Federal Court of Australia

Khan (Trustee) v Lo Pilato (Australian representative of the trustee of Bankrupt Estate of Farouk) [2023] FCA 736

ORDERS

THE COURT ORDERS THAT:

1.    The application be dismissed.

2.    The costs of the Second Respondent be his costs in the liquidation.

3.    There otherwise be no order as to costs.

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

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    This was an application made, in part, pursuant to r 39.05(c) of the Federal Court Rules 2011 (Cth) and, so it was said, to vary orders of this Court made on 16 March 2023. The substance of the relief sought was that the applicant, a Mr Khan, be entitled to use money presently held on trust and in a trust account of his solicitors, for the purposes of meeting the anticipated costs and expenses of a public examination which the liquidators of Farlin Properties Pty Ltd (Farlin Properties) are intending to conduct and to which Mr Khan has been summonsed. Mr Khan was a director of Farlin Properties which was the trustee of the Farlin Property Trust, and it is apparent that the liquidator seeks to examine him about his conduct of that company in that capacity.

2    It is important to note that the application was made on the assumption that the orders which are sought to be varied were interlocutory. They were made on 16 March 2022 upon an application to wind up Farlin Properties Pty Ltd when orders were, in fact, made winding the company up and appointing Mr Herrett as liquidator. Certain other orders were made as to the holding of certain funds which were subject to the terms of the trust. Those orders were made pursuant to an agreement between Mr Khan and the applicant for winding up, Mr Frank Lo Pilato who is the Australian representative of the trustee of the Bankrupt Estate of Mr Mohammed Farouk. As part of the agreement Mr Khan provided to the Court the following undertakings:

I, Ahmad Gulnishtar Khan of 12 Healy Place, Mount Ommaney hereby undertake as follows:

1.    Subject to paragraph 3 below, I will not, without the written consent of the applicant and the liquidator (the Liquidator) of Farlin Properties Pty Ltd ACN 072 217 817 (the Company), dispose of or encumber any asset of the Farlin Property Trust (the Trust) without first providing the applicant and the Liquidator 14 days' written notice of my intention to do so.

2.    I will not make or cause to be made any application to remove the caveats bearing the dealing numbers 720988528 and 721229788 without first providing the applicant and the Liquidator 14 days' written notice of my intention to do so.

3.    To the extent that I seek payment out of the Fund (as defined in the orders attached hereto) for expenses relating to the administration of the Trust, I will:

(a)    Obtain the consent of the Liquidator and the applicant, such consent not to be unreasonably withheld, prior to withdrawal from the Fund;

(b)    Not seek an order of any court for release of money from the Fund without first allowing the Liquidator and the applicant 14 days to consider their position in relation to consent, except in cases of urgency;

(c)    When seeking consent of the Liquidator and the applicant for legal, accounting or professional services fees relating to the administration of the Trust, I will prior to incurring such costs (except in cases of urgency) provide an estimate of the costs to be incurred and the tasks to be undertaken.

3    It is apparent that following Mr Farouk’s bankruptcy, Farlin Properties ceased to be the trustee of the trust and Mr Khan was appointed in its stead and it was in his capacity as trustee that he provided those undertakings.

4    Although the relief now sought in the Originating Application is that orders be made as to uses to which the money constituting “the Fund” can be put, such orders would be inconsistent with and would effectively negate Mr Khan’s undertakings.

5    As mentioned, the application was made on the assumption that the orders of 16 March 2023 were interlocutory. Mr Shaw for the respondent submitted that they were “final orders” and he was correct to do so. The orders were made in the finalisation of the winding up application.

6    That, however, is not the end of the matter. The question is really one of whether the undertakings given to the Court by Mr Khan should be released, either in whole or in part. In that respect, it is well accepted that the Court has inherent power to release undertakings given to it and, indeed, can do so when circumstances change. However, it seems to be now well-established that it will not do so unless good reason is shown and in consideration of that issue there is very little difference between the matters a court will take into consideration under r 39.05(c) to vary an interlocutory order and the matters it will take into account in the present circumstances on an application to vary the undertaking.

Background

7    On or about 29 November 2018, Mr Mohammed Farouk was made bankrupt by an order of the High Court of the Republic of Singapore and trustees were appointed to administer his estate. An application was made to this Court for, amongst other things, to entrust the administration, realisation and distribution of Mr Farouk’s assets in Australia to the first respondent, Mr Lo Pilato, and orders were made to that effect on 15 March 2021. Mr Lo Pilato was given all the powers which were normally available to a trustee in bankruptcy.

8    At the time of his bankruptcy Mr Farouk held interests in various corporations in Australia, including an interest as a hundred per cent shareholder in Farlin Properties Pty Ltd which was the trustee of the Farlin Property Trust.

