Federal Court of Australia

Morelli (liquidator), in the matter of FW Projects Pty Limited (in liq) v White Hills Pty Limited [2024] FCA 789

ORDERS

THE COURT ORDERS THAT:

1.    Bradd William Morelli and Trent Andrew Devine (plaintiffs) as joint liquidators and receivers of FW Projects Pty Limited (ACN 160 553 515) (Company) are justified in proceeding on the basis that the levies issued in respect of lots 2 and 5 (Levies) by the Building Management Committee of Deposited Plan 1233744 registered with the Registrar-General of New South Wales (BMC), pursuant to a Strata Management Statement falling within s 105 of the Strata Development Act 2015 (NSW) and registered as SP96741 to which the Company was a party, prior to the appointment of the plaintiffs as liquidators of the Company on 18 April 2019, which remain unpaid, comprise an unsecured debt of the Company and should be treated as such by the plaintiffs.

2.    The plaintiffs are justified in proceeding on the basis that Levies issued by the BMC in the period between the appointment of the plaintiffs as liquidators and the entry by the plaintiffs into the deed of compromise and disclaimer with Karellas Investments Pty Limited ACN 008 547 911 on 30 October 2020 (Deed of Compromise and Disclaimer), comprise an unsecured debt of the Company and should be treated as such by the plaintiffs.

3.    The plaintiffs are justified in proceeding on the basis that Levies issued by the BMC after the plaintiffs’ entry into the Deed of Compromise and Disclaimer on 30 October 2020, comprise debts incurred by the plaintiffs in their capacity as receivers of the assets of the Freshwater Development Trust and should be treated as such by the plaintiffs.

4.    The parties are to provide agreed short minutes to the Associate to Justice Halley, or in the absence of agreement, file and serve any submissions, as to costs or any other orders or declarations sought to give effect to these reasons for judgment, not exceeding three pages in length, and any affidavits in support, by 4.00 pm on Friday, 2 August 2024, and any dispute as to costs or any other orders or declarations sought will be determined on the papers unless a party seeks an oral hearing.

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

REASONS FOR JUDGMENT

HALLEY J:

A.     Introduction

1    By a further amended originating process, Bradd Morelli and Trent Devine as the liquidators and receivers (plaintiffs) of FW Projects Pty Limited (in liquidation) (Company) seek judicial advice from the Court pursuant to s 90-15 and s 90-20 of the Insolvency Practice Schedule (Corporations) (IPS) in Sch 2 of the Corporations Act 2001 (Cth) (Corporations Act).

2    The Company was the trustee of the Freshwater Development Trust (Trust). On the winding up of the Company it ceased to be a trustee by reason of an ipso facto clause in the trust deed. It retained only a bare legal title, and the plaintiffs were shortly thereafter appointed as receivers and managers of the assets of the Trust, including two lots in a development that had been undertaken by the Company (Lots 2 and 5) as trustee for the Trust. Lots 2 and 5 were subsequently sold by the plaintiffs, as receivers, to the defendant (White Hills).

3    The application for judicial advice is directed at the question of whether the plaintiffs, as liquidators or receivers, are required to pay levies issued by the strata building management committee of the building the subject of the development (BMC) that arose after the Company went into liquidation and receivership (strata levies) in full and in priority to all other unsecured creditors, or pari passu with the Company’s unsecured creditors.

4    The plaintiffs accept that they should pay all amounts that they are legally obliged to pay but at the same time are concerned that they do not deprive other unsecured creditors of amounts that would be available for distribution in the winding up of the Company. In both their written and oral submissions the plaintiffs advanced contentions that pointed to matters that might lead the Court to conclude that the strata levies should not be afforded any priority over other unsecured creditors of the Company. In effect, given the position taken by White Hills and the intervener, Owners Corporation SP 96741 (as an agent of the BMC), the plaintiffs acted as a contradictor.

5    The plaintiffs relied on four affidavits affirmed by Mr Morelli that outlined the background facts relevant to their application for judicial advice. Mr Morelli was briefly cross-examined. He answered questions directly and consistently with his affidavit evidence.

6    Both White Hills and the intervener contend that the strata levies are payable by the plaintiffs as receivers (or liquidators), in priority to other unsecured creditors, as they elected to stay in possession of Lots 2 and 5 for the purpose and benefit of the receivership (or liquidation) by undertaking rectification works prior to the sale of Lots 2 and 5 to White Hills.

7    White Hills relied on an affidavit sworn by Dr Nicholas Eugene Cunio, in his capacity as a director of White Hills in which he addressed the potential impact on White Hills of the judicial advice sought by the plaintiffs. The intervener relied on an affidavit affirmed by Rebecca Fisher, a licensed senior strata manager. Ms Fisher gave evidence of the strata management of the building on which Lots 2 and 5 are located and outstanding levies for shared facilities in the building owned by the Company by reason of its ownership of Lots 2 and 5. Neither Dr Cunio nor Ms Fisher was cross-examined.

B.     Issues for determination

8    By their application for judicial advice in the further amended originating process, the plaintiffs seek answers to the following specific questions:

1.1    Whether the levies (Levies) issued in respect of lots 2 and 5 by the Building Management Committee of Deposited Plan 1233744 registered with the Registrar-General of New South Wales (BMC), to the Company pursuant to a Strata Management Statement falling within section 105 of the Strata Schemes Development Act 2015 (NSW) and registered as SP96741 to which the Company was a party, prior to the appointment of the Plaintiffs as liquidators to the Company and which remain unpaid, comprise an unsecured debt of the Company and should be treated as such by the Plaintiffs;

1.2    Whether Levies issued to the Company subsequent to the appointment of the Plaintiffs as liquidators fall within the meaning of section 556(1)(a) or (dd) of the Corporations Act 2001 (Cth) and are payable by the Plaintiffs in priority to unsecured creditors of the Company;

1.3    Whether Levies issued to the Company subsequent to the appointment of the Plaintiffs as liquidators, but during the period that the plaintiffs were appointed receivers to the assets of the Freshwater Development Trust pursuant to their appoint as such by the Supreme Court of New South Wales on 3 May 2019, comprise debts incurred by the Plaintiffs in their capacity as receivers and not liquidators.

1.4    If the unpaid Levies issued by the BMC to the Company are not payable by the Plaintiffs pursuant to either section 556 of the Corporations Act 2001 (Cth) or on any other basis, whether such Levies comprise an unsecured debt of the Company and should be treated as such by the Plaintiffs.

1.5    What steps the Plaintiffs should take in relation to the Levies and the amount of $600,000 set aside from the proceeds received by the Plaintiffs pursuant to the completion of the Sale Contract pending resolution of this proceeding.

9    Shortly prior to the hearing of the proceedings, the plaintiffs, White Hills and the intervener filed the following statement of agreed issues for determination:

1.     Whether, during the period 18 April and 2 May 2019 (or after that date), the subject levies were expenses incurred by the Plaintiffs in their capacities as liquidators of FW Projects Pty Ltd (ACN 160 553 515) (in liquidation) within the meaning of s. 556(1)(a) or (dd) of the Corporations Act 2001 (Cth).

2.     Whether, from the date of the Plaintiffs’ appointment as receivers on 3 May 2019, the subject levies were incurred by the Plaintiffs in their capacity as receivers.

