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Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953 (18 August 2017)
Last Updated: 5 September 2017
FEDERAL COURT OF AUSTRALIA
Lane (Trustee), in the matter of Lee
(Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953
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File number(s):
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QUD 198 of 2017
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Judge(s):
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DERRINGTON J
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Date of judgment:
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Catchwords:
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BANKRUPTCY AND INSOLVENCY – trustee
in bankruptcy’s right to insolvent trustee’s right of exoneration
– discussion of the nature of
the right of exoneration – whether the
funds are to be distributed to all creditors or only to trust creditors –
whether
right of indemnity “property divisible among the bankrupt’s
creditors” or trust property BANKRUPTCY AND INSOLVENCY
– trustee’s right of indemnity – whether bankruptcy changed
the nature of the right of exoneration – whether
the priority regime in s
109 of the Bankruptcy Act 1966 (Cth) applies to the use of the right of
exoneration – trust creditors paid pari passu – whether the
right of exoneration ought to be exhausted before dividends are paid –
“hotchpot” principle
considered BANKRUPTCY AND INSOLVENCY
– costs expenses and remuneration of trustee in bankruptcy
– use of the right of indemnity to meet the costs expenses and
remuneration of bankruptcy trustee – consideration of Berkeley
Applegate principles – consideration of Universal Distributing
principles – reasonableness of remuneration of
trustee TRUSTS AND TRUSTEES – trustee’s right of
indemnity – nature of the trustee’s right of indemnity
– trustee’s equitable lien supporting the right of exoneration
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whether trustee’s right of indemnity is trust property
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Legislation:
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Bankruptcy Act 1966 (Cth), ss 5, 58, 108,
109, 116, 117, 122, 132, 133, 134, 140, 433
Corporations Act 2011 (Cth), ss 473, 555, 556, 562
Companies Act 1961 (Qld), s 293
Companies Act 1962 (SA), s 292
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Cases cited:
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Combis in the matter of Reehal Holdings Pty Ltd (in liq) [2017] FCA
793
Cummings v Claremont Petroleum NL (1986) 185 CLR 124
Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq)
[2002] NSWCA 29
Hood’s Trustees v Southern Union General Insurance Co of
Australasia Ltd [1928] 1 Ch 793
Kite v Mooney; In the matter of Mooney’s Contractors Pty Ltd (in
liq) (No.2) [2017] FCA 653
Mannigel v Aitken (1983) 77 FLR 406
NT Power Generation Pty Ltd v Power and Water Authority (2004) 219
CLR 90
Re AAA Financial Intelligence Ltd (in liq) ACN 093 616 445 (in liq)
[2014] NSWSC 1004
Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989]
Ch 32
Re Law Guarantee Trust and Accident Society Ltd: Liverpool Mortgage
Insurance Co’s Case [1914] 2 Ch 617
Rogers v Asset Loan Co (2006) 4 ABC(NS) 293
Rothmore Farms Pty Ltd v Belgravia Pty Ltd (1999) 2 I.T.E.L.R.
159
Seafish Tasmania Pelagic Pty Ltd v Burke, Minister for the
Sustainability, Environment, Water, Population and Communities [2013] FCA
782
Woodgate, in the matters of Bell Hire Services Pty Ltd (in liq)
[2016] FCA 1583
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Date of last submissions:
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19 July 2017
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Registry:
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Queensland
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Division:
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General Division
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National Practice Area:
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Commercial and Corporations
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Sub-area:
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General and Personal Insolvency
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Category:
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Catchwords
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Number of paragraphs:
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Counsel for the Applicants: |
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Solicitor for the Applicants:
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Cooper Grace Ward
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Counsel for the First Respondent:
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Ms A Wheatley
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Solicitor for the First Respondent:
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Australian Tax Office
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Counsel for the Second to Fifth Respondents:
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The Second to Fifth Respondents did not appear
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Table of Corrections
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The appearances for the Respondents have been corrected
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ORDERS
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IN THE MATTER OF THE BANKRUPT ESTATE OF
WARWICK GORDON LEE
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MORGAN GERARD JAMES LANEFirst
Applicant RAJENDRA KUMAR KHATRISecond Applicant
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AND:
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DEPUTY COMMISSIONER OF TAXATIONFirst
Respondent JANET MAY LEESecond Respondent WESTPAC
BANKING CORPORATION (and others named in the Schedule) Third
Respondent
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SUBJECT TO RECEIVING FURTHER SUBMISSIONS WITHIN SEVEN (7) DAYS AS
TO THE PRECISE WORDING, THE ORDERS OF THE COURT WILL BE AS FOLLOWS:
- That
the name of the Respondent be amended to “Deputy Commissioner of
Taxation” and that the matter shall continue as
if the action were started
against that office holder.
- The
Applicants are entitled to the following directions:
(a) That, subject to order 4 hereof, the sum of
$599,782.02 being the proceeds of sale of assets of the Warwick Lee Family Trust
(“the
Funds”) are subject to Mr Lee’s right of exoneration out
of the trust assets and, subject to the following orders herein,
are available
to be distributed to trust creditors to the exclusion of non-trust
creditors.
(b) The Applicants are entitled to distribute the Funds prior to the payment of
any dividend from the bankrupt’s estate.