9    When Mr Lo Pilato was appointed, Farlin was the registered proprietor of some two parcels of land, one at Broadbeach on the Gold Coast and one at Mount Ommaney in Brisbane. It would seem that it acquired those properties in its capacity as trustee. The Broadbeach property was sold and the mortgage over it was discharged. Substantial net proceeds were recovered although the present location of all of those funds is not entirely clear. At least $350,000 is retained in the trust account of Mr Khan’s solicitors. The reason for that appears to be that Mr Khan was appointed as the trustee of the Farlin Trust prior to the winding up of Farlin Properties such that he claimed to be entitled to retain the proceeds of sale in his capacity as the new trustee.

10    Although there are caveats over the Mount Ommaney property, it is estimated that its value is between $1.2 and $1.4 million.

11    On the material, the Court could only be satisfied that the value of the assets held pursuant to the terms of the Farlin Property Trust is between $1.5 million and $1.8 million.

12    The financial statements of the trust which were created whilst Farlin Properties was the trustee, reveal that for many years it carried substantial loans and, in particular for present purposes, it had a loan from Mr Farouk. At the end of the financial year ended 30 June 2020, the accounts of Farlin Properties as trustee for the Farlin Property Trust identified that Mr Farouk was owed approximately $11 million. On the available evidence it appears that Mr Khan who was identified in those accounts as a director of Farlin Properties, had authorised or approved the financial statements indicating that they presented a fair picture of the company’s financial position. That is significant because the accounts indicated that Farlin Properties as trustee had incurred a substantial debt to Mr Farouk and, no doubt, Mr Farouk’s trustee in bankruptcy is entitled to claim to be a creditor of Farlin Properties in the amount of that loan.

13    In the course of the hearing there was some evidence that the existence of the loan was disputed by Mr Khan. One suggestion was that the loan is not recoverable because it is barred by the statute of limitations. There is some difficulty with that proposition given that Farlin Properties has regularly acknowledged the existence of the debt in its financial statements which is likely to have had the effect of restarting the limitation period from the occasion of each acknowledgment: see s 35(3) of the Limitation of Actions Act 1974 (Qld) and Law of Limitation, GE Dal Pont, 2016 LexisNexis, Ch 17, “Acknowledgment and Part Payment”, especially paragraph [17:39]. Whilst that issue cannot be foreclosed, it would appear that the submission that the debt is not recoverable on the basis that the relevant limitation period had lapsed might be of little merit.

14    A further problem is that the entitlement of the trustee is one in equity and one supported by the Trusts Act 1973 (Qld). In this respect, it is difficult to see how the proprietary right of the trustee being its lien over the assets in the trust, can be displaced by the statute of limitations in relation to the recovery of debts. Again, that renders Mr Khan’s claim of the debt being irrecoverable of little substance.

15    The difficulty for Mr Khan’s application is that as a consequence of the operation of the trust, there is sufficient to conclude, at least at a prima facie level, that Farlin Properties Pty Ltd (in liq) is entitled to a right of indemnity out of the trust assets in an amount of in excess of $10 million and a concomitant lien to support it. That arises as a consequence of it having incurred that debt in its capacity as a trustee to Mr Farouk. Mr Lo Pilato, as effectively Mr Farouk’s trustee in bankruptcy, is entitled to recover that debt from Farlin Properties.

16    It is worth noting as an aside that Mr Lo Pilato might claim to be entitled to be subrogated to the rights of Farlin Properties and to its supporting lien in the manner referred to in Lane v Deputy Commissioner Taxation [2017] 253 FCR 46, 50 [5]. However, he filed a submitting appearance in the proceedings and took no part in the application and made no such claim to the assets in the trust.

17    In any event, as mentioned, the value of the assets held by Mr Khan as the current trustee of the Farlin Trust are substantially less than $10 million and most probably around $1.5 to $1.7 million at best. In that respect it is noted that the financial statements of Farlin Properties, signed by Mr Khan, indicated that there were large non-current loans and receivables extending perhaps to $13 million, although the nature of those receivables and loans are not clear from the financial statements and their value may be questionable. In these circumstances, Mr Shaw submitted that there are, in fact, no remaining trust assets of the Farlin Trust, because anything held on the terms of the trust are subject to Farlin Properties Pty Ltd right of indemnity and the supporting lien. On that basis it would follow that there is an absence of trust assets in respect of which the Court might make any of the orders sought by Mr Khan. Such a conclusion would align with the observations of Gordon J in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (2019) 268 CLR 524, 578 [132].

Issues for consideration

18    Given the foregoing, the question then is how the application might be dealt with.

19    Mr Herrett, the liquidator of Farlin Properties, has served Mr Khan and his wife with a summons to produce documents and to be examined at a public examination which is likely to involve a consideration of the operations of Farlin Properties as trustee of the Farlin Trust over a period of four years during which Mr Khan was its director. That may take some substantial period of time and Mr Khan may be examined for a number of days. If he is represented at the hearing it may cost him a substantial amount of money.

