Federal Court of Australia

Rathner (liquidator), in the matter of Garrows Close Pty Ltd (in liq) [2021] FCA 505

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act 2001 (Cth), the first plaintiffs (the liquidators) are both justified and acting reasonably in conducting the winding up of the second plaintiff (the company) on the basis that:

(a)    the company holds its interest in:

(i)    the land situated at Lot S2, 95-97 Nicholson Street, Warrnambool, Victoria, being the land described in certificate of title volume 11525 folio 209 (Lot S2); and

(ii)    the land situated at Lot S3, 95-97 Nicholson Street, Warrnambool, Victoria, being the land described in certificate of title volume 11525 folio 210 (Lot S3),

    in its capacity as bare trustee for Ms Regina Patricia Cohen and Mr Gerard Harrington as tenants in common as to half each (the Trust); and

(b)    all assets of the company (including for the avoidance of any doubt, the company’s interests in Lot S2 and Lot S3), are properly characterised as property held by the company in its capacity as trustee of the Trust (the Trust property).

2.    Pursuant to s 63(1) of the Trustee Act 1958 (Vic), the following powers necessary to enable the liquidators to wind up the Trust are conferred on them:

(a)    the power to carry on the business of the Trust;

(b)    the power to sell the company’s property including its interest in Lot S2 and/or Lot S3;

(c)    the power to compromise any claim made against the company in its capacity as trustee of the Trust or against Lot S2 and/or Lot S3 on any terms the liquidators see fit; and

(d)    the power to execute any tax returns, financial statements or other documents relating to the Trust.

3.    Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), the liquidators are justified and otherwise acting reasonably in proceeding on the basis that they can deal with, hold, apply and/or distribute the Trust property in accordance with Parts 5.5 and 5.6 of the Corporations Act.

4.    Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), the liquidators are and were justified and otherwise acting reasonably in proceeding on the basis that:

(a)    the liquidators are and were entitled to be paid from the Trust property their remuneration, costs and expenses properly incurred in preserving, realising or getting in the Trust property, or in distributing the Trust property (once realised), or in conducting the winding up of the company; and

(b)    the said remuneration and expenses include the remuneration, costs and expenses of and incidental to this application and are to be paid in accordance with the priority specified in s 556(1) of the Corporations Act.

5.    There is liberty to apply to any person who can demonstrate sufficient interest to modify these directions and orders on not less than 48 hours’ notice.

6.    The liquidators are to serve a copy of this order on each of the persons served with a copy of the originating process.

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

REASONS FOR JUDGMENT

BEACH J:

1    The liquidators of Garrows Close Pty Ltd (in liquidation) have applied under s 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act 2001 (Cth), and s 63(1) of the Trustee Act 1958 (Vic) for orders that they be empowered to deal with trust property of the company for the purpose of distribution so as to enable the completion of the winding up.

2    The company’s assets are held as bare trustee for Ms Regina Patricia Cohen and Mr Gerard Harrington as tenants in common as to half each. Essentially, the company’s assets consist of its interests in two adjacent properties being the land situated at Lot S2 and Lot S3, 95–97 Nicholson Street, Warrnambool, Victoria.

3    The application has been made on notice to each of Ms Cohen and Mr Harrington, whose roles I will explain in a moment, and to the Australian Securities and Investments Commission; ASIC has indicated by letter that it has no objection to the orders sought.

4    On the basis of the evidence before me I will grant this application. The orders sought are unremarkable, save that I need to say something as to the choice made of preferring the conferring of additional trust powers over the standard option of imposing a receivership over trust assets, and also the appropriateness of imposing the regime for distribution and priorities under the Corporations Act when the company only holds trust assets, save its right of indemnity, and has only incurred trust liabilities. For the moment, I need say little about the power of recoupment or the power of exoneration.

5    The present matter reflects a standard context where orders have been made for the purpose of selling trust assets and distributing the proceeds among trust creditors by conferring on the liquidators of a corporate trustee of a bare trust the power to either deal with the assets of the trust or to have the liquidators appointed as receivers. In the present context, the liquidators seek an order conferring on them the power to deal with the assets of the trust, without also appointing them as receivers. Receivership is not necessary as I am not dealing with multiple trusts and there is no trading on involved.

