Federal Court of Australia

Wight, in the matter of Verve Portraits Pty Ltd (administrators appointed) [2023] FCA 1014

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth) or alternatively s 90-15 of the Insolvency Practice Schedule (Corporations) (IPSC), that the first and second plaintiffs be appointed as joint and several receivers and managers without security over all of the assets and undertaking of the Verve Portraits Unit Trust (Receivers).

2.    Pursuant to s 90-15 of the IPSC that the Receivers have, in respect of the Verve Portraits Unit Trust’s assets and undertaking, all of the powers provided by s 437A of the Corporations Act 2001 (Cth) as if reference therein to “the company” were to the Verve Portraits Unit Trust including, without limitation, the power to do all things necessary and convenient to effect the sale of the assets and undertaking of the Verve Portraits Unit Trust.

3.    Pursuant to s 90-15 of the IPSC, the plaintiffs are justified in treating and shall treat:

(a)    All of the business and assets of the Company as assets of the Verve Portraits Unit Trust.

(b)    All of the debts and liabilities which are provable in the external administration of the Company as having been incurred in the conduct of a business as trustee of the Verve Portraits Unit Trust.

(c)    All of the assets of the Verve Portraits Unit Trust, including the proceeds of assets realised or due to be realised by the plaintiffs in the course of the external administration of the Company (Proceeds) as being subject to an indemnity in favour of the Company as to its power to exonerate the debts and liabilities.

4.    The costs and expenses incurred by and the remuneration of the Receivers in acting as receivers and managers of the Verve Portraits Unit Trust be paid from the assets of the Verve Portraits Unit Trust and, if they be insufficient, from the assets of the Company.

5.    The Receivers be entitled to be paid remuneration for their services, from time to time, calculated on a time basis at the rates ordinarily charged by Cor Cordis, and such remuneration is to be approved by the Court.

6.    The plaintiffs have liberty to apply, including for approval of their remuneration in acting as Receivers.

7.    The plaintiffs’ costs of this application to date be paid from the assets of the Verve Portraits Unit Trust, and if insufficient be their costs in the voluntary administration of the Company, and if the Company is wound up be their costs in the winding up.

8.    The plaintiffs will as soon as practicable provide a copy of this order on each of the persons listed in section E of the originating process.

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

REASONS FOR JUDGMENT

O’CALLAGHAN J:

1    I made the orders set out above at a hearing on 24 August 2023. The application was filed the previous day, and was listed before me as the Commercial and Corporations Duty judge, because it was urgent.

2    These are my reasons for making the orders.

The facts

3    The first and second plaintiffs (administrators) were appointed as administrators to Verve Portraits Pty Ltd (the Company), the third plaintiff, on 8 August 2023 by way of a resolution of the directors.

4    The Company’s business operates photography studios from leased locations in Fortitude Valley in Queensland, South Melbourne in Victoria, and Rushcutters Bay in New South Wales

5    The administrators applied by way of originating process dated 23 August 2023 under s 57 of the Federal Court of Australia Act 1976 (Cth), ss 437A and 447A of the Corporations Act 2001 (Cth) and s 90-15 of the Insolvency Practice Schedule (Corporations) (Schedule 2 of the Corporations Act) for orders for their appointment as receivers and managers of the assets of the Verve Portraits Unit Trust ABN 16 940 982 308 (the Trust).

6    The administrators relied on two affidavits. The first was an affidavit of Mr Barry Wight affirmed on 23 August 2023. The second was an affidavit of a solicitor, Mr Prudden, sworn 24 August 2023. Mr Prudden deposed to the various efforts made to notify interested parties of the application. Mr AA Segal of counsel also tendered a confidential exhibit which set out the terms of an indicative offer to buy the assets of the Company’s business and to assume certain employee entitlements.

7    Mr Wight is a Chartered Accountant and a Registered Liquidator. He is a partner of the firm Cor Cordis. He deposed to the following relevant facts.

8    The Company was incorporated on 12 May 2008.

9    Ms Holly McErvale (appointed 12 May 2008) and Ms Julie Patricia McErvale (appointed 21 October 2008) are, and have at all relevant times been, the directors of the Company. Holly McErvale has at all times since 12 May 2008 been the sole secretary of the Company.

