Federal Court of Australia

Kaso (administrator), in the matter of Sanitation Maintenance Services Pty Ltd (administrators appointed) [2023] FCA 418

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) in Sch 2 of the Corporations Act 2001 (Cth), the first plaintiffs (the Administrators), in their capacity as administrators and deed administrators of the second, third, fourth and fifth plaintiffs (the Companies), are justified and acting reasonably in proceeding on the basis that:

(a)    each of the Companies carried on business in their capacity as trustee of a trust, namely:

(i)    the second plaintiff as trustee of the Sanitation Maintenance Services Trust;

(ii)    the third plaintiff as trustee of the Fullarton Property Services Trust;

(iii)    the fourth plaintiff as trustee of the Facilities Management Services (Aust) Trust; and

(iv)    the fifth plaintiff as trustee of the Pollo Group Services Trust

(together, the Trusts); and

(b)    all assets of the Companies are properly characterised as property held by each of the Companies in its capacity as trustee of the respective Trust (Trust Property).

2.    Pursuant to s 90-15 of the Insolvency Practice Schedule, the Administrators are justified and otherwise acting reasonably in proceeding on the basis that, to the extent that they are dealing with and distributing property of the Trusts (in their capacity as deed administrators of the deed of company arrangement executed on 9 November 2022 by the Companies, the Administrators and Lustra Commercial Pty Ltd (the DOCA)), they may do so in accordance with the provisions of the DOCA.

3.    Pursuant to s 1318 of the Corporations Act and, or alternatively, s 67 of the Trustee Act 1958 (Vic), the Administrators are relieved from any liability arising from any dealing with the Trust Property between the date of their appointment and the date of this order.

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

(a)    the Administrators are 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 voluntary administration of the Companies and in acting as the deed administrators of the DOCA (Remuneration and Expenses); and

(b)    the Remuneration and Expenses include the remuneration, costs and expenses of and incidental to this application.

5.    The plaintiffs take all reasonable steps to provide notice of these orders to potentially interested parties, including:

(a)    all persons identified as being the unit holders of each of the Trusts;

(b)    the Australian Securities and Investments Commission; and

(c)    the creditors of the Companies.

6.    There be liberty to apply to any person who can demonstrate sufficient interest to modify any directions, orders and, or alternatively, declarations made pursuant to this proceeding on not less than 48 hours’ notice to the Administrators.

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

REASONS FOR JUDGMENT

MCEVOY J

1    Before the Court is an originating process filed on 21 October 2022. The first plaintiffs, Sam Kaso and Bruno Secatore (collectively, the Administrators), seek orders under s 90-15 of the Insolvency Practice Schedule (Corporations) contained in Sch 2 of the Corporations Act 2001 (Cth), s 1318 of the Corporations Act, and ss 48, 63, 63A and 67 of the Trustee Act 1958 (Vic) determining questions arising in the administration of the second to fifth plaintiffs, being Sanitation Maintenance Services Pty Ltd (administrators appointed) (ACN 635 700 051), Seguard SA Commercial Pty Ltd (administrators appointed) (ACN 623 064 728), Facilities Management Services (Aust) Pty Ltd (administrators appointed) (ACN 635 699 820) (FMS) and Pollo Group Services Pty Ltd (administrators appointed) (ACN 637 309 892) (collectively, the Companies).

2    Aspects of the orders sought by the Administrators in the originating process are no longer pressed, or are sought in an alternative form, principally on account of the Companies now having executed a deed of company arrangement (DOCA). The Administrators now seek orders:

(a)    pursuant to s 90-15 of the Insolvency Practice Schedule that they are justified and acting reasonably in proceeding on the basis that each of the Companies carried on business as trustee of a trust and all assets of the Companies are properly characterised as property of the respective trust (Trust Property);

(b)    allowing them to deal with the Trust Property in accordance with the DOCA;

(c)    pursuant to s 1318 of the Corporations Act and, or alternatively, s 67 of the Trustee Act, relieving them from any liability arising from any dealing with the Trust Property between the date of their appointment and the date of the orders;

(d)    pursuant to s 90-15 of the Insolvency Practice Schedule entitling them to payment of their remuneration and expenses from the proceeds of the realisation of the Trust Property, including their costs of and incidental to this application; and

(e)    ancillary orders for the benefit of interested parties.

3    The application is made in circumstances where each of the Companies was rendered the bare trustee of a trust, having ceased to be the trustee of the relevant trust consequent upon the appointment of the Administrators. The property held by each of the Companies at the time of the Administrators’ appointment was held as trustee of the relevant trust, rather than by each of the Companies in their own right. By reason of the execution of the DOCA, the entry into which was approved by the Companies’ creditors, the Trust Property has either been returned to the control of the directors of the Companies, along with control of the Companies, or is reflected in the pool of assets that comprises the DOCA Fund and is to be distributed to the Companies’ creditors in accordance with the terms of the DOCA.