3.     Whether the contract for the sale of land dated 10 May 2022 entered into between the Plaintiffs and the Defendant in relation to the lots the subject of the levies give rise to an obligation for the Plaintiffs to pay the subject levies

4.     Whether the Plaintiffs adopted in their capacity as liquidators or receivers, or accepted liability to pay the subject levies under the Strata Management Statement pursuant to which the subject levies were issued:

4.1    From the date of their appointment as liquidators;

4.2     From the date of their appointment as receivers;

4.3    On 1 December 2021, consequent to entering into a lease with Karellas Investments Pty Ltd.

4.4    On 10 May 2022, consequent to exchanging a contract for the sale of land with the Defendant;

4.5    On 28 June 2022, consequent to completing the contract for the sale of land with the Defendant exchanged on 10 May 2022; or

4.6     At any other time.

5.     Whether the Plaintiffs arranging for the lots the subject of the levies to be readied for sale constitutes the Plaintiffs adopting, or accepted liability to pay the subject levies under, the Strata Management Statement pursuant to which the subject levies were issued.

6.     Whether the Lundy Granite principle applies to the Plaintiffs in relation to the subject levies in their capacity as:

6.1     Liquidators during the period 18 April and 2 May 2019 (or after that date);

6.2     Receivers from 3 May 2019 onwards.

10    For the reasons that follow, I have concluded that:

(a)    neither the entry into the lease with Karellas Investments Pty Limited ACN 008 547 911 (Karellas) nor the contract for the sale of Lots 2 and 5 to White Hills gave rise to any obligation for the plaintiffs, as liquidators or receivers, to pay the subject levies to the BMC;

(b)    the Lundy Granite principle relevantly applied to the plaintiffs, in their capacity as receivers, in relation to the strata levies by analogy or extension to the previous application of that equitable principle; and

(c)    the plaintiffs adopted the strata management statement, and thereby became liable to pay the strata levies as an expense of the receivership, by entering into a deed that provided for the completion of the development of Lots 2 and 5 for the purpose of maximising their sale value for the benefit of the receivership.

C.     Background

11    The salient facts relevant to the determination of the plaintiffs’ application for judicial advice were largely agreed and recorded in a statement of agreed facts. For present purposes, it is sufficient to set forth the following background facts which are taken from the statement of agreed facts or are matters not disputed by the parties.

12    The capacity in which the plaintiffs acted with respect to the Company is at times not clearly identified in contemporaneous documents and the parties’ submissions on that issue were not always consistent. Where relevant, I have subsequently addressed the specific capacity in which the plaintiffs acted in the consideration section of these reasons.

13    On 28 September 2012, the Company was incorporated as a special purpose vehicle to develop a mixed retail and residential building at 22-26A Albert Street, Freshwater (Land).

14    The proposed development involved the construction of 24 residential units, a number of retail premises and a car park.

15    On 19 September 2013, the Company entered into an agreement for lease (Lease) with Karellas, in respect of what was then described as Shop 1 (supermarket) (which ultimately became Lot 2) for a period of 15 years.

16    On 16 February 2015, a unit trust deed by subscription was entered into that established the Trust (Trust Deed).

17    The Land was held on trust by the Company as trustee for the Trust.

18    On 13 July 2018, Strata Plan 96741 (Strata Plan) and a strata management statement (Strata Management Statement) were registered.

19    On 18 April 2019, the plaintiffs were appointed as liquidators of the Company.

20    As at the date of the plaintiffs’ appointment as liquidators, there were defects in the construction works and no final occupation certificate had been issued for Lot 2.

21    On 3 May 2019, by an order of the Supreme Court of New South Wales, the plaintiffs were appointed as joint and several receivers over the assets of the Trust. The orders included an order that the costs, expenses and remuneration incurred by the plaintiffs as receivers, in acting in their capacity as receivers of the Trust, be paid from the assets of the Trust.

22    In or about mid-2019, the plaintiffs disclaimed the car parking agreement between the Company and Wilsons Parking for Lot 5 (Car Park).

23    On 15 October 2019, the plaintiffs settled the sale of Lot 3, the premises occupied by Bakers Delight. The plaintiffs paid the outstanding levies, issued by the BMC in respect of Lot 3, on settlement.

24    On 6 February 2020, the plaintiffs issued a liquidators’ report to creditors (Report to Creditors).

25    Following their appointments as liquidators and subsequently as receivers, the plaintiffs paid expenses from monies held in a joint liquidation/receivership account, including for rectification costs and utility expenses relating to Lots 2 and 5.

26    On 30 October 2020, the plaintiffs entered into a deed of compromise and disclaimer with Karellas (Deed of Compromise and Disclaimer). The Deed of Compromise and Disclaimer attached a draft lease.

27    Between February 2021 and December 2021, Karellas carried out rectification works to Lot 2 on behalf of the Company.

28    On 21 November 2021, an occupation certificate for Lot 2 was issued.

29    On 1 December 2021, the Company entered into a new lease with Karellas for Lot 2, in the form of the lease attached to the Deed of Compromise and Disclaimer which commenced on that day (New Lease).

30    On 10 May 2022, the Company exchanged contracts with White Hills, for the sale of Lots 2 and 5 (Sale Contract).

31    On 28 June 2022, the Sale Contract was completed. The plaintiffs did not pay any monies to the BMC for outstanding levies in respect of Lots 2 and 5.

32    On the same day, the plaintiffs and the defendant entered into a deed for the retention of $600,000 from the proceeds of the sale of Lots 2 and 5, pending determination of these proceedings.

33    Following the settlement of the sale of Lots 2 and 5, the plaintiffs paid Karellas approximately $587,000 in reimbursement of the costs of the rectification works.

34    On 29 September 2022, the transfer for the sale of Lots 2 and 5 was registered with New South Wales Land Registry Services.

35    On 25 August 2023, the BMC issued certificates for outstanding levies for Lots 2 and 5. The certificates were for outstanding levies and interest calculated under provisions of the Strata Management Statement for Lot 2 in the amount of $191,182.03 and for Lot 5 in the amount of $337,129.03, in aggregate $528,311.06 (outstanding levies).

36    The outstanding levies were issued pursuant to the Strata Management Statement, which derives its force from contract under s 105 of the Strata Schemes Development Act 2015 (NSW) (SSDA). Section 105 of the SSDA provides that a strata management statement has “effect as an agreement under seal containing the covenants referred to in subsection (2)” between, inter alia, the owners corporation of the strata scheme (owners corporation) and the owners of other parts in the building (owners). Section 105(2) of the SSDA imposes a statutory covenant that, inter alia, the owners corporation and the owners “jointly and severally agree to carry out their obligations under the registered strata management statement”.

37    Section 105(8) of the SSDA provides that the covenant entered into “does not merge in a transfer of a lot” and thus the obligations of a party to a strata management statement arising under it continue after that party has transferred a lot. The Strata Schemes Management Act 2015 (NSW) (SSMA) does not provide any obligation for a party to it to pay contributions levied pursuant to a strata management statement. Neither the SSDA nor the SSMA contains a statutory obligation to pay levies issued pursuant to a strata management statement.

38    Clause 4.2(a) of the Strata Management Statement relevantly provides that a registered proprietor of a Lot must:

(i)    comply promptly with their obligations under this Statement and the Act;

(ii)    pay promptly their respective contributions for Shared Facilities and any other payments due under this Statement;

39    In the present case, levies were issued pursuant to the Strata Management Statement both prior to and subsequently upon the appointment of the plaintiffs as liquidators of the Company. They arose by reason of the Company’s legal ownership of Lots 2 and 5.

D.     Submissions

D.1.     Plaintiffs’ submissions

D.1.1.     Adoption of the Strata Management Statement

40    The plaintiffs accept that s 419 of the Corporations Act has no relevant application because they were not appointed as receivers for the purpose of enforcing a charge.

