Federal Court of Australia

Brooks, in the matter of CannHarvest Ltd (in liq) [2022] FCA 1473

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiff is justified in treating the following funds received by CannHarvest Ltd (in liquidation) as money required to be held on trust for the payers of those monies:

2.    The plaintiff is justified in commencing proceedings against Troy Langman in respect of alleged expenditure and ACN 161 995 204 Pty Ltd in respect of alleged receipt of the funds referred to in (1).

3.    The plaintiff is justified in not commencing proceedings against Hollie Nasser, Stephanie Jong and Anthony Nagy in respect of the alleged expenditure of the funds referred to in (1).

4.    Liberty is granted to the plaintiff to renew her application for the relief sought in paragraphs 4 and 5 of the originating application filed on 15 August 2022 in the form of further submissions and affidavit evidence which liberty may be exercised by email to chambers.

5.    The costs of this application be costs in the liquidation of CannHarvest Ltd, to be borne equally by the general creditors and the beneficiaries listed in (1).

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

REASONS FOR JUDGMENT

MCELWAINE J:

1    Ms Shelley-Maree Brooks (applicant) in her capacity as liquidator of CannHarvest Ltd (in liquidation) (company) seeks judicial advice pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Corporations Act 2001 (Cth) (Insolvency Practice Schedule). The application is made ex parte and, as is well understood, is one for private advice: Macedonian Orthodox Community Church St Pekta Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 (Macedonian Church) at [64]-[66], Gummow A-CJ, Kirby, Hayne and Heydon JJ. Kiefel J delivered separate concurring reasons. Where advice is given, provided the applicant has made full disclosure, she may act upon and take steps authorised by it free from the risk of personal liability for breach of duty: Re One.Tel Limited (2014) 99 ACSR 247; [2014] NSWSC 457 at [32], Brereton J.

2    The applicant on 4 August 2022 affirmed an extensive affidavit that sets out the results of her investigations that are relevant. Each finding of fact that I set out is in accordance with the matters deposed to. My findings are expressed at a relatively high level of generality for the reason that a component of the advice that is sought concerns the commencement of proceedings against one of the directors of the company, Mr Troy Langman, and a corporation associated with him, ACN 161 995 204 Pty Ltd (ACN Co).

3    On 19 March 2019, the applicant was appointed as joint and several administrator of the company with Mr Brent Morgan. The business of the company concerned growing hemp on leased farming properties in Tasmania. On 3 May 2019, the creditors of the company resolved that it be wound up whereupon the applicant and Mr Morgan became the joint and several liquidators. On 20 March 2020, Mr Morgan resigned his office as liquidator.

4    In or about March 2019, the applicant became aware that the company had participated in a form of fundraising and that approximately 70 investors had provided funds to the company, in the expectation that they would be issued with shares, but which shares were not issued to all of the investors.

5    The records of the company did not include any prospectus for the issue of the shares. In June 2019, the applicant spoke with Mr Langman as to whether there was in fact a prospectus in existence for the initial capital raising. She was told there was not. However, in September 2019, the applicant was anonymously provided with information in the form of a prospectus in the name of the company dated 12 November 2018 relating to a capital raising by share issue (the prospectus). By that document the offer was scheduled to close at 5 pm on 28 February 2019. On the face of it that document at least has the appearance of a prospectus, however, whilst it states that it was lodged with ASIC on 28 February 2019, there is no evidence that it was so lodged. The prospectus stated that the share offer was conditional upon ASX confirmation that it would admit the company and also that the minimum subscription of 25 million shares at an issue price of $0.20 per share to raise $5 million was met. Neither of those conditions was satisfied.

6    Through further investigations, the applicant ascertained that a number of investors provided funds to the company in order to be issued with shares. In total, $809,997.84 was paid by prospective share applicants to the company. Some of the applicants were issued with shares. Some were not. A reconciliation of the historic bank account records of the company that has been undertaken by employees of the applicant, when compared with the share register of the company, discloses that there were 11 applicants for shares who each paid $10,000, but were not issued any shares. All of the money that was paid by the prospective share applicants was receipted into the general account of the company and was used for expenditure. Mr Langman was the sole signatory to that account.

