and paying employees which the second plaintiff did in its own right;

(b)    All of Balsub’s property, with the exception of the funds in the ‘NAB Cheque Account’, is held by it as trustee of the BF Trust; and

(c)    Balsub’s creditors, other than its employees, the Deputy Commissioner of Taxation with respect to pay as you go withholding tax, Superannuation Guarantee Charge and associated interest and penalties, Marina Radiology and Telstra Corporation Limited, are creditors whose debts have been incurred by Balsub in its capacity as trustee of the BF Trust.

2.    Pursuant to s 1318 of the Corporations Act and s 90-15 of the IPS the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that:

(a)    The Liquidator is entitled to be paid his ‘Trust Remuneration’ and ‘Trust Expenses’ from the ‘Trust Assets’; and

(b)    The Liquidator be indemnified out of, and have an equitable lien over, the Trust Assets for all the Trust Remuneration and Trust Expenses.

3.    Pursuant to s 1318 of the Corporations Act and s 90-15 of the IPS that to the extent any remuneration and expenses are not attributable to the Trust and/or Trust Assets and are not otherwise met out of the assets of Balsub:

(a)    The question of the manner and source of the payment of such remuneration and expenses; and

(b)    The question whether the remuneration and expenses of tasks undertaken by the Liquidator other than those identified in the definitions of Trust Remuneration and Trust Expenses set out below are costs and expenses that may be recoverable from the Trust Assets,

are reserved, with the Liquidator having liberty to apply in respect of that question.

THE COURT ORDERS THAT:

4.    Pursuant to s 63 of the Trustee Act 1958 (Vic), Balsub, in its capacity as trustee of the BF Trust, shall have the following powers at its absolute discretion:

(a)    to sell or otherwise dispose of, in any manner, all or any part of the BF Trust Property in its capacity as trustee of the BF Trust;

(b)    to compromise any claim made against Balsub in its capacity as trustee of the BF Trust or against any of the BF Trust Property on any terms Balsub sees fit; and

(c)    to bring any claim against any party on behalf of the BF Trust.

5.    The Liquidator's remuneration, costs and disbursements (including legal costs) of this application be paid from Trust Assets on an indemnity basis.

6.    Liberty to apply to any person who can demonstrate sufficient interest to modify any directions, orders and/or declarations made pursuant to this Originating Process on not less than 48 hours' notice to the first plaintiff.

7.    The first plaintiff have leave to file and serve any further material concerning the question of whether the Liquidator should be relieved from liability for past dealings with Trust Property as sought by prayer (3) of the originating application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 201

REASONS FOR JUDGMENT

ANASTASSIOU J:

1    By originating process dated 3 February 2020 the first plaintiff, the Liquidator of the second plaintiff, Balsub Pty Ltd, seeks various orders to enable him to undertake the liquidation. As will become apparent, Balsub carried on business primarily in its capacity as trustee of the Balms Family Trust (ABN 30 171 425 659) (BF Trust).

2    The Liquidator seeks orders under certain provisions of the Trustee Act 1958 (Vic), the Corporations Act 2001 (Cth), the Insolvency Practice Schedule (Corporations) (IPS), being schedule 2 to the Corporations Act, and pursuant to the inherent jurisdiction of the Court. The reason for the application arises because of the terms of Clause 12.4 of the relevant Trust Deed. Clause 12.4 provides in part that “[t]he office of a Trustee shall be ipso facto determined and vacated if … such Trustee being a company shall enter into liquidation whether compulsory or voluntary”.

3    The Liquidator was appointed by orders of a Registrar of this Court on 26 July 2019 (VID 242/2019). As no replacement trustee has been appointed, Balsub remains the bare trustee of the BF Trust. In the absence of relevant orders of the Court, the Liquidator does not have the authority to get in or deal with the assets of the Trust.