20    It should be recorded that Mr Khan sought the liquidator’s consent to the use of the funds currently held by his solicitors for the payment of any professional services including legal services in relation to that public examination, but the liquidator refused and there seems to be some lack of explanation for that refusal, although nothing turns upon that.

21    It must be kept in mind that Mr Khan is to be examined in relation to the performance of his obligations as a director of Farlin Properties and not by reason of any personal obligations as a trustee. On that basis it was submitted that he is not entitled to indemnity because it is not a proper expense of the trust as it was the company which was the trustee.

22    That issue does not need to be finally determined but it is likely that the conduct of directors of a trustee company which acts solely as a trustee may well be properly described as conduct in the performance of the obligations of the duties of a trustee. In that respect, it is sufficiently clear that the conduct of a natural person who is a trustee is a matter arising in the performance of the duties of a trustee. If that conduct became the subject of an examination to which the trustee was examined, the costs of attending that examination would more than likely constitute an expense of the trust. The fact that a corporate entity was the trustee would not seem to make any difference because it could only act by its directors. In substance then, the conduct of the directors of the corporate trustee is the conduct of the trustee and, subject to the terms of the trust deed, the directors’ costs in relation to their examination may well be properly described as trust expenses.

23    Here, however, the essential issue is whether some release of the current undertakings should occur so as to permit moneys held subject to the terms of the Farlin Trust to be used to meet Mr Khan’s expenses. In that respect, the difficulty is that, on the evidence before the Court, it is apparent that there are no funds which can properly be regarded as funds held under the trust deed as trust assets. Such funds as are held have, as in the case of many insolvent trusts, become subject to the trustees’ rights of indemnity with the consequence that there are no remaining trust assets available to meet any expenses which Mr Khan might incur. It follows that, were any order made, it would effectively have the consequence of allowing Mr Khan to use the assets belonging to Farlin Properties in liquidation for his own personal expenses. The applicant was unable to identify any power which would justify the Court making such orders.

24    It should be added that, even if there were available trust assets which could be properly identified as such, insufficient reasons have been established as to why the undertakings given, which operated in favour of Mr Khan to some extent, should be released. The circumstances do not show any good cause other than that Mr Khan now seeks to utilise trust funds for his own benefit. As Mr Shaw of Counsel observed in his submissions, given that Farlin Properties was being wound up, it would have been evident at the time the undertakings were given that there was a high risk that a liquidator would undertake inquiries as to any recoverable funds including by way of a public examination. If Mr Khan had wished, he could have sought to obtain agreement to use the funds held for that purpose. However, he did not do so even though it would have been reasonably prudent to do so at the time. That observation is given without making any finding as to whether the applicant for the winding up of Farlin Properties would have agreed to such a proposal, but it suffices to establish that there is no good ground shown as to why the undertaking should now be released.

25    It follows that the application should be dismissed.

Costs

26    On the question of costs, some difficulty arises. The central issue was whether or not, prior to the making of the application, the liquidator gave a fair or reasonable explanation as to why he was not prepared to consent to Mr Khan using the money held in his solicitor’s trust account. Mr George for Mr Khan submitted that consent was sought and the basis for the refusal of the consent was not given, and he points to some correspondence which, on its face, suggests that might be so. Mr Shaw on the other hand submitted that when the correspondence is read fully, an explanation as to the liquidator’s refusal appears.

27    Without in any way making any criticism of either the liquidator or his solicitors, the explanation provided perhaps lacked the clarity which could have been given. One might apprehend that the grounds of the liquidator’s opposition was not perceived by those acting on behalf of Mr Khan in the way it was advanced during the hearing. Certainly, it was not clearly asserted by the liquidator that all of the assets the subject of the Farlin Trust were now subject to Farlin Properties’ right of indemnity. It would appear that the parties have been at cross purposes as to the foundation of the opposition to the application.

28    The liquidator is of course entitled to his costs and regardless of what costs order is made, the amount can be paid out of the assets available in the liquidation. Whilst that impacts the creditors, that is one of the unfortunate consequences of liquidation. In the circumstances, the appropriate order is that the liquidator’s costs should be his costs in the liquidation and otherwise there be no order as to costs.

29    It should be added that Mr Shaw, on behalf of the liquidator, sought an order that Mr Khan not be able to take his costs of the application from the trust assets and, particularly, the money held in the trust account of his solicitors. No such order can be made on the current application although, on the basis of the evidence which exists today, there is a more than reasonable argument that any assets which are the subject of the Farlin Property Trust are no longer trust assets, but assets subject to the trustee’s rights of indemnity and subject to the lien.

30    Having made those findings it would be an egregious step for a party to seek to use funds which they might claim are funds of the Farlin Property Trust for their own purposes. Nothing further needs be said.

Associate:    

Dated:    30 June 2023