41    The plaintiffs submit, however, by reference to well established principles that (a) property does not vest in a receiver, by reason of their appointment, (b) a receiver who carries on an existing contract entered into prior to the receivership is not personally liable unless they adopt the contract, (c) a receiver is not personally liable for a pre-receivership contract provided they have not accepted liability, and (d) it might be beneficial for a receivership for a contract to be performed but unless the receiver has accepted personal liability or unless something extra is agreed upon, the receiver is not liable because they have not adopted it.

42    The plaintiffs submit that there is a conceptual difficulty in any finding that they, as receivers, did anything to “adopt” the Strata Management Statement or that they “accepted liability” for it. They submit the liability arose before their appointment as liquidators or receivers and there was never any need to, and they did not, adopt or accept liability, as the Company’s liability for the strata levies arose by reason of its ownership of Lots 2 and 5.

43    The plaintiffs submit that (a) they had no choice as to whether the strata levies were issued, (b) there was no act or omission by the plaintiffs involved in the strata levies being issued and a debt thereby arising, (c) the issue of the strata levies was unrelated to the Company (apart from it being the legal owner of the Lots), and (d) the Company became liable for the strata levies in any event, regardless of any act or omission of the plaintiffs.

D.1.2.     Sale Contract and New Lease

44    The plaintiffs submit that (a) cl 14.1 and cl 14.2 of the Sale Contract provide only a contractual basis for an adjustment of liabilities on completion, (b) the Sale Contract does not mandate any payment of liabilities to third parties, and (c) the inclusion of “[n]ormally” in cl 14.1 of the Sale Contract implicitly denotes that the priority would not always apply, they suggest by way of example, when a receiver is selling land, and where levies, which are not a charge on the land, have been issued after a corporate owner has been placed in liquidation. They submit that nothing in the Sale Contract or the New Lease could cause a debt to arise between themselves as receivers (or liquidators) and the members of the Strata Management Statement, because the obligations were only inter partes and did not extend to third parties.

45    The plaintiffs also submit that cl 14.1 of the Sale Contract cannot logically comprise evidence establishing the legal “incurring” of an expense by the liquidators vis-à-vis a third party. They submit that the fact that future levies may be needed by the BMC to raise funds, at its highest, may be said to be a consequence of the previous levies not having been paid, but it cannot be evidence of the liquidators having “legally” incurred the previous levies remaining unpaid by the Company.

46    The plaintiffs submit that cl 13.8(a) and cl 28(1)(a)(i) of the New Lease may nevertheless constitute the liquidators having adopted or accepted liability for the strata levies. They submit that the answer depends upon whether the acceptance of such liability (a) can be constituted by an expression of a third party (in this case, Karellas), regardless of whether it is communicated to, known by, or enforceable by the party, (in this case, the members of the Strata Management Statement) otherwise owed money under the pre-receivership contract, or (b) must be given to the person to whom such a receivership contract liability would otherwise be owed.

D.1.3.    Deed of Compromise and Disclaimer

47    The plaintiffs submit that only a liquidator can disclaim property or a contract, and hence any disclaimer by the plaintiffs as liquidators pursuant to the Deed of Compromise and Disclaimer could not logically affect any assessment of whether the plaintiffs, as receivers, had adopted or accepted liability for the levies, or had otherwise incurred them.

D.1.4.    Lundy Granite principle

48    The plaintiffs submit that the Lundy Granite principle is typically applied to situations where a liquidator or administrator takes over the operations of a business, and continues its operations involving rented premises for the benefit of the liquidation or administration, including to maximise the sale value of the business, or its assets, or to facilitate their sale. They submit that the application of the principle is not restricted solely to distress for rent, but its application remains limited, and it does not apply to receivers.

49    The plaintiffs submit that it is difficult to see how it could apply in the circumstances of the present case given the members of the Strata Management Statement were not a landlord, the levies were not rent and a liquidator or (administrator) has a choice of terminating a lease but the plaintiffs had no choice but to pay the levies as the liability to pay the levies arose because the Company was the legal owner of the Lots.

D.1.5. Section 556 of the Corporations Act

50    The plaintiffs submit that the liability of the Company to pay the strata levies arose axiomatically with it holding the legal title to Lots 2 and 5, regardless of the Company or the plaintiffs, as liquidators, complying with any other obligation or taking any step.

51    Further, the plaintiffs submit that s 556(1)(a) of the Corporations Act introduces an assessment of the “propriety” of the relevant expense being incurred by the use of the phrase “properly incurred”. They submit that it is difficult to see how there could be any assessment of “propriety” unless the plaintiffs, as liquidators, incurred a liability to pay the strata levies as “a matter of choice”.

D.2.    White Hills’ submissions

52    White Hills submits that cl 14.1 specifically identifies “rates, water, sewerage and drainage, levies and other periodic outgoings” (emphasis in original) each of which is a payment to a third party and “levies” are expressly included. It also submits that it is irrelevant that the strata levies are not a charge on the Land, cl 14.1 provided a contractual promise to pay the strata levies and any shortfall in the payment of the strata levies reduced the funds available for necessary works on the building. It submits that an incoming owner has a real interest in ensuring all past levies are paid so that they do not become, as in this case, the subject of a special levy to make up the shortfall. It submits that the contrary position is uncommercial and would make any purchase of a strata lot from a liquidator or receiver inherently problematic.

53    White Hills submits that the strata levies were incurred by the plaintiffs, as receivers (or liquidators) in caring for, preserving or realising the property, because they elected to stay in possession of Lots 2 and 5 for the purposes of and for the benefit of the receivership (or liquidation). It submits that this constituted “beneficial occupation” rather than passive occupation for the following principal reasons:

(a)    the Company undertook the development of the Land as the trustee pursuant to the terms of the Trust Deed which gave the trustee a right of indemnity from the trust fund and the automatic removal of the trustee on the appointment of a liquidator or receiver;

(b)    the existence of both a statutory and contractual obligation on members of the Strata Management Statement to pay their levies;

(c)    the appointment by the Court of the plaintiffs as receivers on 3 May 2019 with the powers conferred by s 420 of the Corporations Act, including pursuant to ss 420 (a), (b) and (h) of the Corporations Act empowering them to enter into possession of the Land, enter into a lease and carry on the business of the Company;

(d)    the entry into the Deed of Compromise and Disclaimer and the New Lease and Karellas carrying out the rectification works for Lots 2 and 5 as the agent of the Company (in liquidation);

(e)    the entitlement to remain a member of the Strata Management Statement was essential for the rectification works to be undertaken in order to finalise the development;

(f)    the terms of the New Lease in which the plaintiffs covenanted to pay the strata levies and comply with the Strata Management Statement;

(g)    on the settlement of the sale of Lot 3, the plaintiffs agreed to pay outstanding levies of $9,423.80; and

(h)    in a report to creditors dated 8 March 2023, the plaintiffs reported that they had engaged a strata consultancy firm who had confirmed that the strata levies for Lot 5 were “normal and in line with accepted practice”.

54    In the context of these matters, White Hills submits that “it is beyond argument” that the plaintiffs, as receivers:

(a) were actively conducting the development for the benefit a greater return; (b) were “caring for, preserving and realising property” for the benefit of a greater return; (c) entered into two agreements being the Deed of Compromise and Disclaimer and the New Lease whereby they agreed to pay the levies and (d) undertook all the work knowing that they were entitled to an indemnity and lien over the assets of the Trust for these “costs and expenses”.