Background to the present application

4    Balsub was incorporated on 24 June 2004. Since its incorporation Bradley Alastair Marks has been its sole director. Mr Marks holds all of the company’s shares. The BF Trust was established by the Trust Deed on 25 June 2004. The primary beneficiaries are Mr Marks and Worth the Wait Pty Ltd (ACN 109 472 317), a company controlled by Mr Marks.

5    As stated above, Balsub was wound up on 26 July 2019. Following his appointment, the Liquidator carried out investigations and enquiries into the affairs of Balsub and the BF Trust. These investigations revealed that Balsub operated three “Subway” restaurants in Mount Waverley, Oakleigh and Chelsea Heights (Restaurants). Balsub conducted the Restaurants under three franchise agreements. These franchise agreements were entered into in 2012 by Mr Marks and his wife Angela Marks in their personal capacities with Subway Systems Australia Pty Ltd. The operation of the Restaurant businesses under the franchise agreements is said to have been licensed to Balsub pursuant to oral agreements discussed below.

6    The premises from which the the Restaurants were operated were sub-leased to Mr and Ms Marks by Subway (Premises).

7    The present application came before me for case management on 25 February 2020. The application was supported by an affidavit of the Liquidator dated 29 January 2020. The Liquidator appeared at the hearing as the moving party on the present application. There was no appearance for any other interested parties. I fixed the application for hearing on 18 March 2020 and directed the Liquidator to provide written submissions in support of his application.

8    Due to the onset of the Covid-19 pandemic the hearing was unable to proceed. Subsequently, I directed the Liquidator to write to creditors of the BF Trust and Balsub attaching a copy of the application and requiring them to contact the Liquidator’s solicitors should they wish to be heard on the application. I indicated that I would consider whether to determine the matter on the papers following a review of any objections to the application.

9    The solicitors for the Liquidator filed seven affidavits of service indicating that all but the following creditors had been served with the application and relevant materials:

The Liquidator either does not have contact details for those individuals, or, the mail or email sent to the known contact details resulted in a return to sender message. The affidavits deposed that no responses had been received in opposition to the application.

10    I am satisfied that the Liquidator has given reasonable notice of the present application to interested parties such that it can proceed without a contradictor and on the papers.

RELIEF SOUGHT

11    The originating process sought the following relief (the originating process included a “definitions” section which has been reproduced and adopted in Annexure A to this judgment):

(1)    A direction pursuant to s 1318 of the Corporations Act and s 90-15 of the IPS that the Liquidator is justified and acting reasonably in proceeding on the basis that:

(a)    Balsub carried on business in its capacity as trustee of the BF Trust, subject to employing and paying employees which the second plaintiff did in its own right;

(b)    all of Balsub’s property, with the exception of the funds in the NAB Cheque Account (as described below), is held by it as trustee of the BF Trust; and

(c)    Balsub’s creditors, other than its employees, the Deputy Commissioner of Taxation with respect to pay as you go withholding tax, Superannuation Guarantee Charge and associated interest and penalties, Marina Radiology and Telstra Corporation Limited, are creditors whose debts have been incurred by Balsub in its capacity as trustee of the BF Trust.

(2)    In respect of Balsub:

(a)    an order pursuant to s 63 of the Trustee Act that Balsub, in its capacity as trustee of the BF Trust, shall have the following powers at its absolute discretion:

(i)    to sell or otherwise dispose of, in any manner, all or any part of the BF Trust Property in its capacity as trustee of the BF Trust;

(ii)    to compromise any claim made against Balsub in its capacity as trustee of the BF Trust or against any of the BF Trust Property on any terms Balsub sees fit; and

(iii)    to bring any claim against any party on behalf of the BF Trust.

(b)    alternatively to order 2(a):

(i)    an order pursuant to s 48 of the Trustee Act, appointing Balsub as trustee of the BF Trust under the Trust Deed; and

(ii)    an order pursuant to section 63A of the Trustee Act approving the variation of clause 12.4 of the Trust Deed such that clause 12.4 is removed.