4    The Administrators rely on the following material in support of their application:

(a)    in relation to the orders sought, the affidavits of:

(i)    Sam Kaso affirmed 6 October 2022; and

(ii)    Sam Kaso affirmed 14 December 2022.

(b)    in relation to service of the documents and correspondence with interested persons, the affidavits of:

(i)    Krystelle Hsu affirmed 6 December 2022;

(ii)    Krystelle Hsu affirmed 2 February 2023; and

(iii)    Krystelle Hsu affirmed 13 April 2023.

5    As well as oral submissions made by counsel at the hearing of the application on 28 April 2023, the Administrators have also filed detailed and comprehensive written submissions dated 20 December 2022 in support of their application. I have drawn from these submissions in the preparation of these reasons. No other party has sought to be heard on the application, and the Administrators have notified all potentially interested parties of the application, the supporting material filed, and the return date. The notified parties include the unitholders of the relevant trusts, any known creditors of the Companies and the Australian Securities and Investment Commission.

6    For the reasons that follow, orders were made on 28 April 2023 substantially in the terms now sought by the Administrators.

BACKGROUND

7    The Administrators were appointed to the Companies on 15 July 2022. At that time, each of the Companies was the trustee of the following trusts:

(a)    Sanitation Maintenance was the trustee of the Sanitation Maintenance Services Trust (SMS Trust);

(b)    Seguard was the trustee of the Fullarton Property Services Trust (Fullarton Trust);

(c)    FMS was the trustee of the Facilities Management Services (Aust) Trust (FMS Trust); and

(d)    Pollo was the trustee of the Pollo Group Services Trust (Pollo Trust).

(collectively, the Trusts).

8    Each of the Companies provided labour services to Lustra Commercial Pty Ltd, a provider of cleaning services. The Companies employed, as at the date of the Administrators’ appointment, 120 people. In the period following their appointment the Administrators continued to trade the businesses of each of the Companies, save for Pollo, which had ceased to trade in December 2021.

9    The Administrators’ assessment is that each of the Companies only conducted activities as trustee of the relevant Trust and existed exclusively to perform the role of trustee. This assessment is based upon the Administrators’ review of corporate records, including financial statements, bank statements and tax records. It also accords with advice provided to the Administrators’ staff by the Companies’ directors. Further, it is the Administrators’ belief that each of the Companies at all times held such property as it held on trust in its capacity as trustee of the relevant Trust.

10    Each of the Trusts was subject to a trust deed (collectively, the Trust Deeds), each of which was in substantially the same form. Clause 85 of the Trust Deeds relevantly provides:

The appointment of the trustee terminates automatically if any of the following occurs:

…

•    the trustee enters into compulsory or voluntary liquidation (except for the purposes of amalgamation or reconstruction), or has an administrator, controller, receiver, receiver and manager or provisional liquidator appointed to any part of its assets.

11    As mentioned, the Administrators were appointed to each of the Companies on 15 July 2022. There is no suggestion that a replacement trustee has been appointed to any of the Trusts.

12    Therefore, upon the appointment of the Administrators on 15 July 2022, and as a consequence of the operation of cl 85 of the Trust Deeds, each of the Companies appears to have been a bare trustee of the relevant Trust since 15 July 2022.

13    The Trust Property comprised goodwill, employee contracts, agreements with a service provider and considerable amounts payable by Lustra for services provided to Lustra by the Companies. It is submitted by the Administrators that in continuing to trade the businesses of the Companies, save for Pollo, they necessarily deployed the Trust Property to at least some extent.

14    On 25 October 2022, after this proceeding was commenced, creditors of the Companies approved the entry of the Companies into the DOCA. The DOCA was duly executed by the Companies and Lustra on 9 November 2022. Under the DOCA, Lustra agreed and is obligated to pay $1,300,000 to the DOCA Fund, $400,000 of which has already been paid.

15    It may be accepted that the ability of a bare trustee (or its officers) to deal with trust property, including to satisfy claims of trust creditors, is limited in the absence of a Court order. Therefore, by this application the Administrators seek relief relating to the manner in which they have already dealt with the Trust Property, including through the trading of the Companies’ businesses since their appointment, and their proposed future dealing with cash reserves referable to Trust Property (in accordance with the provisions of the DOCA).