7    Shares, of course, are a financial product: ss 763A and 763B of the Corporations Act. Section 1017E of the Corporations Act provides for what is to be done with money received by an issuer of a financial product where money is received before the product is issued. In that circumstance the money “is taken to be held in trust by the product provider for the benefit of the person who paid the money”: s 1017E(2A). A designated trust account ought to have been established: r 7.9.08(2) of the Corporations Regulations 2001 (Cth). These requirements were not met. There is a prima facie case for breach of trust in relation to the 11 applicants and the $110,000 that was received by reason of the failure to pay the application money into a separate trust account. The statutory trust ceased to apply to the balance of the share applicants upon the issue of shares to each. There are insufficient trust funds in the liquidation to account to the applicants who were not issued with shares. Hence, the applicant has focused her attention on the person or persons responsible for the breach of trust.

8    The applicant has had several discussions with Mr Langman concerning the prospectus and the issue of shares. He has denied knowledge of the prospectus. That denial is difficult to reconcile with a document that has been produced to the applicant which is a circulating resolution that purports to record the decisions taken by the board of the company on 13 November 2018 at which time the directors resolved to issue shares in the company. Mr Langman is recorded as having been present and has admitted to being in attendance in email correspondence with the applicant.

9    The advice that the applicant seeks, framed in accordance with her originating application, is:

1.     That the applicant is justified in treating the funds received by CannHarvest Ltd as set out in Annexure “A” hereto, as moneys required to be held on trust by that company for the payers of those moneys.

2.     That the applicant is justified in commencing proceedings against:

(a)     Troy Langman in respect of the alleged expenditure; and

(b)     ACN 161 995 204 Pty Ltd in respect of the alleged receipt, of those funds set out in Annexure “A” hereto.

3.     That the applicant is justified in not commencing proceedings against Hollie Nasser, Stephanie Jong and Anthony Nagy in respect of the alleged expenditure of funds held on trust by CannHarvest Ltd for prospective shareholders in that company.

4.     That the plaintiff is justified in deploying the funds of CannHarvest Ltd (in liquidation) for the purpose of commencing and prosecuting a proposed proceeding against Troy Langman in respect of the alleged expenditure of funds held on trust by CannHarvest Ltd for prospective shareholders in that company.

5.     That the plaintiff is justified in treating as funds held in trust for those persons identified in Annexure “A”, 15.13% of any amount (after deduction of the liquidator’s costs and expenses of recovery and/or administering those trusts) received or obtained in the liquidation, with each of those persons to be entitled to 9.0909% of any amount so held on trust.

6.     Such further other orders or consequential orders or directions as the Court sees fit.

10    Annexure A is a list of the 11 investors who each paid $10,000 for shares that were not issued.

11    The applicant believes that Mr Langman, by reason of his office as a director of the company, the fact that he was the sole signatory to the company trading account into which the share application money was paid and his awareness that the company was conducting a share issue, is liable as an accessory to the company’s breach of trust under the second limb of Barnes v Addy (1874) LR 9 Ch App 244 which is generally understood as knowing assistance in a breach of fiduciary duty. Further, that he is liable on the same facts for breach of the statutory duties at ss 180, 181 and or 182 of the Corporations Act.