(c) The Australian Taxation Office is not entitled to priority out of the Funds
pursuant to s 109(1)(e) of the Bankruptcy Act 1966 (Cth).
(d) The provisions of ss 108 and 109 of the Bankruptcy Act 1966 (Cth) do
not apply in relation to the distribution of the Funds which are to be paid to
the trust creditors pari passu.
(e) In the distribution of the personal estate of the bankrupt amongst all
creditors, the trust creditors must bring into “hotchpot”
the amount
which they have received from the Funds as trust creditors.
(f) The Applicants are entitled to paid from the Funds (prior to any payment to
any creditors) the amount of $89,326.56 (being 46.76%
of $191,032) for their
costs, expenses and remuneration relating to work undertaken in respect of
causing the trust creditors to
be paid by the application of the trustee’s
right of exoneration.
- It
is declared that, pursuant to s 76 of the Trusts Act 1973 (Qld) that the
Applicants, in their capacity as trustees in bankruptcy of the estate of Mr
Warwick Gordon Lee, acted honestly and
reasonably and ought fairly be excused
for any breaches, failures or omissions relating to the administration of the
bankrupt estate,
arising from the payment of $139,137.04 for their remuneration
from the right of indemnity funds.
- The
parties have liberty to relist the remainder of the Application for further
hearing in relation to the question of the characterisation
of the proceeds
received by the Bankruptcy Trustees from the Australian Taxation Office as an
unfair preference.
- Liberty
to apply.
- The
Bankruptcy Trustees’ costs being their costs in the administration.
- Otherwise
the question of the costs of any other party is reserved.
REASONS FOR
JUDGMENT
DERRINGTON J:
Introduction
- The
application before the Court is for directions and relief pursuant to ss
90-15(1) and 90-20(1)(a) of the Insolvency Practice Schedule (Bankruptcy)
(Schedule 2 of the Bankruptcy Act 1966 (Cth) (the Act)) in
relation to the administration of the bankrupt estate of Mr Warwick Gordon Lee
(Mr Lee). The directions and
forms of relief sought by Mr Lee’s trustees
in bankruptcy in this application are numerous and traverse a wide range of
significant
and complex issues. Central to many of the questions raised is the
issue of whether Mr Lee’s right of indemnity out of certain
assets which
were held by him on trust can be utilised for the purposes of meeting the claims
of “non-trust” creditors
or the claims of the trustees in bankruptcy
for their costs, expenses and remuneration of the administration of the estate.
Other
questions arise as to the entitlement of the Australian Taxation Office
(ATO) to priority over other “trust creditors”
in respect of an
asserted Superannuation Guarantee Charge and as to the proportions in which
funds may be distributed amongst the
creditors.
Nomenclatures used in these reasons
- It
is important to keep steadily in mind that each debt incurred by Mr Lee in his
capacity as trustee was one for which he was personally
liable. The
“trust” is not a legal entity which has rights or to which duties
and obligations are owed (Agricultural Land Management Limited v Jackson (No.
2) [2014] WASC 102; (2014) 48 WAR 1 at 58; [302]). It is merely the label given to that
bundle of rights and obligations, both personal and proprietary, which
constitute the relationship
between a beneficiary and a trustee (Kelly v
Mina [2014] NSWCA 9 at [103]). As a trust has no separate existence, so
far as third parties are concerned the trustee’s obligations to those
parties
are not limited in any way by reference to the assets of the trust, save
in the case of an express agreement (Elders Trustee and Executor Company
Limited v EG Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193 at 253). In the context of
the Bankruptcy Act, any of the trustee’s creditors were entitled to
make the application for the sequestration order regardless of whether the
debt
to them was incurred in the course of the administration of the trust or
otherwise.
- Despite
the above, and although it is legally inaccurate to imply that a trust has some
independent existence apart from the trustee
in whom the trust obligations are
reposed, in these reasons the creditors of Mr Lee whose debts arose in the
proper performance by
him of his obligations as trustee are referred to by the
short-hand expression “trust creditors”. The debts owing to
“trust creditors” are referred to as “trust debts”.
Conversely, the creditors whose debts arose in the course
of Mr Lee’s
personal dealings are identified as “non-trust creditors” and their
debts are referred to as “non-trust
debts”.
- Throughout
these reasons the expression ‘insolvent trustee’ shall be used to
distinguish that trustee from the trustee
administering the insolvent
trustee’s estate, which is referred to as a ‘bankruptcy
trustee’.
Summary of principles regarding the use of a trustee’s
right of exoneration in a bankruptcy
- As
a result of the large number of directions which the Bankruptcy Trustees have
sought in this application and the uncertain state
of the law in relation to the
matters under consideration, the reasons for judgment in this matter are
necessarily extensive. That
being so, it is appropriate to attempt to
succinctly identify some general principles which ought to guide a bankruptcy
trustee when
dealing with a bankrupt trustee’s right of indemnity out of
trust assets.
(1) A trustee has, amongst other rights of indemnity, a
right to indemnification from the assets of the trust in respect of trust
debts
which have been properly incurred and for any tortious liability which has been
not-improperly incurred.
(2) The right of indemnity from the trust assets falls into two discrete parts.