THE ORDERS SOUGHT

16    In Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677, Gordon J summarised the rights and powers of a bare trustee that had been removed as trustee by virtue of a disqualification clause in a trust deed (equivalent to cl 85 in the present case), and its liquidator. Amongst the principles stated by her Honour is that while a bare trustee may still hold trust assets, its “duties, powers and rights are limited to protecting the [t]rust assets”: at [26]. Therefore, an application of the present kind is necessary when, by virtue of an “ipso facto” clause in the relevant trust deed, a trustee company is automatically removed from office on the occurrence of a particular event, such as the appointment of a liquidator: see Deppeler, in the matter of Old Port Road Pty Ltd (in liq) [2021] FCA 980 at [16] (O’Bryan J).

17    Further, in Cremin, in the matter of Brimson Pty Ltd (in liq) (2019) 136 ACSR 649, Moshinsky J noted the following:

[49]     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…

Order one: Administrators are justified in proceeding on the basis that the Companies held assets in their capacity as trustee

18    The Administrators seek orders confirming that they are justified and acting reasonably in proceeding on the basis that:

(a)    each of the Companies carried on business in its capacity as trustee of the relevant Trust; and

(b)    the assets of each of the Companies are properly characterised as property held by each of the Companies in its capacity as trustee of the relevant Trust.

19    The Court has the power to make such orders in relation to the external administration of a company under s 90-15 of the Insolvency Practice Schedule, and the Administrators can apply to the Court for such orders under s 90-20 of the Insolvency Practice Schedule. The Court’s power to make orders under s 90-15 is broad: see Old Port Road at [14].

20    Having regard to the assessment conducted by the Administrators, including a review of the Companies’ corporate records, and advice provided by the Companies’ directors, and where there is no evidence to the contrary, I am satisfied that the Companies traded or held assets exclusively in their capacity as trustee of their respective Trust, and not in their own right. Accordingly, I accept that it is appropriate to make the first order substantially in the form in which it is sought.

21    For completeness, I note that in their originating application the Administrators sought an order pursuant to s 63 of the Trustee Act that the Companies have the power to carry on the business of the Trusts and act as trustee of the Trusts. However, in light of the execution and part-performance of the DOCA, and in circumstances where the Companies have been returned to the control of the directors, along with the remaining Trust Property which does not form part of the DOCA Fund, it is submitted, and I accept, that an order in these terms is no longer necessary.

Order two: Administrators’ ability to deal with Trust Property

22    The Administrators initially sought an order pursuant to s 90-15 of the Insolvency Practice Schedule, that they 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 Pts 5.5 and 5.6 of the Corporations Act.

23    The form of the order has since been varied having regard to the execution of the DOCA. An order is now sought that, to the extent that the Administrators are dealing with and distributing the Trust Property (as deed administrators of the DOCA), they may do so in accordance with the provisions of the DOCA. It is submitted that such an order is required in the interests of certainty.

24    The Administrators submit that analogous orders have been sought and obtained by liquidators in various cases, including In the matter of LXNDR Group Pty Ltd (in liq) [2021] FCA 1243 at [24] (Anderson J), Re Asten Holdings Pty Ltd (in liq) [2020] FCA 1107 at [27] (Anderson J), Re Matthew Forbes Pty Ltd (in liq) [2018] VSC 331 at [20] (Riordan J) and In the matter of St George’s Development Company Pty Ltd (in liq) [2018] VSC 595 at [31] (Kennedy J). In relation to deed administrators, see: Hayes (Deed Administrator), in the matter of The Cambria Management Corporation Pty Ltd (subject to Deed of Company Arrangement) [2020] FCA 1214 at [24] (Gleeson J).

25    In circumstances where the Companies have acted only as corporate trustee for their respective Trust and the DOCA has been executed, I am satisfied that an order should be made that the Administrators are justified and otherwise acting reasonably in proceeding on the basis that to the extent that they are dealing with and distributing property of the Trusts (in their capacity as deed administrators of the DOCA), they may do so in accordance with the provisions of the DOCA: see Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018) 260 FCR 310 at [102] and [108] (Allsop CJ) (Jones v Matrix).

Order three: relieving the Administrators from potential liability for past dealings with Trust Property

26    In the period following the Administrators’ appointment and in the course of discharging their duties, the Administrators have dealt with the Trust Property. This occurred in the trading of the business conducted by the Companies (which entailed the utilisation of Trust Property and has generated a trading surplus that forms part of the DOCA Fund) and the transaction effected by the DOCA which has, in substance, entailed the exchange of the right to recover amounts from Lustra (referable to pre-appointment receivables) for an entitlement to receive the amounts payable by Lustra under the terms of the DOCA.