12    The necessary elements of a knowing assistance claim were summarised by Gageler J in Ancient order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [71]:

Knowing participation by a non-fiduciary in a dishonest and fraudulent breach of fiduciary duty is conduct which is regarded in equity as itself unconscionable and as attracting equitable remedies against the knowing participant of the same kind as those available against the errant fiduciary. Knowing participation in a dishonest and fraudulent breach of fiduciary duty includes knowingly assisting the fiduciary in the execution of a “dishonest and fraudulent design” on the part of the fiduciary to engage in the conduct that is in breach of fiduciary duty. The requisite element of dishonesty and fraud on the part of the fiduciary is met where the conduct which constitutes the breach transgresses ordinary standards of honest behaviour. Correspondingly, the requisite element of knowledge on the part of the participant is met where the participant has knowledge of circumstances which would indicate the fact of the dishonesty on the part of the fiduciary to an honest and reasonable person.

(Footnotes omitted.)

13    Of course, in this case Mr Langman was also a fiduciary vis-à-vis his office as a director of the company. I am satisfied, based on the detailed evidence contained in the applicant’s affidavit, that there is a proper and reasonable basis for the applicant to believe that the company has a viable claim and reasonable prospects of success against Mr Langman by application of these principles. Similarly, I am also satisfied that the applicant has a proper and reasonable basis for believing that the company has reasonable prospects of success against Mr Langman for breach of his statutory obligations pursuant to the Corporations Act. Necessarily, these views are formed in the context of a summary application for judicial advice, but that is no reason itself to refuse the advice that is sought which is to the effect that the applicant will be justified in the commencement of proceedings against Mr Langman to recover the sum of $110,000 together with interest: Macedonian Church at [79]-[80]. The important point is that the applicant must make full disclosure of all facts as known to her, and I am satisfied that she has.

14    The applicant also identifies a proper basis to commence a knowing participation claim against a corporation associated with Mr Langman, ACN Co, of which he is presently the sole director, secretary and shareholder. There is documentation to the effect that it is the trustee of a trust known as the Troy Langman Family Trust. Between 2018 and 2019, the company paid to this trustee a total of $101,750 from the money that ought to have been held in trust for the issue of shares. The applicant believes she has a reasonable claim for knowing receipt of this money under the first limb of Barnes v Addy. Although it is not sufficient to establish that Mr Langman at all material times was a director of each corporation, there is sufficient evidence as disclosed in the applicant’s affidavit to support her contention that Mr Langman was at all material times the directing mind and will of the trustee and on that basis, his knowledge may be attributed to it to found a knowing receipt claim: Yore Contractors Pty Ltd v Holcon Pty Ltd (1990) 2 ACSR 663 at 670, Cole J. I am further satisfied that there is a reasonable basis to include the trustee as a party to the proceeding that the applicant wishes to commence.

15    Conversely, according to the applicant’s inquiries thus far she does not believe that there is a proper evidentiary basis to commence like proceedings against three other persons who were at various times directors of the company: Stephanie Wong, Hollie Nasser and Anthony Nagy. On the facts as set out in her affidavit, I agree.

16    Accordingly, I am satisfied that it is appropriate to give the advice that is sought at paragraphs 1, 2 and 3 of the originating application.

17    The applicant seeks further advice that she is justified in using funds of the company in order to commence and prosecute a proceeding against Mr Langman and ACN Co. In the course of the liquidation, the applicant has received approximately $373,000 in funds. She submits, correctly in my view, that the costs of the litigation should be principally borne by the beneficiaries of the statutory trusts, and not the general body of creditors, upon the general principle that she is entitled to be indemnified as to the costs of the litigation from the trust funds and which burden cannot be thrown upon the beneficiaries of another fund: In the Matter of BBY Ltd (Receivers and managers appointed) (in liq) (No 3) [2018] NSWSC 1718 at [38], Brereton J.

18    The applicant’s evidence is that the funds held by her, after making an appropriate allowance for the expenses incurred by the company in cultivating certain crops that resulted in a recovery, may be apportioned as 84.87% as beneficially held by the company and 15.13% as held in trust for the persons who paid for but were not issued with shares. Her evidence, which I accept, is that it is not practicable or feasible to trace the individual investor funds into particular assets. Accordingly, it is necessary to undertake a relatively broad brush, pari passu, distribution: Re Sutherland; Re French Caledonia Travel Service Pty ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008, Campbell J.