10    Holly McErvale, together with Mr Kane McErvale, Ms Tina McErvale and Listeen Pty Ltd are the shareholders of the Company.

11    The Trust was established by a Unit Trust Deed dated 30 June 2008 (Trust Deed), a copy of which Mr Wight produced.

12    The unitholders of the trust are:

14    To the best of Mr Wight’s knowledge, the Trust Deed has not been amended or varied; and at all relevant times the Company was the sole trustee of the Trust.

15    Clause 23.3 of the Trust Deed provides an indemnity to the trustee as follows:

23.3    Indemnity

The Trustee acting in good faith must be indemnified out of the Fund in respect of:

(1)    all liabilities incurred by the Trustee arising in or about the investment and administration of the Fund;

(2)    all liabilities incurred by the Trustee relating to the execution of any powers, duties, authorities and discretions vested in it by this Deed;

(3)    all liabilities incurred by the Trustee in the conduct and management of any business forming part of the Trust Fund;

(4)    all costs and expenses incurred by the Trustee in investigating any demand and taking or defending any action or other proceeding in relation to anything done or omitted to be done concerning the Trust; and

(5)    all liabilities incurred in the acquisition of any investment under any contract entered into by the Trustee.

16    Clause 25.1(2)(b) of the Trust Deed provides that the trustee must resign if, among other things, being a corporation it becomes an externally-administered body corporate as defined in the Corporations Act:

25.1    Retirement or Resignation of the Trustee

...

(2)    The Trustee must resign:

…

(b)    if (being a corporation) it becomes an externally administered body corporate as defined in the Corporations Act ...

17    Clause 25.3 of the Trust Deed provides that the unitholders may by ordinary resolution appoint a new trustee to fill a vacancy:

25.3    Unit Holders May Appoint New Trustee

The Unit Holders may by Ordinary Resolution appoint a new Trustee to fill a vacancy in the office of Trustee.

18    As a consequence of the operation of cl 25.1(2)(b) of the Trust Deed, the Company has been a bare trustee of the Trust since 8 August 2023.

19    As Mr Prudden deposed, the Australian Securities and Investments Commission, all of the unitholders, the directors of the Company, and the Commonwealth Bank of Australia (which has security over trust assets) were given notice of the application and the relief sought by the administrators. None appeared.

The legislation

20    Sections 437A to 473D of the Corporations Act relevantly provide as follows:

Division 3—Administrator assumes control of company’s affairs

437A    Role of administrator

(1)    While a company is under administration, the administrator:

(a)    has control of the company’s business, property and affairs; and

(b)    may carry on that business and manage that property and those affairs; and

(c)    may terminate or dispose of all or part of that business, and may dispose of any of that property; and

(d)    may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.

(2)    Nothing in subsection (1) limits the generality of anything else in it.

437B    Administrator acts as company’s agent

When performing a function, or exercising a power, as administrator of a company under administration, the administrator is taken to be acting as the company’s agent.

437D    Only administrator can deal with company’s property

(1)    This section applies where:

(a)    a company under administration purports to enter into; or

(b)    a person purports to enter into, on behalf of a company under administration;

a transaction or dealing affecting property of the company.

(2)    The transaction or dealing is void unless:

(a)    the administrator entered into it on the company’s behalf; or

(b)    the administrator consented to it in writing before it was entered into; or

(c)    it was entered into under an order of the Court.

(3)    …

(4)    Subsection (2) has effect subject to an order that the Court makes after the purported transaction or dealing.

(5)    If, because of subsection (2), the transaction or dealing is void, or would be void apart from subsection (4), an officer or employee of the company who:

(a)    purported to enter into the transaction or dealing on the company’s behalf; or

(b)    was in any other way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the transaction or dealing;

contravenes this subsection.

21    Section 90-15 of the Insolvency Practice Schedule (Corporations) relevantly provides as follows:

90-15    Court may make orders in relation to external administration

Court may make orders

(1)    The Court may make such orders as it thinks fit in relation to the external administration of a company.