A right of recoupment (being the right to recoup
money from the trust assets in
respect of liabilities which the trustee has previously discharged from their
own funds) and a right
of exoneration (being a right to discharge trust
liabilities directly from the assets of the trust).
(3) The value of the trustee’s right of indemnity can only be fully
ascertained upon the taking of the accounts of the trust,
which includes the
application of the “clear accounts rule”. In general terms, the
value of the indemnity is equal to
the extent to which the balance of the
accounts favours the trustee regardless of the quantum of trust debts owing.
(4) The trustee has an equitable lien which supports their rights of indemnity
(both exoneration and recoupment). The consequence
of the existence of the
right of indemnity and lien is that the trustee has a beneficial interest in the
assets held upon the terms
of the trust and, to that extent, the
beneficiaries’ interest in the trust property is diminished.
(5) On the occasion of the trustee’s insolvency all existing trust
creditors are equally entitled to be subrogated to the trustee’s
right of
exoneration and supporting lien although not to the right of recoupment.
(6) Both the right of recoupment and the right of exoneration will form part of
the personal property of the insolvent trustee which
will pass to the bankruptcy
trustee as “property of the bankrupt divisible amongst creditors”.
Neither is trust property.
The benefit of the supporting equitable lien will
also pass to the bankruptcy trustee. It also is not trust property.
(7) The exercise of the right of recoupment by a bankruptcy trustee will result
in trust funds being transferred beneficially to
the estate of the bankrupt
which are then available to meet the claims of both trust and non-trust
creditors. The distribution of
such funds accords with the usual distribution
of the proceeds of the bankrupt’s property pursuant to the priority regime
in
the Bankruptcy Act 1966 (Cth) (the Act).
(8) The right of exoneration is much more limited. Its exercise by the
bankruptcy trustee will only result in the transfer of trust
funds directly to
the trust creditors in payment of their debts. The exercise of the right does
not result in the beneficial receipt
of funds by the bankrupt’s estate
which might be used to meet the claims of non-trust creditors.
(9) Whilst the right of exoneration is property of the bankrupt, it is not
capable of being realised so as to create “proceeds”
which might be
applied pursuant to ss 108 and 109 of the Act. It is merely a limited right to
use trust funds to discharge trust
debts and that is the only manner in which a
bankruptcy trustee may exercise it in the course of the administration of the
bankrupt’s
estate.
(10) As all trust creditors have equal rights of subrogation to the right of
exoneration and supporting lien, it follows that the
payments to them consequent
upon the exercise of the right of exoneration occurs pari passu.
(11) In the distribution of the proceeds of the bankrupt’s property under
ss 108 and 109, the “hotchpot” principle
applies such that the trust
creditors must bring into account the amounts which they have received by the
application of the right
of exoneration, prior to participating in the
distribution.
(12) The limited nature of the right of exoneration has the consequence that it
is not capable of being used to pay the costs, expenses
and remuneration of the
bankruptcy trustees. However, the principles in Re United Distributing
and Berkeley Applegate provide a justification for allowing payment
to the bankruptcy trustees of certain amounts from the pool of funds generated
by their
work before the right of exoneration is exercised.
(13) The costs, expenses and remuneration which might be paid to the bankruptcy
trustees pursuant to the principles in Re United Distributing and
Berkeley Applegate are limited to that relating to the performance of
work necessary for exercising the right of exoneration. However, where the sole
business of the bankrupt was acting as trustee, it is likely that a substantial
proportion of the costs, expenses and remuneration
of the administration of the
estate will be chargeable out of the pool of funds produced by the bankruptcy
trustees.
(14) Whether the amount of the bankruptcy trustee’s entitlement can be
debited against the interest of the trust’s beneficiaries
as opposed to
the interest of the trust creditors in the pool of funds created need not be
determined in this case as no “trust
assets” remained.
Background facts
- The
Warwick Lee Family Trust was established by a deed dated 11 March 1998. The
trustees initially appointed under that deed were
Mr Lee and his wife, Wendy
Ellen Lee. By the time of his bankruptcy in February 2013, Mr Lee was the sole
trustee. The trust was
a discretionary trust of which, inter alia, Mr Lee, Mrs
Lee and Mr Lee’s children were “beneficiaries” in the sense
that they were objects of the exercise of the trustee’s discretionary
power to distribute income and in whom the corpus of
the trust vested on the
Vesting Day.
- Prior
to his bankruptcy, Mr Lee, as trustee, operated the business of a Subway
franchise located in the suburb of Brassall in the
State of Queensland. In the
course of the operation of that “fast-food” business, Mr Lee
employed a number of staff
and incurred a number of significant liabilities.
Importantly, for the claims of the Deputy Commissioner of Taxation in this
matter,
he did not employ anyone in his private capacity. Apparently, the
Subway business was not a financial success. It was advertised
for sale and a
contract for its purchase by an unrelated third party was entered into on 18
December 2012. Settlement took place
on 19 February 2013. Three days later, on
22 February 2013, Mr Lee was made bankrupt on a debtor’s petition. Mr
Rajendra
Kumar Khatri and Mr Morgan Gerard James Lane were appointed as the
trustees in bankruptcy of Mr Lee’s estate. For convenience,
and to
distinguish them from the trustee of the Lee Family Trust, they are referred to
herein as the “Bankruptcy Trustees”.