55    Further, White Hills submits that pursuant to cl 13.8 and cl 28.1 of the New Lease, the plaintiffs’ conduct could be characterised as the plaintiffs giving new covenants as receivers, citing Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd (2012) 265 FLR 33; [2012] VSC 112 at [85] (Sifris J).

56    In its written submissions, White Hills submitted that the Lundy Granite principle applied directly or by analogy to the plaintiffs, as receivers, but subsequently indicated in its oral submissions that the principle can only apply in a liquidation context.

57    White Hills submits that if the Court did not find that the strata levies were incurred by the plaintiffs, as receivers, and payable as a primary liability of the receivership, the strata levies would otherwise be expenses for the purposes of s 556(1) of the Corporations Act because the plaintiffs remained the registered proprietors (or the plaintiffs stayed in possession) for the legitimate commercial purposes being pursued by the receivers.

D.3.    Intervener’s submissions

58    The intervener sought to advance two further submissions in addition to those advanced by White Hills.

59    First, the intervener submits that even if the plaintiffs were acting as liquidators rather than receivers, the levies after the date of liquidation fall to be paid as a primary liability of the receivers, as the levies would be expenses within the meaning of ss 556(1)(a) and (dd) of the Corporations Act. The intervener submits that pursuant to the Lundy Granite principle, liabilities arising under a pre-liquidation obligation may be deemed to be expenses incurred by a liquidator where a liquidator continues to make use of the property or benefits for the benefit of the creditors in liquidation or retains the property for the purpose of advantageously disposing of it. The intervener submits that the plaintiffs benefit from the retention of the property, rectification of defects and entering into the New Lease.

60    Second, the intervener submits that it seems clear that the plaintiffs were acting as receivers, and that the Supreme Court of New South Wales gave the plaintiffs an indemnity over assets of the Trust for costs and expenses incurred, which was not qualified as costs and expenses “properly” incurred.

61    In oral submissions, the intervener submits that in assessing whether the conduct of the plaintiffs, as receivers and liquidators, was passive or active it is necessary to bear in mind that (a) the Company was a development entity that built and sold properties for profit, (b) it would have been impossible to fix the defects and maximise the sale price of Lots 2 and 5 without using the areas within the common property, (c) the only reason why the owners of Lots 2 and 5 were permitted to use the common property was because of the Strata Management Statement, and (d) by making the decision to fix the defects before selling Lots 2 and 5 the plaintiffs have continued to operate the business of the Company.

62    Contrary to the position ultimately taken by counsel for White Hills at the hearing, the intervener submits that, by analogy, the Lundy Granite principle would apply in the present circumstances. The intervener submits that the acts of the plaintiffs as receivers in arranging for the repairs to be conducted to correct the defects and complete the development in order to maximise the sale price of Lots 2 and 5 established that the retention of possession of the lots was for the benefit of the creditors of the Trust. The intervener submits that this gave rise to an adoption by the plaintiffs of the Strata Management Statement, in their composite position as both liquidators and receivers, given continued legal ownership was the hallmark of the liability of the Company for the strata levies.

E.     Consideration

E.1.     Overview

63    As explained above, the Company was the trustee of the Trust. The assets of the Company, including Lots 2 and 5, were held by it as trustee for the Trust.

64    Clause 20.3 of the Trust Deed, however, provided for the immediate removal of the Company as the trustee of the Trust if it went into liquidation or a receiver or official manager of its undertaking was appointed.

65    On the appointment of the plaintiffs as liquidators of the Company, the Company ceased to be the trustee of the Trust. In the absence of the appointment of any replacement trustee, the Company became a bare trustee and continued to hold the assets of the Trust, including Lots 2 and 5, on trust for the beneficiaries of the Trust. As a bare trustee, the Company had only limited powers to deal with the assets of the Trust but its rights of exoneration and indemnity and creditors’ rights of recourse against the assets of the Trust, were otherwise not affected: Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677 at [8] (Gordon J).

66    As a bare trustee, the Company’s duties, powers and rights were limited to protecting the assets of the Trust: Caterpillar Financial at [26] citing Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472; [2008] FCAFC 184 at [79] (Ryan, Mansfield and Dowsett JJ); Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2010) 188 FCR 516; [2010] FCA 978 at [52] (Graham J); Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at 281 (Gummow J).

67    As the High Court explained in CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174; [2010] HCA 26 at [36] (French CJ, Heydon, Crennan, Kiefel and Bell JJ):

The trustee of a bare trust has no interests in the trust assets other than those which exist by reason of the office of trustee and the holding of legal title. Further, the trustee of a bare trust has no active duties to perform other than those which exist by virtue of the office of the trustee, with the result that the property awaits transfer to the beneficiaries or awaits some other disposition at their direction. One obligation of a trustee which exists by virtue of the very office is the obligation to get the trust property in, protect it, and vindicate the rights attaching to it. That obligation exists even if no provision of any statute or trust instrument creates it. It exists unless it is negated by a provision of any statute or trust instrument.

68    The subsequent appointment of the plaintiffs as receivers by the Supreme Court of New South Wales enabled them to realise the assets of the Trust for the benefit of the creditors of the Company. Given the Company held its assets as a corporate trustee of the Trust, the creditors of the Company were relevantly “trust creditors”, namely entities and persons to which the Company, as the corporate trustee of the Trust, is indebted.

69    The appointment of the plaintiffs as both liquidators and receivers of the Company was therefore a necessary step in order to realise the trust assets for the benefit of trust creditors, but in practice the distinction between the two roles was not always rigorously maintained. By way of example, the plaintiffs operated a joint liquidation and receivership bank account and they entered into the Deed of Compromise and Disclaimer as liquidators of the Company, but then submitted that this was an error because the capacity in which they entered into the deed was actually as receivers of the assets of the Trust. Ultimately, for present purposes, given the plaintiffs were both liquidators and receivers, I am satisfied that any blurring of the distinction does not make any material difference to the issues to be resolved in these proceedings.

70    Further, given that the Company remained a bare trustee and the legal owner of the assets of the Trust, it remained necessary for the plaintiffs, in their capacity as liquidators, to enter into contracts, including the Sale Contract, notwithstanding that the plaintiffs were acting in their capacity as receivers in (a) dealing with the assets of the Company, and (b) engaging in the negotiations that led to the entry into the New Lease, the Deed of Compromise and Disclaimer and ultimately the Sale Contract.

E.2.     Contextual statutory provisions and legal principles

71    The Corporations Act includes specific provisions addressing the priority to be given to debts incurred by a liquidator in a winding up and by a receiver appointed to enforce a charge. Neither is directly applicable in the present case because the plaintiffs were dealing with Lots 2 and 5 as receivers, except in the 15 day period between their appointment as liquidators and receivers in which no strata levies were issued by the BMC, and they were not appointed receivers to enforce a charge. Nevertheless, those provisions provide a useful context in which to consider the present application by the plaintiffs.

72    Section 556(1)(a) of the Corporations Act provides:

(1)     Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:

(a)     first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business;

73    In New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179, the High Court examined the concept of an expense being “incurred” in the context of income tax. In that case, Dixon J found that “incurred” “does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon”. His Honour then noted, however, that it was “unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application”: at 207.

74    A debt has been said to have been incurred when (a) a corporation “so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt”: Hawkins v Bank of China (1992) 26 NSWLR 562 at 576 (Kirby P), or (b) a corporation, “by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable”: Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 at 314 (Hodgson J).

75    In Re HIH Insurance Ltd (2001) 39 ACSR 645; [2001] NSWSC 997, Hodgson J stated at [16] that it was “clear enough that the expressions ‘properly incurred’ in s 556(1)(a) and (dd)” is to be interpreted broadly, but then said at [17]:

Nevertheless, these provisions must be viewed in the context of the functions and duties of a liquidator. Those duties are primarily to realise and get in the assets of a company as soon as is practicable (see s 478, Corporations Act 2001 (Cth)) and to distribute to the persons entitled.