Orders on own initiative or on application

(2)    The Court may exercise the power under subsection (1):

(a)    …

(b)    on application under section 90-20.

…

22    Section 57 of the Federal Court Act relevantly provides as follows:

57    Receivers

(1)    The Court may, at any stage of a proceeding on such terms and conditions as the Court thinks fit, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just or convenient so to do.

(2)    …

(3)    When in any cause pending in the Court a receiver appointed by the Court is in possession of property, the receiver shall manage and deal with the property according to the requirements of the laws of the State or Territory in which the property is situated, in the same manner as that in which the owner or possessor of the property would be bound to do if in possession of the property.

Consideration

23    I am satisfied on Mr Wight’s evidence that the Company’s only business was to act as bare trustee of the Trust in operating the business of Verve Portraits Pty Ltd, and that he is justified in treating the assets and liabilities of the Company on that basis.

24    Because that is so, the Company may still hold the assets of the Trust, but its duties, powers and rights are limited to protecting the Trust assets. Such limited powers do not extend to the power of sale. See, way of example only, Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677 (Gordon J).

25    As Mr Segal said in his written submissions, the cases establish that:

(a)    Where a trustee is removed from office, it retains a right of indemnity to resort to the trust assets to vindicate its right to be exonerated for the liabilities it incurred by reason of acting as trustee.

(b)    Upon its ouster as trustee (here, by operation of cl 25.1(2)(b) of the Trust Deed) the former trustee holds legal title to the trust assets without the powers conferred under the trust deed, as a bare trustee.

(c)    The former trustee is entitled to retain possession of the property as against the beneficiaries for the purpose of its right of indemnity.

(d)    A receiver and manager can be appointed over trust property to secure the trustee’s right of indemnity out of the assets. The courts are generally willing, in appropriate circumstances, to make orders permitting the external administrators of a former trustee to sell trust assets.

26    Further, it makes good commercial sense to appoint a receiver where, in a case such as this, there is a prospect of trading on, and not doing so might imperil the business. As Derrington J said in Trenfield, In the matter of Crusaders Managers Pty Ltd (Administrators Appointed) [2018] FCA 876 at [15] in a passage equally applicable on the facts here:

There are a number of benefits to be derived from the sale of the underlying business including the benefit of some certainty to be derived from the sale of the business as a whole. In addition, the administrators have deposed to the fact that if the business is not sold as a going concern, the amount that might be realised on the sale of the assets and equipment will be substantially less. There is evidence that negotiations for the sale of the business have already been entered into. There is a prospect, which flows from the sale of the underlying business as a whole, that the existing employees will retain their employment with the new business …

27    In this case, the indicative offer contained in the confidential indicative bid further indicates that the proposed purchaser intends to assume all employee entitlements if the sale proceeds.

28    I should also say that I was satisfied that the matter was urgent and appropriately heard as an urgent duty matter because, as Mr Wight deposed:

Under the terms of the Indicative Offer, the purchaser seeks to retain a number of the staff who are currently on a period of unpaid leave, as the Administrators cannot incur payroll liabilities whilst the Company is not trading. As detailed in the Indicative Offer, these employees’ entitlements are to be transferred to the new entity.

I am concerned that the longer that it takes to finalise the sale of the Business, the more risk these employees will search for employment elsewhere.

I am also aware that the Company also has customer photo shoot bookings scheduled from 26 August 2023. If possible, I am proposing to conduct the Business on an interim basis, pending the potential sale of the Business.

If the Orders are not granted urgently, there is a risk that employees needed to reopen the trading operations will be lost, and that the customer bookings have scheduled for the coming weeks will need to be rescheduled which may result in customers seeking their photography sessions elsewhere.

29    As to the question of costs (see order 7 above), because the sole activities of the Company were as trustee of the Trust, it follows that, leaving its right of exoneration aside, the Company has no assets of its own. It is therefore appropriate that the Receivers’ remuneration and expenses be paid out of Trust assets.

30    For those reasons, I made the orders set out above.

Associate:    

Dated:    25 August 2023