- On
the day prior to the execution of the contract of sale of the Subway business,
being 17 December 2012, the trust deed of the Warwick
Lee Family Trust was
amended to remove a provision which would have disqualified Mr Lee from
continuing to act as trustee in the
event of his bankruptcy. No explanation has
been proffered as to why that occurred. Nevertheless at all material times he
has remained
as the trustee of the Warwick Lee Family Trust.
- From
the material filed by the Bankruptcy Trustees, it is apparent that the operation
of the trust was somewhat disorganised and unsophisticated.
This has little
relevance to the core issues to be determined, but it does have some
significance with respect to the quantum of
remuneration sought by the
applicants. In any event, after a not-inconsiderable amount of work, the
Bankruptcy Trustees have ascertained
the nature and scope of Mr Lee’s
personal estate. Necessarily, that required that they also ascertain the nature
and scope
of the trust estate.
- The
net proceeds of the sale of the Subway franchise, in the sum of $448,659.49,
were received by the Bankruptcy Trustees in the period
from 20 March 2013 to 28
May 2013. The evidence shows that monies were received “in response to a
demand being made by the
Trustees in Bankruptcy pursuant to Mr Lee’s right
of indemnity”. By way of a letter dated 26 February 2013 to Mr Graham
Roberts of Cooper Grace Ward, who was then Mr Lee’s solicitor, the
Bankruptcy Trustees asserted that the trustee’s right
of indemnity under
the Warwick Lee Family Trust vested in them and, on that basis, they requested
the transfer to them of the sale
proceeds. Prior to any such transfer of the
funds pursuant to that request, Mr Roberts held them for his client, Mr Lee,
who, in
turn, held them as trustee of the Warwick Lee Family Trust. It seems,
therefore, that the funds which were then held in trust (and
which were subject
to the equitable lien protecting the trustee’s right of indemnity) were
paid out of the trust and to the
Bankruptcy Trustees in a purported realisation
of the trustee’s personal right of indemnity. However, the Bankruptcy
Trustees
have indicated that they have kept these funds separate from the
personal estate of Mr Lee and they are prepared to deal with the
funds in the
manner in which the Court directs. It is presumed that, by this the Bankruptcy
Trustees accept that if the funds ought
not to have been paid to them by Mr
Lee’s solicitors consequent upon their demand, they will deal with the
funds as they ought
to have been dealt with in the first instance.
- In
the course of the administration of Mr Lee’s estate, the Bankruptcy
Trustees recovered an unfair preference payment of $322,447.58
from the ATO
which had been paid by Mr Lee in discharge of taxation liabilities arising from
the operation of the Subway franchise.
On the return of the money from the ATO
it was apportioned between the trust on the one hand and Mr Lee’s personal
estate
on the other. The rationalisation for this was that Mr Lee had used an
amount of $171,659.00 of his own funds to pay part of the
tax debt such that it
was appropriate to return an equal amount to his estate on the transaction being
rendered void. The Deputy
Commissioner has asserted that the whole of the funds
should form part of the personal estate of Mr Lee so as to be available for
all
creditors. This was a submission made in writing well after the oral hearing
had been concluded and it is dealt with at the
end of these reasons.
- In
their written submissions the Bankruptcy Trustees identified that at the date of
the filing of this application the creditors of
Mr Lee in his capacity as
trustee were the following:
(a) ATO (superannuation liability in respect
of the Subway employees) in the amount of $128,574.88;
(b) ATO (trust tax liability) in the amount of $1,037,171.40;
(c) Bevmont Pty Ltd as trustee for the Lee Family Trust in the amount of
$330,000; and
(d) Janet May Lee in the amount of
$73,727.37.
- Further,
the Bankruptcy Trustees assert that Mr Lee’s personal creditors were as
follows:
(a) ATO (personal taxation liability) in the
amount of approximately $295,291.71;
(b) Janet May Lee in the amount of $27,000;
(c) Westpac Bank in the amount of $26,363.26; and
(d) the Lee Family trust in the amount of $399,720 (which appears to be a loan
made to Mr Lee by the trust).
- The
ATO has given notification that its claim against Mr Lee of $128,574.88 is the
subject of a Superannuation Guarantee Charge (SGC)
with the result being that it
is entitled to the payment of that amount as a priority pursuant to s 109(1)(e)
of the Act. This superannuation
liability arose in the course of conducting the
Subway franchise and it is a liability of the trust. However, r 6.02 of the
Bankruptcy Regulations 1996 (Cth) limits the amount of any such priority
under s 109(1)(e) at a set amount per employee with the consequence that the
ATO’s
priority amount will be capped at $100,969.52. That leaves a
shortfall to be recovered as a non-priority trust debt in the sum of
$27,605.36.
- The
asset and liability position of the bankrupt’s estate and the trust are as
follows:
(a) Mr Lee’s estate has assets of
$183,750.22 and creditors of $876,949.85; and
(b) The trust creditors total $1,317,165.35 and the trust assets are said to be
$599,782.02.