(3)    An order pursuant to s 1318 of the Corporations Act, s 90-15 of the IPS and/or s 67 of the Trustee Act that the Liquidator be relieved from any liability for dealing with the BF Trust Property between the date of his appointment and the date of this order.

(4)    A direction pursuant to s 1318 of the Corporations Act and s 90-15 of the IPS that the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that:

(a)    The Liquidator is entitled to be paid his Trust Remuneration and Trust Expenses from the Trust Assets (as those terms are defined in the Definitions below in Annexure A); and

(b)    The Liquidator be indemnified out of, and have an equitable lien over, the Trust Assets for all the Trust Remuneration and Trust Expenses.

(5)    A direction pursuant to s 1318 of the Corporations Act and s 90-15 of the IPS that to the extent any remuneration and expenses are not attributable to the Trust and/or Trust Assets and are not otherwise met out of the assets of Balsub:

(a)    The question of the manner and source of the payment of such remuneration and expenses; and

(b)    The question whether the remuneration and expenses of tasks undertaken by the Liquidator other than those identified in the definitions of Trust Remuneration and Trust Expenses set out below are costs and expenses that may be recoverable from the Trust Assets,

are reserved, with the Liquidator having liberty to apply in respect of that question.

(6)    Orders that the Liquidator's remuneration, costs and disbursements (including legal costs) of this application be paid from Trust Assets on an indemnity basis.

(7)    An order that there be liberty to apply to any person who can demonstrate sufficient interest to modify any directions, orders and/or declarations made pursuant to this Originating Process on not less than 48 hours' notice to the first plaintiff.

(8)    Such further or other order as the Court sees fit.

12    For the reasons that follow the application is allowed save for the orders sought in (3) above, namely, that the liquidator be relieved of liability for dealings with trust property since his appointment. I have, however, granted liberty to further apply for those should the Liquidator be so advised.

13    I will consider each form of relief sought in turn.

(1) s 1318 directions regarding the operations of Balsub and the BF Trust, property, and creditors

14    The Liquidator seeks directions under s 1318 of the Corporations Act that Balsub carried on its business as trustee save for employing employees in its own right, that its property save for one bank account is held as trustee, and that its creditors other than certain listed creditors are trust creditors. The direction is sought owing to recent authority to the effect that the expression “property of the company” in s 556 of the Corporations Act does not apply to property held by a company on trust: Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20; 93 ALJR 807; 368 ALR 390; 17 ABC(NS) 1. The Liquidator’s affidavit in effect deposes to the Liquidator’s belief that each of the declarations sought is true, and sets out the evidence for those conclusions (see [57]).

15    Whether Balsub traded in its own capacity or as a trustee is a question of fact. The Liquidator pointed to several features of the circumstances of Balsub that were similar to other decided cases where a similar direction had been given. Though guidance may be had by reference to similar cases, there is no one criteria which is determinative. The Liquidator’s submissions adopted the factors referred to by Robson J in Re Amerind Pty Ltd (receivers and managers apptd) (in liq) [2017] VSC 127; 121 ACSR 201 at [46]. Re Amerind was overturned in Commonwealth v Byrnes [2018] VSCA 41; 54 VR 230. An appeal from Byrnes was dismissed in Carter Holt. However, Robson J’s conclusion that the company traded as trustee and not in its own right was accepted on appeal: Byrnes at [3], and Carter Holt at [4] per Kiefel CJ, Keane and Edelman JJ, at [61] per Bell, Gageler and Nettle JJ, and at [100] per Gordon J.