6    Section 90-15(1) of the Insolvency Practice Schedule (Corporations) confers power on me to make “such orders as it thinks fit in relation to the external administration of a company”. The “[e]xamples of orders that may be made”, set out in s 90-15(3), which include “determining any question arising in the external administration of the company”, demonstrate that the power is broad and is at least as extensive as the powers formerly available under ss 479(3) and 511 of the Corporations Act.

7    Further, s 63(1) of the Trustee Act provides:

Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorized to be expended, and the costs of any transaction are to be paid or borne as between capital and income.

8    In my view s 63(1) not only permits the conferral of power on a corporate trustee but also its liquidators in such a capacity; that arises as a necessary implication from the terms of s 63(1) or is a necessary ancillary order, particularly as it is only the liquidators who control the insolvent corporate trustee and who must be the recipient of and exercise any relevant power in substance.

9    Now as I say, the company’s assets are held in its capacity as bare trustee, such that the company has no interest therein other than that existing by reason of the office of trustee and the holding of legal title, and with the obligation to convey the trust estate to the beneficiaries on demand.

10    I am satisfied that s 63(1) provides me with adequate power to authorise the necessary dealing with and application of trust assets, subject to what I will say later concerning Parts 5.5 and 5.6 of the Corporations Act.

11    In Re Cremin (in his capacity as liquidator of Brimson Pty Ltd in (ACN 621 156 643) (in liq) and others) (2019) 136 ACSR 649 Moshinsky J observed (at [49] and [50]):

…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 … 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 (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; 260 FCR 310; 124 ACSR 568] at [89]. …

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 … 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 …

12    Now in the present case, in circumstances where the company has acted as a trustee of only one trust, where all assets owned by the company were held by it as trustee save its right of indemnity which is a personal asset, where all liabilities incurred by it were incurred in its capacity as trustee, and where there is no trading on, the preferable course is to confer suitable powers on the liquidators under trustee legislation instead of appointing the liquidators as receivers.

13    I should set out some background before dealing in more detail with the orders sought.

Background

14    Ms Cohen is the sole director and secretary of the company. Mr Harrington was a director of the company from 10 December 2015 until 31 March 2017. There are three shares issued in the company which are registered in the name of Ms Cohen.

15    On 19 October 2020, the company resolved to appoint the liquidators as administrators pursuant to s 436A of the Corporations Act; on 25 January 2021, they were appointed as liquidators.

16    In late 2015 or early 2016, Ms Cohen and Mr Harrington, together with the company, entered into a written joint venture agreement for the purposes of purchasing and developing land, being the Lots S2 and S3 that I have previously described. Apparently, there is no copy of the signed joint venture agreement. But in other legal proceedings involving Ms Cohen, Ms Cohen produced an unsigned copy of the joint venture agreement, which she said reflected the agreement that had been entered into. I will proceed on the basis that the unsigned copy reflects the executed joint venture agreement.

17    According to the joint venture agreement, Lot S2 was to be purchased for a price of $1,260,000; Lot S3 was to be purchased for a price of $500,000. Both lots were to be registered in the name of the company. For the purposes of the joint venture, the joint venturers had agreed that the value of the property was $1,760,000, being the total price noted in the contracts of sale. The development was intended to involve the construction of 11 residential dwelling units on the property by a registered builder.

18    The joint venture agreement contained, inter-alia, the following terms:

(a)    the joint venturers would jointly appoint the company as a bare trustee and manager to hold on their behalf the property subject to the development;

(b)    each of the joint venture partners would be shareholders and directors of the company;

(c)    the beneficial interest in the joint venture would belong to the joint venturers as tenants in common in equal shares (subject to any later adjustment);

(d)    the joint venturers would as between themselves share in the net profits of the joint venture in equal proportions unless specifically varied; and

(e)    the joint venturers would as between themselves be liable for the losses of the joint venture in equal proportions.

19    By a contract of sale made on 12 January 2016, the company agreed to purchase from Emcee Investments Pty Ltd Lot S2 for a price of $1,260,000. By a contract of sale also made on 12 January 2016, the company agreed to purchase from Emcee Lot S3 for a price of $500,000.