76    Section 419(1) of the Corporations Act provides:

A receiver, or any other authorised person, who, whether as agent for the corporation concerned or not, enters into possession or assumes control of any property of a corporation for the purpose of enforcing any charge is, notwithstanding any agreement to the contrary, but without prejudice to the person’s rights against the corporation or any other person, liable for debts incurred by the person in the course of the receivership, possession or control for services rendered, goods purchased or property hired, leased (including a lease of goods that gives rise to a PPSA security interest in the goods), used or occupied.

77    In Australian Securities and Investments Commission v Letten (No 13) (2011) 86 ACSR 174; [2011] FCA 1151, Gordon J determined that receivers were justified in refusing to pay a termination fee as an expense of the receivership, and it was therefore unnecessary to consider whether it should be paid in priority to the payment of proceeds to a secured lender. The receivers had been appointed to, among other things, “identify, collect and secure the property of an unregistered investment scheme, provide a disclosure report to the court, and wind up that scheme”: at [59]. Her Honour was satisfied that the appointment of the receivers to undertake these tasks was consistent with the traditional function of a court appointed receiver to “preserve the assets of the company and its potential to earn future profits”: at [58]. Her Honour referred to the following observations of Street J in Duffy v Super Centre Development Corporation Ltd [1967] 1 NSWLR 382 at 383-384:

There is some contrast to be borne in mind between the function of a privately appointed receiver and the function of a Court appointed receiver … To some extent the privately appointed receiver, particularly in current commercial practice, makes an effort to restore the financial prosperity of the company whose affairs he has been appointed to administer by a debenture holder. A Court appointed receiver does not fill the same position. He is not so much what might be described as a company doctor, but rather his function is that of a company caretaker. His function is not so much to restore profitability. It is rather to preserve those assets of the company upon which its fortunes may be dependent, and to preserve its potentiality for earning profits in the future.

(Emphasis in original.)

78    Justice Gordon rejected a submission that the phrase “for the purpose of enforcing a charge” in s 419 should be construed broadly. Her Honour observed that the specific mischief that s 419 had been directed at addressing, as identified in the parliamentary debates, was that of a receiver “buying goods without paying from them and, on their being sold, giving the proceeds to the debenture-holder, the original seller not being paid”: Letten (No 13) at [60] citing Hansard, 13 November 1934, p 1996.

79    In Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 3) (2008) 246 ALR 580; [2008] FCA 448 (Finklestein J), receivers had been appointed to oversee the winding up of an unregistered managed investment scheme. The assets to the scheme included land in Western Australia that was subject to two mortgages. Following the sale of the land but before the sale was completed the receivers made a claim on the proceeds of sale. Relevantly for present purposes, Finkelstein J observed that a receiver is entitled to recover their costs ahead of a secured creditor’s claims in several circumstances, including, “to be paid out of the proceeds of sale of mortgaged property the cost of any work that directly benefits the mortgagee”: at [10].

E.3.     Lundy Granite principle

80    I turn now to address the question of the potential application of the Lundy Granite principle to the plaintiffs’ application for judicial advice.

81    Re Lundy Granite Co; Ex parte Heaven (1871) LR 6 Ch App 462 concerned a landlord’s distraint of items belonging to a company that had been left upon a tenant’s property. The tenant had agreed to assign the lease to the company, but the assignment was not effected and the company was nonetheless permitted into possession of the property. After a winding up order was made, the liquidator of the company retained possession of the land with a view to selling the company’s assets on the land. The distraint was allowed to proceed because, inter alia, the liquidator had retained possession of the land for the purposes of the liquidation. Lord Justice James observed at 466:

[I]f the company for its own purposes, and with a view to the realization of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, common sense and ordinary justice require the Court to see that the landlord receives the full value of the property.

82    In Re Oak Pits Colliery Co (1882) 21 Ch D 322, the owner of a colliery sought to distrain or be paid the proceeds of sale of the plant and machinery held on land adjoining the colliery. The colliery and the minerals in the adjoining land, but not the surface of the adjoining land, had been leased to a company that brought the plant and machinery on to the surface of the adjoining land and sank three trial pits. The company subsequently mortgaged their lease by way of a sublease. Relevantly, the liquidator had left the company’s plant and machinery where he found them until he sold them in July 1881. The liquidator had the plant and machinery valued with a view to a sale which was not carried out, and he took no steps to surrender the company’s interest in the colliery. Lord Justice Lindley was not satisfied that these facts were sufficient to show that the liquidator had retained the property for the purpose of advantageously disposing of it or had continued to use it so as to entitle the lessor to payment in full of the rent. His Lordship stated at 330:

When the liquidator retains property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purposes of winding up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose. and in such a case it appears to us that the rent for the whole period during which the property is so retained or used ought to be paid in full without reference to the amount which could be realised by a distress. This was the view taken by Lord Justice James in the case of the Lundy Granite Company and by Mr Justice Fry in In re Brown, Bayley & Dixon, and by Mr Justice Kay in the present case. But no authority has yet gone the length of deciding that a landlord is entitled to distrain for or be paid in full rent accruing since the commencement of the winding up, where the liquidator has done nothing except abstain from trying to get rid of the property which the company holds as lessee. If the landlord had endeavoured to re-enter and the liquidator had objected, the case might be different, but having regard to the provisions of the Companies Act, 1862 , we are of opinion that in the case now supposed the landlord must rely on his right, if any, to re-enter and prove for the arrears due to him, and that he is not entitled to anything more.

(Emphasis added, footnotes omitted.)

83    In explaining how the Lundy Granite principle applies, Lindley LJ held that a landlord seeking to distrain after a winding up order or seeking to be paid their rent in priority to other creditors “must show why he should have such an advantage over the other creditors”: Oak Pits Colliery at 329. His Lordship stated that if, however, the liquidator has kept possession for their benefit and for the benefit of the company, by an arrangement with the landlord, and there is no agreement with the liquidator that they are to pay rent, the landlord is not allowed to distrain: at 330.

84    An immediate difficulty with any application of the Lundy Granite principle, at least any direct application, is that it has never been applied outside of a winding up or voluntary administration context in England or a winding up context in Australia. The principle can fairly be characterised as an extension of the rationale for s 419 and s 556 of the Corporations Act. It seeks to impose liability on a liquidator by treating continuing obligations under contractual arrangements entered into before a winding up as debts incurred by the liquidator and entitled to payment in priority to other unsecured creditors, if those obligations arise during a period in which the Company holds property for its own advantage.

85    The underlying rationale and potential scope of the Lundy Granite principle has been the subject of extensive consideration in case law.

86    In Re ABC Coupler and Engineering Co Ltd (No 3) [1970] 1 WLR 702, claims were made against a company in liquidation in respect of a lease entered into prior to a winding up. Justice Plowman observed that, generally, rent accruing after the commencement of a winding up was not payable in full, and was provable in the winding up rather than being treated as an expense of the winding up. His Honour observed at 709 that rent may be payable in full where:

[T]he liquidator has retained possession “for the convenience of the winding up”, and that whether he has done so or not, depends upon his purpose in retaining possession.