- The
Bankruptcy Trustees have now finalised all recovery actions, have ascertained
all known unsecured creditors and are in a position
to distribute the funds
under their control. However, due to some legal uncertainties they seek
directions as to the appropriate
method of disposal. In that respect, at
paragraph 20 of their written submissions (filed 22 May 2017) they
submit:
A number of the issues the subject of the directions
sought have no direct legal authority that has been located, and others are the
subject of conflicting or inconsistent single judge and intermediate appellate
decisions.
There is no doubt that there exists some not-insubstantial uncertainty and
confusion in this area of the law as is evidenced by the
numerous inconsistent
authorities and commentaries which surround it. In that environment it is not
surprising that the Bankruptcy
Trustees made this application for directions and
other relief. It appears from the material filed that all persons who have an
interest in the outcome of this application have been served or notified of it.
Only the Deputy Commissioner of Taxation has appeared
to make
submissions.
The making of an application for directions under the
Bankruptcy Act
- As
mentioned, this application purports to be made by the Bankruptcy Trustees
pursuant to ss 90-15(1) and 90-20(1)(a) of sch 2 of the Act which affords the
Court power to make any orders it thinks fit in relation to the administration
of
a regulated debtor’s estate. By s 5-15 of that schedule, a
“regulated debtor” includes a person who is bankrupt.
Section
90-15(1) appears to have replaced, in part, the now repealed s 134(4) which had
permitted a bankruptcy trustee to make an
application to the court for
directions.
- For
present purposes the relevant parts of s 90-15 provides:
90-15 Court may make orders in relation to estate
administration
Court may make orders
(1) The Court may make such orders as it thinks fit in relation to the
administration of a regulated debtor’s estate.
...
Examples of orders that may be made
(3) Without limiting subsection (1), those orders may include any one or more
of the following:
(a) an order determining any question arising in the administration of the
estate;
...
(f) an order in relation to remuneration, including an order requiring a person
to repay to the estate of a regulated debtor, or
the creditors of a regulated
debtor, remuneration paid to the person as trustee.
- The
power conferred by this section is wide and obviously intended to facilitate the
resolution of contentious matters as they arise
in the course of the
administration of a bankrupt’s estate. It is not limited to the making of
directions as was the former
s 134(4) which was encumbered with various inherent
limitations (See Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111
and the cases cited therein). The power granted by s 90-15 is sufficiently wide
to make the directions or give the relief which
is sought in the
Application.
Whether the funds are to be distributed to all creditors or
only to “trust creditors”
- The
first question raised by the Bankruptcy Trustees in relation to the use of the
funds held by them allegedly as proceeds of the
right of indemnity is stated in
the following terms:
Whether the $599,782.02 received by the applicants
pursuant to Warwick Gordon Lee’s right of indemnity as trustee... be
distributed
amongst creditors of Mr Warwick Gordon Lee as trustee or amongst
creditors of both Mr Warwick Gordon Lee as trustee and Mr Warwick
Gordon Lee
personally.
- As
posed, the question fails to acknowledge some of the more difficult issues
surrounding the nature of a trustee’s right of
indemnity and the manner in
which it might be dealt with by those who administer the insolvency of a trustee
and in whom such indemnity
is vested. Much has been said in the recent
authorities and commentaries concerning these issues and there is a danger that
adding
to that discussion might only serve to confuse rather than elucidate.
However, whilst both of the parties before the Court acknowledged
the acute
difficulty of the issues raised, each asserted that their consideration was
essential to the directions and the relief
which the Court is asked to
give.
The statutory regime pursuant to which the issue
arises
- In
this matter it is the provisions of the Act which fall to be construed and
applied. In many of the authorities to which reference
was made in the course
of argument, it was the cognate insolvency provisions of the relevant
companies’ legislation which were
the subject of consideration. Whilst,
in some cases, differences in the various insolvency regimes may provide a
legitimate ground
for distinguishing certain decisions, the essential issue
raised in cases of this ilk, concerns the manner in which a trustee’s
right of indemnity can be utilised by those responsible for administering the
estate or property of the insolvent trustee. Neither
the nature of that right
nor the manner in which it is held by a trustee, will alter depending upon
whether the trustee is an individual
or a corporation. On the other hand, the
method by which the property of the insolvent trustee might be disposed of under
the alternative
insolvency regimes may provide some legitimate ground of
differentiation. That being so, it is necessary to consider the legislative
context in which the assets and rights of the bankrupt are to be administered
under the Act.
- Section
58 of the Act causes certain property to vest in the bankruptcy trustees on an
individual’s bankruptcy. Relevantly,
that section provides:
58 Vesting of property upon bankruptcy-general
rule
(1) Subject to this Act, where a debtor becomes a
bankrupt:
(a) the property of the bankrupt, not being
after-acquired property, vests forthwith in the Official Trustee or, if, at the
time when
the debtor becomes a bankrupt, a registered trustee becomes the
trustee of the estate of the bankrupt by virtue of section 156A,
in that
registered trustee; ...
- The
expression “the property of the bankrupt” as it is used in s 58 is
defined in s 5 of the Act, inter alia, as follows:
the property of the bankrupt, in relation
to a bankrupt means:
(a) Except in subsections 58(3) and (4):
(i) the property divisible among the
bankrupt’s creditors; and
(ii) any rights and powers in relation to that property that would have been
exercisable by the bankrupt if he or she had not become
a bankrupt;
...