19    The applicant does not at this stage seek advice in relation to, or approval of, the quantum of her remuneration or disbursements. However, she does seek further advice to the effect that: first, she would be justified in using trust money to fund the litigation and second, if there is a shortfall or the litigation fails and she is ordered to pay costs, that she is able to use general company funds.

20    On the first issue, the applicant plainly may deploy the trust funds in pursuit of litigation for the trust beneficiaries if she considers that to do so is in their best interests: Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 180 FLR 393; [2004] NSWSC 28 at [80], Campbell J.

21    Resolution of the second issue is more difficult. The applicant submits that she cannot identify “any principle by which it is inappropriate to pursue trust-related claims from general company resources – save that, of course, the liquidator must act for the interests of creditors as a whole”.

22    At this stage, I decline to provide this aspect of the advice that is sought. It seems to me that there are competing considerations that were not addressed by the applicant in her written submissions. That is not to be understood as a criticism. Rather, it is a consequence of determination of this application on the papers. In order to give proper consideration to this aspect of the application detailed consideration should be given to the following.

23    In Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 268 CLR 524; [2019] HCA 20 (Carter Holt), the Court resolved the long standing controversy whether the statutory order of priority for the payment of company debts at ss 433 and 556 of the Corporations Act applies to trust property that is the subject of the trustee’s right of indemnity. However, and importantly, any proceeds held in consequence of the exoneration of the trustee may only be applied in satisfaction of the liabilities of the trust and not to general liabilities of the company: Carter Holt at [40], [44], Kiefel CJ, Keane and Edelman JJ; [92], Bell, Gageler and Nettle JJ. Where the company only acted as trustee of one trust no difficulty arises in the distribution of its assets amongst the trust creditors. But, as Brereton J has noted, where a company acted as trustee for more than one trust and/or traded in its own right, claims for remuneration by a liquidator and for recoupment (where the trustee first makes a personal payment: Carter Holt at [31]) raise more complex questions: Re AAA Financial Intelligence Ltd (in liq) [2014] NSWSC 1004 where his Honour very usefully summarised the principles at [13]:

(1)    Where the company is trustee of a trading trust and has no other activities, the liquidators are entitled to be paid their costs and expenses, whether for administering the trust assets or for “general liquidation work”, out of the trust assets [Re Suco Gold Pty Limited (1993) 33 SASR 99; 7 ACLR 873; Grime Carter & Co Pty Limited v Whytes Furniture (Dubbo) Pty Limited [1983] 1 NSWLR 158; Re Sutherland; Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361; 48 ACSR 97, [201]; Bastion v Gideon Investments Pty Ltd (in liq) [2000] NSWSC 939; (2000) 35 ACSR 466, 480 [70]; In the matter of North Food Catering Pty Ltd [2014] NSWSC 77].

(2)    Where the company does not act solely as trustee, costs and expenses referable to work done in relation to trust assets which may nonetheless be considered as having been done for the purpose of winding up the company ought ordinarily be borne primarily by the (non-trust) property of the company, to the extent that the assets permit [Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, 685-689; Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301; French Caledonia, [209]].

(3)    At least where the non-trust assets do not permit that course, and perhaps even when they do, a liquidator is entitled to be indemnified out of trust assets for his costs and expenses, but only to the extent that they are referable to administering the trust assets [13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377, 385; French Caledonia, [211], [213]. This is pursuant to the court's equitable jurisdiction to allow a trustee remuneration costs and expenses out of trust assets, which extends to a person such as a liquidator who is, for practical purposes, controlling a trustee [Berkeley Applegate (Investment Consultants) Ltd; Harris v Conway [1989] Ch 32, 50-51; Re Application of Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297; Trio Capital Ltd (Admin App) v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425; In re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426, [55]; Alphena Pty Ltd (in liq) v PS Securities Pty Ltd atf Joseph Family Trust [2013] NSWSC 447; (2013) 94 ACSR 160].