87    On his appointment, the liquidator had closed down the business conducted by the company, arranged for a valuation of the company’s plant and machinery and considered what further steps he should take. It was only after the liquidator had subsequently been given leave to sell the company’s assets and determined to put the company’s assets on the market that Plowman J held that he was retaining the premises for the benefit of the winding up and was liable to pay rent in full. His Honour concluded at 720:

In my judgment the inference is irresistible that from the time when the official receiver had been given leave to sell the company’s assets and had taken advice as to the best method of doing so, his tactics were directed to carrying out that advice and that he retained the lease for the purpose of carrying it out and for the benefit of the liquidation. In those circumstances “common sense and ordinary justice” (to quote James L.J. at 6 Ch.App. 466 ) seem to me to require that from the end of July until November 19 the applicants should be entitled to be paid their rent in full unless the retention of the lease can, on the facts, fairly be regarded as having been for the joint benefit of the applicants and the company.

88    In Re Toshoku Finance UK plc [2002] 1 WLR 671; [2002] UKHL 6, Lord Hoffman provided the following explanation at [27] as to how the Lundy Granite principle should be understood, by reference to the statements of Lindley LJ in Oak Pits Colliery at 330:

My Lords, it is important to notice Lindley LJ was not saying that the liability to pay rent had been incurred as an expense of the winding up. It plainly had not. The liability had been incurred by the company before the winding up for the whole term of the lease. Lindley LJ was saying that it would be just and equitable, in the circumstances to which he refers, to treat the rent liability as if it were an expense of the winding up and to accord it the same priority. The conditions under which a pre-liquidation creditor would be allowed to be paid in full were cautiously stated. Lindley LJ said, at p 329, that the landlord “must show why he should have such an advantage over the other creditors”. It was not sufficient that the liquidator retained possession for the benefit of the estate if it was also for the benefit of the landlord. Not offering to surrender or simply doing nothing was not regarded as retaining possession for the benefit of the estate.

(Emphasis in original.)

89    Lord Hoffman then referred to the origin and scope of the Lundy Granite principle in the following terms at [29]:

The principle evolved from Exhall Coal Mining Co Ltd 4 De GJ & S 377 and Lundy Granite Co LR 6 Ch App 462 is thus one which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate. Although [it] was originally based upon a statutory discretion to allow a distress or execution against the company’s assets, the courts quickly recognised that its effect could be to promote a creditor from merely having a claim in the liquidation to having a prior right to payment in full. As in the case of other equitable doctrines, the discretion hardened into principle. By the end of the 19th century, the scope of the Lundy Granite Co principle was well settled.

90    In Timbercorp Securities Ltd (in liq) v Plantation Land Ltd (2009) 72 ACSR 620; [2009] FCA 741, Finkelstein J reviewed the case law relevant to the Lundy Granite principle and then stated at [19]:

The point of these cases is that distress for rent is allowed when the liquidator has “elected” to retain possession of the leased land: Re Silkstone & Dodworth Coal and Iron Co (1881) 19 Ch D 158 at 161 per Fry J; see also Re ABC Coupler and Engineering Co Ltd (No 3) [1970] 1 All ER 650; [1970] 1 WLR 702 per Plowman J. Whether or not the liquidator has elected to retain possession (that is whether or not he has decided to do so) may involve a subjective assessment of the state of mind of the liquidator but, more usually, will be determined objectively based on what the liquidator has said and done: In Re Downer Enterprises Ltd [1974] 1 WLR 1460 at 1466.

91    Justice Finkelstein observed that the rationale for the principle was not that pre-liquidation rental expenses were “incurred” in the winding up, but that in the particular circumstances of the case, courts have on occasions decided that in appropriate cases, as the landlord was deprived of enjoyment of the property, it would be “just and equitable” to treat a rent liability as if it were an expense of the liquidation and to accord it the same priority: Timbercorp at [20]. His Honour held that the principle did not apply where, as in the case before him, the liquidators were considering whether to retain possession of the leased land for the purposes of the liquidation, but had not yet decided whether to do so: Timbercorp at [21].

92    In Grapecorp, Sifris J considered the scope of the principle, in the context of a winding up, and observed:

[83]     In the lease cases, whether the liquidator has elected to retain possession will be determined objectively by what she or he has said and done. The fact that the liquidator retains possession of the land is not, of itself, sufficient to render the rent an expense of the winding-up. The possession must be for the benefit of the winding up. Thus, it will not be sufficient that possession was maintained if it was also for the benefit of the landlord. Furthermore, not offering to surrender or simply doing nothing will not be regarded as retaining possession for the benefit of the estate.

[84]     Commonly, a liquidator may elect to continue occupation of rented premises in order, for example, to continue the company’s business pending its sale as a going concern, or as a place to store or auction stock or plant and equipment. In such cases, the incidental liabilities, including rent, rates and other taxes, will be incurred by the liquidator as if they were an expense of the liquidation, notwithstanding that the lease of the premises was entered into prior to the liquidation.

(Footnotes omitted, emphasis in original.)

93    In Jervis v Pillar Denton Ltd [2015] Ch 87; [2014] EWCA Civ 180, the Court of Appeal of England and Wales applied the Lundy Granite principle to an administration where rent due under leases was payable in advance and had fallen due for payment prior to a company’s entry into administration. In reaching their conclusion, Lewison LJ (with whom Sharp and Patten LJJ agreed) observed at [8]:

It is also common ground that whether rent is payable as an administration expense is not a question of an exercise of the court’s discretion. Either it counts as an expense, or it does not. If rent falls within the principle known variously as the “salvage principle”, the “liquidation expenses principle” or “the Lundy Granite principle” it is an administration expense. If not, not. The origins and development of the principle, which I shall call the “salvage principle”, were explained by Lord Hoffmann in In re Toshoku Finance UK plc [2002] 1 WLR 671.

94    His Lordship further observed at [77]:

I accept that whether the salvage principle applies is not a matter of discretion. As Lord Hoffmann explained in In re Toshoku Finance UK plc it is a principle that informs the interpretation of the rules which contain the complete list of what could rank as expenses of the relevant insolvency process: see para 16 above. Thus in order to rank as an expense a liability must fall within the rules as interpreted in the light of the salvage principle. But it does not follow from that that the principle, once understood, is incapable of being applied to factual situations that did not confront our Victorian forebears. Although the salvage principle owes its origins to applications relating to distress for rent, it has long outgrown those origins. I agree with [the appellant’s counsel] that the rationale is a judge-made deeming provision under which the office holder is deemed to have incurred the liability in the course of the winding up or administration. The foundation of the principle is the application of equity. Lord Hoffmann makes this clear not only in the passage just cited (“it would be just and equitable, in the circumstances to which he refers, to treat the rent liability as if it were an expense of the winding up and to accord it the same priority”), but in other passages as well. Thus he said, at para 29:

“The principle evolved from the … cases is thus one which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate.” (Emphasis added.)

    (Emphasis in original.)

95    In Ford (Administrator), in the matter of The PAS Group Limited (Administrators Appointed) v Scentre Management Ltd (2020) 145 ACSR 654; [2020] FCA 1023, administrators sought directions as to the priority which rent would have over other debts or claims in a winding up. The principal question to be determined was whether the rent incurred by the companies in administration during the standstill period would be a debt or claim entitled to priority in a winding up. Justice O’Callaghan observed at [22] that the provisions relating to an administrator’s liability in Pt 5.3A of the Corporations Act would not bear on the question of the ranking of claims in a liquidation under s 556, in a winding up. His Honour concluded at [33]:

[W]here an administrator (or a liquidator) elects to cause the company to continue in occupation of leased premises for the purposes of the administration (or liquidation), referred to in some cases as the period of “beneficial occupation”, the rent is payable as an expense of the administration or liquidation properly incurred in carrying on the company’s business within the relevant governing provisions (in Australia, s 556(1)(a) of the Act).