- The
meaning of the phrase “property divisible among the bankrupt’s
creditors”, is explained in s 116 of the Act
in the following
terms:
116 Property divisible among
creditors
(1) Subject to this
Act:
(a) all property that belonged
to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has
been acquired or is
acquired by him or her, or has devolved or devolves on him
or her, after the commencement of the bankruptcy and before his or her
discharge; and
(b) the capacity to exercise, and to take proceedings for exercising all such
powers in, over or in respect of property as might
have been exercised by the
bankrupt for his or her own benefit at the commencement of the bankruptcy or at
any time after the commencement
of the bankruptcy and before his or her
discharge;
...
is property divisible amongst the creditors
of the bankrupt.
(2) Subsection (1) does not extend to the following
property:
(a) property held by the
bankrupt in trust for another
person.
- In
the interpretation of the expression “the property divisible among
creditors”, consideration must also be given to
the separate definition of
“property” in s 5 which is:
“Property means real or personal
property of every description, whether situate in Australia or elsewhere, and
includes any estate, interest
or profit, whether present or future, vested or
contingent, arising out of or incident to any such real or personal
property.”
- Reference
also needs to be made to the provisions empowering the bankruptcy trustees to
pay the claims of the creditors. These provisions
are contained in Division 2
of Part VI which is headed “Order of Payment of Debts”. In
particular s 108 provides:
108 Debts proved to rank equally except as otherwise
provided
Except as otherwise provided by this Act,
all debts proved in a bankruptcy rank equally and, if the proceeds of the
property of the
bankrupt are insufficient to meet them in full, they shall be
paid proportionately.
- Section
109 of the Act imposes an order of priority in respect of the payment of debts
from the “proceeds of the property of
the bankrupt” and the
chapeaux of s 109(1) provides:
109 Priority payments
(1) Subject to this Act, the trustee must,
before applying the proceeds of the property of the bankrupt in making any other
payments,
apply those proceeds in the following
order:
Thereafter, the subparagraphs of subsection (1) establish the priority regime
for payments from the proceeds which are realised from
the bankrupt’s
property.
- The
expression “proceeds” in the phrase “proceeds of the
property” as used in ss 108 and 109, has the usual
meaning of the
“sum, amount, or value of land, investments, or goods, etc., sold, or
converted into money” as defined
in Jowitt’s Dictionary of
English Law (4th ed), p 1920. Indeed, given the context, it is
likely that it means the “net proceeds” of realisation after the
expenses
of sale are deducted. (See the definition of “proceeds” in
Stroud’s Judicial Dictionary (9th ed)).
- It
can be immediately observed from this suite of provisions that the
“property of the bankrupt” which vests in a bankruptcy
trustee is
not necessarily the property which is actually distributed to the creditors once
the estate is otherwise fully administered.
Whilst under s 58(1)(a) the
bankruptcy trustee takes possession of all of the “property of the
bankrupt” (ss 58 and
116), it is only from the “proceeds” of
the realisation process that payments are made to the creditors under ss 108
and
109 (cf s 134(1)(ac)). Occasionally, some of the bankrupt’s property is
not capable of being realised so as to produce
“proceeds”. It may
be of such a nature that possession of it results in additional expense to the
holder. This may
occur in the case of a lease or mortgaged land where the
income or anticipated realisation to be derived is less than the cost of
its
retention and maintenance. In those circumstances the bankruptcy trustee has
power to disclaim the onerous property (s 133 of
the Act). Other property of
the bankrupt, which may be in the nature of rights or powers, may be productive
of little or no realisation
due to their inherent limitations. Consequently,
the “proceeds” which are to be used to meet the creditors’
claims
in accordance with the priority provisions, are not equivalent to the
“property of the bankrupt” which vests in the bankruptcy
trustee on
the making of the sequestration order.
- It
did not seem to be disputed before the Court that an insolvent trustee’s
right of indemnity from trust assets might be within
the description of
“property” which vests in a bankruptcy trustee, although it was also
acknowledged that there are a
variety of inconsistent authorities on this issue.
Generally, the authorities (albeit from a corporate insolvency context) which
hold that the right of indemnity is not property which vests in the bankruptcy
trustees, do so on the basis that the indemnity is
effectively “trust
property”, see for instance Re Independent Contractor Servicers (Aust)
Pty Ltd (in liq) [2016] NSWSC 106; (2016) 305 FLR 222 and Re Amerind Pty Ltd (in liq)
[2017] VSC 127.