(4)    In principle, where the liquidator does work which would entitle him both to remuneration as liquidator by the company, and recovery from the trust assets, there are two funds liable and there should be contribution between them. However, where there are no assets of the company available, it is unnecessary to consider the question of contribution. If a liquidator has done work which is attributable equally to the winding up of the company and the administration of trust assets, and there are no assets of the company at all to meet his expenses in doing so, the expenses are payable solely from the trust assets [French Caledonia, [212]].

(5)    Where the liquidator is administering, through the company of which he/she is liquidator, more than one trust, the liquidator is not entitled to charge the beneficiaries of one trust with the costs and expenses incurred in relation to the other, although where allocation is not possible a pari passu allocation may be permitted [Re Suco Gold, ACLR 882-3; 13 Coromandel, 386].

24    Based on advice from her solicitor, the applicant estimates the costs of proceedings against Mr Langman and his associated company within the range of $25,000 to $50,000 inclusive of counsel’s fees. In my assessment, that is very modest and turns on the rather large assumption that Mr Langman will not raise any positive matters of defence. And that estimate does not include the applicant’s remuneration for dealing with the proceedings. The actual amount is likely to be significantly greater. On the percentage split of 15.13% of total liquid assets held on trust for the shareholder applicants ($395,000 x 15.13% = $59,000) it is in my view quite unlikely that the applicant will hold sufficient trust money to pursue the intended litigation. At some point therefore it is likely that the applicant will seek to use the funds that the company beneficially holds to fund litigation that is only for the benefit of the beneficiaries of the statutory trust. The answer to her ability to do so, as noted by Allsop CJ in Jones v Matrix Partners Pty Ltd; Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018) 260 FCR 310; [2018] FCAFC 40 at [108], may lay in:

Considerations of, or akin to, marshalling or hotchpot may be relevant as to the payment of debts dealt with in the statutory order. But these complexities will be resolved by application of principle and the text of the legislation, in a manner reflected by the approach of King CJ in Re Suco Gold.

25    The applicant did not mention principles akin to marshalling or hotchpot as authorising her to use non-trust assets to pursue litigation for the benefit of the putative shareholder applicants. Her submissions mention the general principle that expenses incurred in recovering a fund must be borne by that fund: Re Universal Distributing Co Ltd (1933) 48 CLR 171, but do not address how it operates where the outcome in this case may be that there is no recovery and the creation of an additional costs liability which is likely to be borne significantly by the general creditors. Without the benefit of detailed submissions from the applicant as to these principles, it is not appropriate that I determine question 4, nor the related question 5, at this stage. To the extent necessary, I grant liberty to the applicant to agitate these questions on a subsequent application.

26    Finally, in my view it is appropriate that the costs of this application be borne equally by the general creditors and the trust beneficiaries as the advice is relevant to the interests of each.

Conclusion and Orders

27    For these reasons I direct and order as follows:

(1)    The applicant is justified in treating funds received by CannHarvest Ltd (in liquidation) as follows:

As money required to be held on trust for the payers of those monies.

(2)    The applicant is justified in commencing proceedings against Troy Langman in respect of alleged expenditure and ACN 161 995 204 Pty Ltd in respect of alleged receipt of the funds referred to in (1).

(3)    The applicant is justified in not commencing proceedings against Hollie Nasser, Stephanie Jong and Anthony Nagy in respect of the alleged expenditure of the funds referred to in (1).

(4)    Liberty is granted to the applicant to renew her application for the relief sought in paragraphs 4 and 5 of the originating application filed on 15 August 2022 in the form of further submissions and affidavit evidence which liberty may be exercised by email to chambers.

(5)    The costs of this application be costs in the liquidation of CannHarvest Ltd, to be borne equally by the general creditors and the beneficiaries listed in (1).

Associate:

Dated:    9 December 2022