96    As a matter of principle, I see no reason why the Lundy Granite principle should be confined to liquidations or English voluntary administrations. It is in substance an equitable principle that seeks to ameliorate the inherent unfairness in a company in liquidation continuing to enjoy the benefits of a contract entered into prior to its winding up for the benefit of the insolvent estate, beyond simply realising the assets for sale, but not treating further liabilities accruing on that contract as an expense of the liquidation. Fundamentally different considerations apply to the pari passu entitlement afforded to unsecured creditors for liabilities that had accrued prior to a winding up of a company. The conferral of a priority pursuant to s 556 of the Corporations Act to creditors with whom a liquidator has incurred liabilities enables a liquidator to continue to operate the business of a company, pending the sale of its assets for the benefit of creditors, and to distribute any surplus to shareholders, or in the case of a trust, to beneficiaries. The Lundy Granite principle extends that conferral of priority for, at least, leases entered into prior to a winding up of a company. The same rationale is equally applicable to a receiver appointed by the Court for the purpose of realising assets or for the purpose of enforcing a charge.

97    In my view, it would be incongruous to conclude that a receiver appointed by a secured creditor for the purpose of enforcing a charge could incur liabilities pursuant to s 419 of the Corporations Act, but a receiver appointed by a Court to realise trust assets for the benefit of trust creditors would not be in an equivalent position. It would be incongruous, not least because the enforcement of a charge would typically include the realisation of assets for the benefit of the secured creditor and priority creditors, and to the extent of any surplus, unsecured creditors.

98    In Melbourne Aircraft Leasing (UK) Ltd v Algeri in their capacity as joint and several Trustees of Project Volar Creditors’ Trust (2022) 161 ACSR 569; [2022] NSWSC 443, the plaintiffs sought to recover from a trustee of a creditors’ trust, as priority creditors, unpaid rent following the companies’ entry into voluntary administration and subsequently into deeds of company arrangement that culminated in the establishment of the creditors’ trust. The plaintiffs were lessors of aircraft and aircraft engines to companies in the Virgin Australia Group of companies.

99    The plaintiffs sought to rely on the Lundy Granite principle in support of their claims. After a comprehensive review of the case law, Black J concluded that the plaintiffs had not established that the Lundy Granite principle should be applied in admitting proofs of debt against the trust: at [94]. His Honour reached that conclusion for three principal reasons.

100    First, Black J pointed to the absence of any previous application of the Lundy Granite principle outside a winding up or English voluntary administration, stating at [94]:

First, the Plaintiffs identified no English or Australian authority which has extended that principle beyond a winding up, or a distribution of assets on the same basis in an English voluntary administration, and I can see no reason in policy to extend that well-established principle beyond the circumstances in which it arose.

101    Second, Black J did not accept that the “sense of deprivation” that was a substantial theme of the plaintiffs’ submissions in comparing the position that would have applied in a winding up supported an application of the Lundy Granite principle. His Honour stated at [95]:

There was, of course, no winding up of the Virgin companies, because the airline business was sold and the Trust was established, and the position in a winding up would have been very different, not least because the proceeds of the sale of the business as a going concern which will be distributed to the Plaintiffs and other creditors under the Trust would likely not have been available. There is no requirement that a deed of company arrangement, still less a creditors’ trust, replicate the position that would have occurred in a winding up, although creditors may challenge a deed of company arrangement which departs from that order in an appropriate case. No such challenge was brought by the Plaintiffs here. The Plaintiffs did not seek to establish that their economic return from the Trust, which has benefited from the sale proceeds of the business as a going concern, will be worse than their return had they been allowed priority in a winding up where those increased proceeds would likely not have been received.

102    Third, his Honour concluded that the priority to be afforded to the plaintiffs’ claims was to be determined by the proper construction of the trust deed on the relevant facts, having regard to its text, context and purpose: Melbourne Aircraft Leasing at [96]. The trust deed expressly provided that the trust fund was to be paid to all Pool A Creditors (which included the plaintiffs) on a “pro rata” basis and there were no express provisions for the plaintiffs to have priority, unlike the position for creditors pursuing an insurance claim and obtaining payments from an insurer, and claims by employees for their entitlements: at [97]-[98].

103    The decision in Melbourne Aircraft Leasing can readily be distinguished from the present case. Unlike the position in Melbourne Aircraft Leasing, (a) no creditors’ trust had been established that expressly provided for pro rata payments to all creditors, (b) there is a winding up of a corporate trustee, (c) the creditors have rights of recourse against the assets of the Trust, including the proceeds of the sale of Lots 2 and 5, and (d) the economic return achieved by the owners, including White Hills, will be higher if their claims for priority are upheld.

104    Further, I am satisfied that an ongoing liability imposed on a company to pay a strata levy pursuant to a strata management statement entered into prior to a winding up is not relevantly distinguishable in principle from an ongoing obligation to pay rent on a lease entered into prior to a winding up. As a practical matter, membership of a strata plan is no less necessary to continue to occupy premises than a lease. The considerations relevant to an application of the Lundy Granite principle are equally applicable to strata levies. The position of the landlord in the context of a lease is replaced by an owners’ corporation and owners in the context of strata levies.

105    I accept that unlike the position with a lease, a liquidator has no power to disclaim a strata management statement, but I do not consider that difference in isolation is sufficient to preclude the potential application of the Lundy Granite principle to a strata management statement. The power to disclaim is an important consideration in any assessment of whether it is just and equitable that ongoing rental obligations with respect to leases entered into prior to a winding up should be treated as costs of the liquidation, but it is not determinative. Moreover, in my view it would also not be appropriate to preclude any application of the Lundy Granite principle for rental payments arising after a winding up incurred by a receiver on the basis that, unlike a liquidator, the receiver had no power to disclaim the lease. The underlying rationale for the Lundy Granite principle focuses on conduct sufficient to give rise to a beneficial occupation, not the narrower question of whether or not there has been a disclaimer of the lease by a liquidator.

106    The issue thus becomes whether the Company, by remaining the owner of Lots 2 and 5, retained the benefits of the Strata Management Statement for the mutual benefit of the Company, the owners corporation and the owners. More specifically, it is necessary to consider whether it is just and equitable that the strata levies be treated as an expense of the receivership because they arose from the continuing ownership by the Company of Lots 2 and 5. This in turn requires a determination of whether continuing legal ownership of Lots 2 and 5 could be characterised as a “beneficial occupation”, an issue to be determined objectively by reference to what the plaintiffs have said and done or subjectively by reference to the state of mind of the plaintiffs.

107    While it might be thought likely that the remediation works undertaken by Karellas, as the agent of the Company (in liquidation), as the legal owner of the Lots as a bare trustee, pursuant to the Deed of Compromise and Disclaimer must have necessarily involved access and utilisation of common areas, there was no evidence that this was in fact the case. Rather, the relevant context in which to consider whether there had been a “beneficial occupation” was that continuing ownership of Lots 2 and 5 necessarily gave rise to an ongoing liability to the BMC for strata levies.

E.4.     Adoption of the Strata Management Statement

108    The inability of the plaintiffs as liquidators to disclaim the Strata Management Statement does not carry with it any necessary implication that the plaintiffs, as receivers (or liquidators) had adopted the Strata Management Statement. The obligations under the Strata Management Statement were liabilities that had been incurred by the Company prior to the appointment of the plaintiffs as liquidators. Remaining in possession of the Land, including Lots 2 and 5, did not constitute an acceptance of liability under the Strata Management Statement or constitute “something extra” that might constitute an adoption of the statement by the plaintiffs.