- Putting
aside for one moment the impact of s 116(2)(a) of the Act, it can be readily
accepted that an insolvent trustee’s equitable
right to be indemnified in
respect of liabilities incurred in the not-improper administration of a trust,
would be within the concept
of “property divisible amongst the creditors
of the bankrupt”. The right to be indemnified out of trust assets is
personal
property, being a right to exercise power with respect to
“property” within the meaning of s 116(1)(b) as informed by
the
definition of s 5. Not insignificantly, there are also a number of authorities
which have held that a trustee’s right
of indemnity is part of a
trustee’s personal estate which will pass to a bankruptcy trustee in the
event of the trustee’s
insolvency. Some of the more significant are
Savage & Whitelaw v Union Bank of Australasia Ltd [1906] HCA 37; (1906) 3 CLR 1170
at 1188 and 1196; Octavo Investments v Knight [1979] HCA 61; (1979) 144 CLR 360 at
367-368 (Octavo) and In re Suco Gold (1983) 33 SASR 99 at 102
(Re Suco Gold). On one view, the binding effect of these authorities
might be thought of as foreclosing most of the issues concerning the first
question asked of the Court on this application. However, as certain recent
decisions have suggested that a trustee’s right
of indemnity is actually
property held “on trust” such that it falls within the meaning of s
116(2)(a) (or not property
of the company in a corporate insolvency), the
question requires further consideration. It is also appropriate to acknowledge
that
there exists an argument that the decision in Octavo did not
expressly identify the scope of creditors whose claims may be met by the use of
the right of indemnity. In that case all
of the creditors were trust creditors
and it has been said that the High Court did not expressly hold that the right
of indemnity
could not be utilised to meet the claims of non-trust creditors.
This is also a matter which requires detailed consideration.
Nature of the trustee’s right of indemnity
- In
the course of submissions it was suggested that one explanation for the
inconsistency amongst the authorities concerning the use
of a trustee’s
right of indemnity in an insolvency context, was a somewhat less than strict
adherence to the doctrine of precedent
in relation to certain High Court
decisions, including Octavo. Whilst there is possibly some force in that
submission, it is more likely that, properly analysed, conflicts between some of
the
authorities are more apparent than real and that the distinguishing of the
various High Court authorities can be legitimately defended.
However, it is
true that it is not possible to reconcile all of the authorities, some of which
are diametrically opposed.
- It
is apt to keep in mind in the consideration of the authorities that the rights
of exoneration and recoupment from the trust assets
which are considered in this
matter, are only part of the protection afforded to a trustee in relation to
liabilities not-improperly
incurred in the performance of a trust. For example,
in the absence of contrary provisions in the trust instrument, a trustee is
also
entitled to a personal indemnity from the beneficiaries who are all sui
juris and absolutely entitled to the trust assets in relation to all debts
and liabilities incurred in the performance of the trust; (Hardoon v Belilios
[1901] AC 118; Balkin v Peck (1998) 43 NSWLR 706); a trustee has a
right to retain the interest of a beneficiary who owes the trustee money (Re
Akerman [1891] 3 Ch 212 at 219); trustees have a right to contribution
and/or indemnity from any co-trustee in relation to the trust debts and
liabilities;
and a trustee can impound the interest of a beneficiary who has
instigated or requested that the trustee act in a way which involves
a breach of
trust (Fletcher v Collis [1905] 2 Ch 24 at 30-32). The essential point
is that the trustee has a number of rights which are inherent to their position
and which operate
to hold them harmless from liabilities incurred in the
fulfilment of their duties. The entitlement to an indemnity from the trust
assets is merely part of that suite of rights. Whilst these various rights have
the effect of preventing or avoiding any diminution
of the trustee’s
personal estate, they do not all operate by way of replenishing the
trustee’s estate once the trustee
has personally incurred a debt or
liability. Some of them operate by exonerating the trustee from liability by
ensuring that a trustee
is not required to discharge a trust liability in the
first place.
- As
the trustee is personally liable for the debts incurred in the conduct of a
trust, it is a necessary incident of the office of
trustee that they have an
entitlement to indemnity out of the trust assets for all charges, expenses and
liabilities appropriately
incurred. That principle, which was stated by Lord
Eldon LC in Worrall v Harford [1802] EngR 342; (1802) 8 Ves 4; 32 ER 250, it is now
enshrined in most State legislation regulating trusts. For the purposes of the
trust instrument before the Court the
relevant legislative provision is s 72 of
the Trusts Act 1973 (Qld) (Trusts Act) which provides:
72 Reimbursement of trustee out of trust
property
A trustee may reimburse himself or herself for or pay or discharge out of the
trust property all expenses reasonably incurred in
or about the execution of the
trusts or powers.
In this case, the trust instrument itself also makes provision for the
trustee to have a right of indemnity from the assets of the
trust in a similar
manner. By clause 21 of the trust instrument it is provided that:
INDEMNITY OF TRUSTEES
- The
Trustee shall be indemnified and held harmless out of the Trust Fund against all
claims, costs, damages, losses, fees, expenses,
taxes, duties and impositions
which arise in connection with or in consequence of this Deed or the Trusts
hereby created except to
the extent that the same arises from the
Trustee’s own dishonesty provided that the Trustee shall have not right of
indemnity
against any one or more of the Beneficiaries.
The right of indemnity in the trust instrument is wider than that which exists
in equity or under the Trusts Act, in respect of the range of liabilities
for which the trustee is indemnified. In equity, the trustee’s right of
indemnity
only extends to liabilities incurred by the trustee in the
“proper performance of the trust” and to tortious liability
where
that liability has been incurred in the “not improper” performance
of the trust (In re Blundell; Blundell v Blundell (1889) 40 Ch D 370 at
376-7; Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 104 per King CJ). By
comparison, the scope of the indemnity provided for in the trust deed in this
case extends to any expense
or liability arising in connection with the trust
save to the extent to which it arises by the trustee’s own dishonesty.