27    In light of these dealings with the Trust Property at a point in time when the Companies had ceased to hold office as trustees, the Administrators seek an order pursuant to s 1318 of the Corporations Act and, or alternatively, s 67 of the Trustee Act, that they be relieved from any potential liability arising from such dealings. The purpose of s 1318 is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are business persons who act in the environment involving risk in commercial decision-making: see Matthew Forbes at [24] and Re Mackie Group Pty Ltd (in liq) (2017) 122 ACSR 537 at [73] (Kennedy J). Section 67 of the Trustee Act carries with it a similar purpose, providing that a Court may relieve a trustee from personal liability for any breach of trust if it appears that the trustee acted honestly and reasonably and ought fairly to be excused for the breach: see Caterpillar Financial at [33] and Re Mackie Group at [74].

28    The Administrators contend, and I accept, that their conduct in connection with the Trust Property has been both honest and reasonable. It is submitted that they informed the Companies’ creditors that the businesses of the Companies (save for Pollo) would be traded, and further that the creditors voted in favour of the execution of the DOCA. In the circumstances I consider that it is appropriate to make an order relieving the Administrators from any liability arising from past dealings with the Trust Property.

Order four: payment of the Administrators’ remuneration and expenses from Trust Property

29    The affidavits of Mr Kaso contain details of the tasks undertaken by the Administrators and the anticipated further work required to conclude their role as deed administrators of the DOCA.

30    The DOCA makes provision for payment of the costs of the administration (including the administration of the DOCA), which are to be paid in priority to other claims. To the extent that those costs are being met from property that is properly characterised as Trust Property, the Administrators seek an order to confirm their entitlement to be indemnified out of that property.

31    As has been mentioned, the sole activities of the Companies were as trustees of the respective Trusts. Save for their right of exoneration and the supporting lien, the Companies held no assets in their own right. It is submitted that in these circumstances it is appropriate that the Administrators’ remuneration and expenses be paid out of the Trust Property: see Re Mackie Group at [59]; Freelance Global v Bensted [2016] VSC 181 at [58] (Kennedy J); Kite v Mooney, in the matter of Mooney’s Contractors Pty Ltd (in liq) (No 2) (2017) 121 ACSR 158 at [142]-[149] (Markovic J); Jones v Matrix at [105]-[106]; Re Houben Marine Pty Ltd (in liq) [2018] NSWSC 745 at [17] (Gleeson JA); Cremin at [54]; In the matter of JML Property Services Pty Ltd (in liquidation) [2018] NSWSC 1069 at [10] (Black J).

32    As Markovic J observed in Kite v Mooney at [146]:

More recently, in Freelance Global Riordan J considered the right of a liquidator appointed to a corporate trustee to recover expenses from trust assets. His Honour referred to the “salvage principle” as set out in Universal Distributing [(1993) 48 CLR 171] in terms to the effect that a person who works for the exclusive purpose of realising, caring for or preserving property to create a fund or pool of assets is entitled to a lien or charge against the fund or pool of assets for the expenses and remuneration incurred in such work. His Honour noted that the application of the salvage principle entitles a liquidator acting reasonably to be indemnified out of trust assets for its costs and expenses in identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; and distributing trust assets to the persons beneficially entitled to them: at [64].

And then at [149]:

It is clear that Messrs Kite and Hutchins in their capacity as administrators and liquidators have exclusively expended their time and effort getting in and realising Trust assets. As the facts bear out, and as I have already observed, the Company operated solely as trustee for the Trust. It held all of its assets in that capacity and the steps it undertook were required so that Messrs Kite and Hutchins would meet their statutory duties and protect the Trust assets. Those obligations were coextensive. … In all of the circumstances of this case I am satisfied that Messrs Kite and Hutchins are entitled to a lien of the type identified by Dixon J in Universal Distributors and the subsequent decisions which followed that judgment. I am satisfied that, relying on that lien, they are entitled to deduct their remuneration and expenses from the Trust fund before paying the general body of creditors.

33    Having regard to these principles I accept that in all the circumstances the remuneration, costs and expenses incurred by the Administrators in the administration of the Companies, including the administration of the DOCA, should properly be borne by the Trust Property. I also accept, as is submitted, that it is appropriate for the costs of and incidental to this application be met from the Trust Property.

Order five: notice given to all interested parties

34    In the course of oral submissions counsel for the Administrators accepted that it would be appropriate for there to be an order requiring service of a copy of the orders made on the potentially interested parties. I agree that such an order is appropriate.

Order six: liberty to apply

35    Finally, given that no party appeared in opposition to the application at the hearing, it is appropriate that there also be an order granting liberty to apply on 48 hours’ notice to the Administrators to any person who can demonstrate sufficient interest to modify any directions, orders or declarations which have been made.

Associate:

Dated:    8 May 2023

SCHEDULE OF PARTIES