16    The following factors, which correspond to the factors identified in Re Amerind as relevant to the question of whether the company traded in its own right, or as a trustee, were distilled in the Liquidator’s submissions:

    the existence of constituent trust documents which establish a trust: Bastion v Gideon Investments Pty Ltd (in liq) [2000] NSWSC 939; 35 ACSR 466, [51];

    whether accounts were maintained separately to the company’s operational expenditure accounts and/or the company’s own property: In the Matter of ICS Real Estate Pty Ltd (in liq) [2014] NSWSC 479, [40];

    whether the company’s name in its capacity as trustee is noted on key documents such as letters of employment and tax file declarations: Re National Personnel Pty Ltd (in liq) [2012] VSC 508, [34];

    whether invoices rendered by the company in question are issued by the company in its capacity as trustee of the trust: Re Rolcross Pty Ltd (in liq) [2012] NSWSC 846, [6];

    whether expenses were accounted as receipts of the company as trustee: JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; 33 ACSR 691, [79]; and

    whether records contained in the general ledger of the company recorded activity consistent with the operation of a trust: Graf Holdings & Parer Holdings [1999] NSWSC 217, [4].

17    The Liquidator pointed to several of the above features in common with the present case:     

    The Trust Deed provides power to Balsub to operate the business;

    Balsub’s financial reports for years ending 30 June 2016 and 2017 in its capacity as trustee of the BF Trust are consistent with it having been the business entity for the Restaurants. The reports indicate that Balsub in its capacity as trustee of the BF Trust received revenue and paid what appears to be the majority, if not all, of the operating expenses of the Restaurants (save for wages, though including Workcover), and including the royalty fee payable to Subway of 8% of gross sales;

    The tax returns prepared for the BF Trust for the years ending 30 June 2016 and 2017 show that the company’s main business is ‘fast food retailing’ and list the largest expenses of the trust as including cost of sales, rent, interest and other expenses.

18    However, several other features of Balsub’s circumstances point away from Balsub ‘carrying on its business in its capacity as trustee’. For example, the Liquidator accepted, though believing Balsub carried on business in its capacity as trustee of the BF trust, that it employed employees in its own capacity. He deposes that as at his appointment approximately 203 employees were employed by Balsub (at [12]). These workers worked at the Restaurants, but also other Subway restaurants across Victoria. The cost of wages was included as a cost in Balsub as trustee for the BF Trust’s tax return for 2016, though does not appear to have been included for the 2017 return ([43] and [44]). The wages were paid from a chequing account (no 42-907-7510) held in the name of “Balsub Pty Ltd as Trustee for the Balms Family Trust Payroll Account” with the National Australia Bank (NAB Cheque Account).

19    The question is made less categoric by the fact that Balsub was not given permission in writing by Subway to operate the Restaurants under the franchise agreements with Mr and Ms Marks. In correspondence to the Liquidator, Subway stated that it had never consented to any transfer of the franchise agreements to Balsub, nor did they have any record of the same occurring. The Liquidator deposed that in a meeting on 5 August 2019 held at his office, Mr Marks stated that he had agreed orally to license the franchise agreements to Balsub.

20    On 7 August 2019 Mr Mark’s solicitor, Hall & Wilcox, wrote to the Liquidator concerning these matters. The letter, which was exhibited to the Liquidator’s affidavit, stated that Mr and Ms Marks had “granted [Balsub as trustee for the BF Trust] the right to operate the Restaurants and a non-exclusive license [sic] to occupy the Premises in order to operate the Restaurants.” The letter states further that the licence had been terminated upon the Liquidator’s appointment and that Mr and Ms Marks continue to operate the Restaurants under the franchise agreements.

21    In Re Amerind, Robson J declared that the company in question had traded solely in its capacity as trustee, notwithstanding that “the manner in which Amerind entered into agreements with third parties, including suppliers, lessors, insurers as well as Amerind’s employees, did not involve consistent disclosure that it acted in its capacity as trustee of the trust” (at [47]).

22    I am satisfied that Balsub conducted the Restaurant businesses in its capacity as trustee and not in its own capacity. Though there are anomalies or inconsistencies in the certain respects referred to above, such inconsistencies are common place in small business operations. In my view, the weight of the evidence concerning the manner in which the Restaurants’ businesses were conducted leads to a strong inference that Balsub undertook the businesses in its capacity as trustee, notwithstanding that the documentation of its affairs was not perfectly consistent with Balsub acting only in the capacity of trustee.