109    Nor do I accept that the provisions of the Sale Contract and the New Lease relied upon by White Hills and the intervener, gave rise to any adoption of the Strata Management Statement by the plaintiffs.

110    Clause 14 of the Sale Contract relevantly provided:

14.1     Normally, the vendor is entitled to the rents and profits and will be liable for all rates, water, sewerage and drainage service and usage charges, land tax, levies and all other periodic outgoings up to and including the adjustment date after which the purchaser will be entitled and liable.

14.2     The parties must make any necessary adjustment on completion.

…

111    In my view, cl 14 of the Sale Contract makes plain that the liability for the strata levies fell on the Company and gave rise to a contractual obligation for the plaintiffs to pay them. I do not accept, in the absence of any clause to the contrary, that the contractual obligation is relevantly qualified by the use of the word “[n]ormally”. The text, context and purpose of cl 14, considered together, all suggest an unequivocal allocation of liability to the Company, as vendor, for the strata levies. It was an obligation inter partes, however, and did not constitute any assumption of liability by the plaintiffs, as receivers or liquidators, to any third party to pay the levies. Nor, could it logically support any contention that the plaintiffs, as receivers or liquidators, had “incurred” levies previously charged to the Company but that remained unpaid.

112    The New Lease had two clauses relevant to the payment of the strata levies.

113    Clause 13.8 of the New Lease provided:

Rates, Taxes and Operating Expenses

(a)    Despite any other provision of this Lease, the Lessor must pay as and when they fall due:

(i)     all rates, taxes, charges, levies and other operating expenses in connection with the Land and the Premises; and

(ii)    all rates, taxes, operating expenses; charges, levies, costs, contributions to any administrative fund, capital works fund and other like funds and other expenses (including any Shared Costs (as that term is defined in the Strata Management Statement)) for which the Lessor is liable for under the Strata Management Statement.

(b)    The Lessee is not obliged to pay, or contribute to, any costs referred to in this clause 13.8 or otherwise.

114    Similarly, cl 28.l(a)(i) of the New Lease provided that the Company, as lessor, covenanted:

as owner of the Land perform and comply with the obligations of the Lessor under the Strata Management Statement as and when they fall due and promptly if no time is specified.

115    The liability for payment of the strata levies falls clearly within cl 13.8(a)(ii) and cl 28.1(a)(i). Both clauses impose a contractual obligation on the plaintiffs to pay the strata levies but again it is an obligation inter partes, in this case between the Company, as lessor, and Karellas, as lessee. Neither constitutes any assumption of liability by the plaintiffs, as receivers or liquidators, to any third party to pay the strata levies.

116    Nor, contrary to the submissions advanced by White Hills, do I accept that the settlement adjustments on the sale of Lot 3 which resulted in the Company bearing the cost of outstanding levies referrable to that Lot, constituted an adoption by the plaintiffs of the Strata Management Statement. I accept the evidence of Mr Morelli that he did not consider or otherwise seek advice at the time of the settlement of the sale of Lot 3 as to whether the Company was required to pay the outstanding strata levies of $9,423.80 for Lot 3 in full as a priority debt to the BMC. Mr Morelli’s evidence is consistent with the apparent logic of events, including, (a) the small amount outstanding, (b) the plaintiffs’ principal focus on Lots 2 and 5, and (c) the relatively novel question of whether and in what circumstances a receiver (or liquidator) may have adopted a strata management statement entered into prior to their appointment.

117    In my view, however, for the following reasons, the plaintiffs had both adopted the Strata Management Statement and engaged the Lundy Granite principle as and from the date of their entry into the Deed of Compromise and Disclaimer.

118    In the Report to Creditors that was dated 6 February 2020, the plaintiffs identified three options for dealing with Lot 2 (and 5). They were (a) a sale with the Lease in place (lowest value), (b) a sale with no lease (middle value) and (c) a sale with a new lease with more favourable commercial terms (highest value). Consistently with a valuation the plaintiffs had obtained on 23 August 2019, the plaintiffs engaged in negotiations with Karellas to obtain a new lease with more favourable commercial terms to maximise the sale price.

119    On 30 October 2020, the plaintiffs, in their capacity as liquidators of the Company, entered into the Deed of Compromise and Disclaimer with Karellas. Mr Morelli gave evidence that although the Deed of Compromise and Disclaimer recorded that it was entered into in the name of the liquidators, it was in reality, entered into by the plaintiffs in their capacity as joint and several receivers. The Deed of Compromise and Disclaimer provided for a disclaimer of the Lease, the completion of the rectification works and the grant of a new lease to Karellas.

120    Clause 3.6 of the Deed of Compromise and Disclaimer provided that Karellas was to carry out the rectification works as the “agent” of the Company. Clause 2.6 provided that the plaintiffs granted possession of Lots 2 and 5 to Karellas to enable it to conduct the rectification works.

121    By their entry into the Deed of Compromise and Disclaimer, the plaintiffs chose the third option that they had identified in the Report to Creditors. In selecting that option they committed the Company to complete the development of Lots 2 and 5, provided a means by which the defects in the properties could be remedied in order to maximise their sale price, and determined in effect to continue to operate the business of the Company, as a property developer. Moreover, the decision to pursue the third option necessarily had the result that the Company continued to remain an owner of Lots 2 and 5, and continued thereby to accrue liabilities to the BMC for the strata levies. Further, remaining an owner of those lots provided the Company with access under the Strata Management Statement to the common property, an entitlement that might be thought necessary to undertake the rectification works but a matter in respect of which there was no direct evidence.

122    Unlike the position in Letten (No 13), in the period following the entry into the Deed of Compromise and Disclaimer, this was not a case in which the plaintiffs, in their capacity as Court appointed receivers, were only taking steps to “identify, collect and secure” property, provide a disclosure report to the Court and wind up a scheme.

123    The purpose for which the plaintiffs remained in possession of Lots 2 and 5 and thereby necessarily continued to accrue liabilities for strata levies to the BMC was further illustrated in the Annual Administration Return prepared by the plaintiffs for the period ended 17 April 2021. The plaintiffs stated in that return that one of two reasons that might delay the termination of the liquidators’ appointment was stated to be:

Future asset realisations

Improving asset for sale, realisation of real property.

124    In my view, for these reasons, the entry into the Deed of Compromise and Disclaimer constituted an adoption by the plaintiffs of the Strata Management Statement.

F.    Disposition

125    Orders will be made pursuant to s 90-15 and s 90-20 of the IPS that the plaintiffs are justified in proceeding on the basis that strata levies issued by the BMC with respect to Lots 2 and 5:

(a)    prior to the appointment of the plaintiffs as liquidators to the Company, and which remain unpaid, comprise an unsecured debt of the Company and should be treated as such by the plaintiffs;

(b)    in the period between the appointment of the plaintiffs as liquidators and the entry by the plaintiffs into the Deed of Compromise and Disclaimer, comprise an unsecured debt of the Company and should be treated as such by the plaintiffs; and

(c)    after the plaintiffs’ entry into the Deed of Compromise and Disclaimer, comprise debts incurred by the plaintiffs in their capacity as receivers of the assets of the Freshwater Development Trust and should be treated as such by the plaintiffs.

126    The parties (including the intervener) will otherwise be given an opportunity to agree orders as to costs, and any other orders or declarations that they consider necessary to give effect to these reasons, and in the absence of agreement are to file short submissions as to any orders or declarations that they seek, and any dispute will be determined on the papers, unless a party seeks an oral hearing.

Associate:

Dated:    19 July 2024