20    Apparently, between February 2016 and May 2018, Ms Cohen advanced amounts totalling $1,408,519 to the company as trustee of the joint venture, by way of a loan. Ms Cohen has lodged a proof of debt with the liquidators by which she contends that moneys were advanced to the company on the security of an indenture and loan agreement between herself and the company. The liquidators have determined that the value of Ms Cohen’s claim against the company pursuant to her security interest is approximately $1,494,264.

21    Further, apparently in May 2019 Ms Cohen’s mother, Ms Elayne Hoffman, entered into an agreement under which Ms Hoffman advanced $580,000 to the company as trustee of the joint venture, by way of a loan. The liquidators have determined that the value of Ms Hoffman’s claim against the company is $580,000.

22    Further, it would seem that Mr Harrington made no financial contribution to the company or towards the purchase of the property. Further, save for the moneys advanced by Ms Cohen and Ms Hoffman, it would seem that there has been no other financial contribution to the company in respect of the joint venture. I should say that Mr Harrington has apparently lodged a proof of debt with the liquidators, but I do not need to linger on this.

23    Now despite the objective of the joint venture, it would seem that the property has not been developed. The company failed to obtain the necessary financing for the purpose of the joint venture, and on 15 May 2018 the joint venture was apparently dissolved.

24    Now the company completed the contract to purchase Lot S3 and on 15 March 2016 was registered as the proprietor. But the company has not completed the contract to purchase Lot S2. The liquidators’ investigations indicate that $85,000 is outstanding to the vendor. Based on the liquidators’ investigations of funding options and requests for funding made to all creditors, the liquidators believe that it is unlikely that any third party will put them in funds so as to enable the company to complete that contract. On 11 November 2020, the liquidators, who were then the administrators, lodged a caveat on behalf of the company on the title to Lot S2, with the ground of claim relied upon being as purchaser under the contract. Apparently, the vendor remains prepared to complete the contract for this sale.

25    Finally, as I say, the company is only a bare trustee for the joint venture. And the liquidators (as administrators) have expressed this view to creditors of the company in their first and second administrators’ reports to creditors. On 31 March 2021, this view was repeated in their report to creditors in the liquidation of the company. On the information available to me I have no reason to doubt that characterisation and have so proceeded.

26    The liquidators have advised creditors of the company of the present application. No objection has been received.

Orders sought

27    Let me now deal with the orders sought.

28    First, it follows from what I have said that it is appropriate to make an order pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) that the liquidators are both justified and acting reasonably in conducting the winding up of the company on the basis that the company’s assets are held by the company in its capacity as bare trustee for Ms Cohen and Mr Harrington as tenants in common as to half each and that all assets of the company are properly characterised as being held in that capacity.

29    Second, let me say something about the conferral of powers. I will confer on the liquidators under s 63(1) of the Trustee Act the power to deal with the trust assets without appointing them as receivers. Such a course is more preferable in the present circumstances.

30    Third, I will also make an order pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) that the liquidators are both justified and otherwise acting reasonably in proceeding on the basis that their possession, realisation and distribution of property of the trust is governed by rules analogous to Parts 5.5 and 5.6 of the Corporations Act. Such a direction accords with authority; see for example Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth and others (2019) 368 ALR 390 at [95] to [97] per Bell, Gageler and Nettle JJ and at [153] to [172] per Gordon J. Further, I have a plain vanilla situation where the company has only acted as corporate trustee for one trust. I am not faced with the problem of one corporate trustee and multiple trusts. Further, as to the company’s right of indemnity or more correctly its powers of indemnity, presently I do not need to distinguish between a power of recoupment or a power of exoneration, although if anything I am dealing with the latter.

31    Fourth, as the details of the tasks undertaken by the liquidators have been set out in reports to the company’s creditors, I will make an order to confirm the liquidators’ entitlement to be indemnified out of the trust assets in respect of the costs and expenses that they have incurred. As I say, the sole activities of the company were as trustee. It follows that, save for its power of exoneration and the supporting lien, the company has no assets of its own. In these circumstances, it is appropriate that the liquidators’ remuneration and expenses be paid out of trust assets. It is also appropriate that the costs of the present application be met from the property held on trust.

32    I will make orders to accord with these reasons.

Associate:

Dated:    13 May 2021