23    Accordingly, I am satisfied that the declaration should be made.

(2) Powers to deal with trust property pursuant to the Trustee Act

24    The Liquidator seeks to be granted a power to deal with trust property and to be relieved from liability when doing so. These orders are sought, similarly to those under s 1318 of the Corporations Act, to regularise the Liquidator’s position in respect of Balsub and enable him to carry out his statutory function.

25    Such relief is available under s 63 of the Trustee Act. In Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 Gordon J held (at [35]-[36]) that such relief would be appropriate where:

(a)    the company became a bare trustee of the assets of the trust upon the appointment of the liquidator;

(b)    the company had acted only as trustee of the trust and in no other capacity;

(c)    all assets owned by the company were held by it as trustee of the trust and all liabilities incurred by it were incurred in its capacity as trustee of the trust; and

(d)    no new trustee had been appointed.

26    It is apparent that (a), (c) and (d) of the above are readily met in this case. For reasons apparent from my consideration of (1) above, (b) is more complicated. It is apparent that Balsub acted both in its capacity as trustee and in its own right. However, the extent to which Balsub conducted the Restaurant businesses in its own right was limited to the employment of staff. In these circumstances, and given no creditor or other interested person has sought to be heard on this application, I am persuaded that the orders should be made.

(3) Relief from liability for previous dealings with trust property from appointment to date

27    The Liquidator also seeks to be relieved from liability for dealings with trust property to date. This relief is sought under s 1318 of the Corporations Act and / or s 67 of the Trustee Act. In Amirbeaggi, in the Matter of Simpkiss Pty Ltd (in Liq) [2018] FCA 2121 Markovic J granted a similar form of order by way of declaration. Her Honour set out at [46]-[48] the requirements for making such a declaration:

46.    The Court has power, pursuant to s 1318 of the Corporations Act, to excuse an administrator who inadvertently sells trust assets when he or she does not have the power to do so: see [Caterpillar] at [42]; [Re Suncoast Restoration Pty Ltd (in liq) [2013] FCA 355; 211 FCR 203; 93 ACSR 606] at [21], [29]-[39]. …

47.    In order for Ms Amirbeaggi to obtain the relief she sought under s 1318(2) of the Corporations Act she had to establish that:

(1)    she had reason to apprehend that a claim would, or might, be made against her;

(2)    such a claim is in respect of any negligence, default, breach of trust or breach of duty in her capacity as administrator; and

(3)    she acted honestly in relation thereto,

see Suncoast at [29].

48.    In Suncoast Reeves J noted that the nature of the apprehension that a claim might be made was that there “must be an objective basis for believing that the claim will or might be made against that person”: at [31] quoting [John Vouris Re; Epromotions Australia Pty Ltd and Relectronic-Remech Pty Ltd (In Liq) [2003] NSWSC 702; 47 ACSR 155] at [116] per Campbell J.

28    In Amirbeaggi, despite the prospect of a claim being made against the administrator being unlikely, Markovic J held that there was still the chance of such a claim being brought, and therefore the basis to make an order: at [50] and [51]. Her Honour was fortified in her conclusion by the fact that, as here, assets had been dealt with by the administrator while merely a bare trustee (at [52]). Markovic J was satisfied the administrator acted honestly (at [53]). Her Honour found that the administrator had made the sales of assets while not aware that they were properly trust assets.

29    Where, upon the appointment of a liquidator or administrator, a company becomes a bare trustee, it is incumbent on the liquidator to obtain a court order to sell the asset or an order for the appointment of a receiver if a sale of an asset becomes necessary: Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; 260 FCR 310 at [44] (Allsop CJ); Mohen (Liquidator), in the Matter Of Willco Breads Pty Ltd (in Liq) [2019] FCA 1539 at [19] (Banks-Smith J).

30    On the present state of the evidence I am not satisfied that I should grant an order relieving the Liquidator from liability for past dealings with trust property. This is so as the Liquidator’s affidavit provides little detail of any dealings with trust property or actions taken in respect of trust property to date. Further, the Liquidator’s affidavit does not indicate at what time the Liquidator became aware Balsub was a bare trustee nor what he did from that date onward. While the Liquidator acknowledges Balsub is a bare trustee and therefore lacks power to deal with trust assets, he does not specify when he became aware of this and what transactions have occurred before or since becoming aware that Balsub became a bare trustee upon being wound up.

31    I note that the Liquidator is no longer trading the Restaurants. However, this fact is not sufficient to warrant the making of the orders sought in respect of any prior trading operations.

32    For the reasons I have given above, I am not satisfied on the material presently before me that it is appropriate to make the orders. However, the Liquidator may make a further application for such orders, if so advised, supported by additional affidavit material. Further, I note that my refusal to make the orders at this stage does not preclude the Liquidator raising s 1318 of the Corporations Act and s 67 of the Trustee Act in defence to any proceedings that may be issued.

(4)-(6) Orders for the Liquidator’s remuneration and expenses

33    The application also seeks orders enabling the Liquidator to be paid his remuneration and expenses referrable to the BF Trust from trust property, to have an equitable lien to secure this obligation, and to be remunerated on an indemnity basis, and other related orders. Clause 12.12 of the Trust Deed provides for an express right of indemnity for the trustee, but this right is inapplicable to Balsub as a bare trustee.

34    In my view, these orders are reasonable and necessary to enable the orderly winding up of the BF Trust. In practical terms, if no such order were made the Liquidator would be unable to proceed with the winding up of the Trust and consequently of Balsub.

DISPOSITION

35    For the reasons set out above, there will be orders in the terms sought, save for the orders sought in (3) of the originating application reproduced above.

Associate:

Dated:    1 June 2020

Annexure A – Originating Process Definitions

Definitions

In this judgment and its orders, the following words have the following meanings:

Trust Expenses means expenses incurred by the Liquidator in the Liquidation of the Company save for those in respect of which an express right of reimbursement and/or indemnity is conferred on the Company by the constitution of the Trust, being expenses in respect of:

(a)    investigating the Trust and the Trust Assets, including ascertaining the nature, value and position of the assets and liabilities relevant to the Trust;

(b)    identifying claims which may be brought to benefit the Trust Assets or reduce other claims against Trust Assets;

(c)    causing the Company to administer the Trust in accordance with the Corporations Act and the Deed of the Trust;

(d)    obtaining control of the Trust Assets;

(e)    the care, preservation and realisation of Trust Assets and identifying appropriate steps in relation thereto;

(f)    identifying parties who may claim an entitlement (including creditor claims) in respect of the Trust Assets;

(g)    reviewing and dealing with claims by any person to any entitlements (including creditor claims) in respect of the Trust Assets;

(h)    instructing lawyers to:

(i)    advise in relation to any of the matters referred to above; and

(ii)    commence this application.

Trust Remuneration means such remuneration of the Liquidator as liquidator of the Company as approved by creditors or the Court pursuant to 60-10 of the IPS being remuneration in respect of:

(a)    investigating the Trust and the Trust Assets, including ascertaining the nature, value and position of the assets and liabilities relevant to the Trust;

(b)    identifying claims which may be brought to benefit the Trust Assets or reduce other claims against Trust Assets;

(c)    causing the Company to administer the Trust in accordance with the Corporations Act and the constitution of the Trust;

(d)    obtaining control of the Trust Assets;

(e)    the care, preservation and realisation of Trust Assets and identifying appropriate steps in relation thereto;

(f)    identifying parties who may claim an entitlement (including creditor claims) in respect of the Trust Assets;

(g)    reviewing and dealing with claims by any person to any entitlements (including creditor claims) in respect of the Trust Assets;

(h)    instructing lawyers to:

(i)    advise in relation to any of the matters referred to above; and

(ii)    commence this application.

Trust Assets means the assets held by the Company as trustee and or bare trustee of the Trust and any assets of the trust held by any new trustee appointed as trustee of the Trust