Otherwise,
the expression “shall be indemnified and held harmless”
in clause 21 connotes the same procedure for satisfying the indemnity
as exists
in equity; namely the reimbursement of expenses paid by the trustee or the
direct payment of liabilities from the assets
of the trust.
Two alternative rights of indemnity – recoupment and
exoneration
- As
appears from the statement of the principle in s 72 of the Trusts Act,
the right of a trustee to be indemnified from the assets of the trust
falls into two distinct parts. First, where a trustee has discharged
a trust debt out of their own funds, the trustee is entitled to reimbursement
out of the trust funds
in an equivalent amount. That occurs by money being
transferred from the trust funds to the trustee who receives an absolute,
beneficial
interest in that money. That right in relation to satisfied trust
liabilities is often referred to as the right of “recoupment”.
Second, the trustee is entitled to meet unsatisfied trust debts
directly from the trust assets by utilising the right of
“exoneration”. Pursuant to this right, the trustee directly applies
trust assets to discharge the indebtedness by paying trust funds directly to the
trust creditor (Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192
CLR 226 at 245–246; Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 105;
Re Exhall Coal Company (Limited) [1866] EngR 131; (1866) 35 Beav 449 [55 ER 970] per Lord
Romilly MR; see also the discussion of the right in H J A Ford, Trading
Trusts and Creditors’ Rights, (1981) 13 Melb LR at 1, 3, 4, 14 –
19 and 26 and the discussion in Hon BH McPherson, “The Insolvent
Trading Trust” in Finn PD (ed), Essays in Equity (Law Book Co,
1985), Chapter 8 at p 147). This process of “exoneration” does not
involve the trustee obtaining any beneficial
interest in the assets which are
used to discharge the trust debts. The nature of the right has been identified
by the learned authors
of Ford & Lee: The Law of Trusts
(Thomson Reuters Westlaw AU online version) at [13:030] in the following
terms:
In a trust of any magnitude the trustees will
necessarily incur administration expenses. They are entitled to, and for
administrative
reasons preferably should, meet those expenses directly
from the trust fund. This inherent right of the trustee is articulated in
trustee legislation
(Emphasis added)
- The
duality of the trustee’s right of indemnity out of trust assets appears in
the statement of principle found in Halsbury’s Laws of England,
Trusts and Powers (Vol 98, 2013, LexisNexis online edition) at
[342]:
A trustee is entitled to be reimbursed from the trust
funds, or may pay out of the trust funds, expenses properly incurred by him
when
acting on behalf of the trust... (Footnotes omitted)
As expressed in that passage, the right of the trustee is either to be
reimbursed for expenses already paid by the use of his or her
own funds, or to
raise funds from the trust estate for the purposes of satisfying the liabilities
which have been incurred. This
position is recognized succinctly in the
commentary to the American Third Restatement of the Law of Trusts (at
§ 88) p 256 in the following manner:
The trustee’s right of indemnification (§
38(2)) entitles the trustee either to pay proper expenses directly from the
trust
estate (exoneration) or to obtain reimbursement from the trust when the
trustee has personally paid those expenses.
That duality is also referred to by the learned authors of Scott and
Ascher on Trusts (5th ed, Wolters Kluwer) at § 22.1.1, p
1627:
The trustee may use trust funds to pay expenses properly
incurred in administering the trust. A trustee who properly incurs an
obligation
on behalf of the trust is entitled to discharge the obligation out of
trust funds, though applicable law designates the obligation
as the
trustee’s own. A trustee has, in other words, not merely a right of
reimbursement for trust expenses already paid out
of the trustee’s own
funds, but also a right of exoneration, i.e., the power to use trust funds to
discharge obligations that
have arisen out of trust administration.
(Footnotes omitted)
- The
important distinction between these two aspects of the trustee’s right of
indemnity is usefully assayed in Ong D, Ong on Subrogation (The
Federation Press, 2014), Chapter 2 and in Mitchel and Watterson, Subrogation,
Law and Practice (Oxford University Press) at Chapter 12. In the former
work (at pp 31 – 32) the learned author identifies that a trustee is
restricted in the use of the right of exoneration to using it for the purpose
of discharging his liability to the trust creditors and no
other.
- Lest
it be thought that the distinction identified above is
“hair-splitting”, it ought to be observed that the duality
of the
right of indemnity from trust assets reflects a similar attribute in the right
of indemnity which the trustee has as against
the beneficiary. In the latter
case, a trustee is entitled to discharge the trust liabilities by use of their
own funds and then
seek to be reimbursed by the beneficiary, or obtain an order
in equity requiring the beneficiary to pay the creditor once the debt
falls due;
Subrogation, Law and Practice at p 428; para [12.11]. The learned authors
of Jacob’s Law of Trusts in Australia (8th ed,
Butterworths, 2006) at [21-05], p 515 identify that the “usual
order will be one requiring the beneficiary to pay the creditor or otherwise
procure the release or
discharge of the trustee”. Where the trustee has
already paid the debt, the beneficiaries will be required to pay an equivalent
amount to the trustee.
- As
the discussion below identifies, some of the authorities concerning the
trustee’s right of indemnity from the trust assets
do not always maintain
this critical distinction between the right of “recoupment” or
“reimbursement” on
the one hand and the right of
“exoneration” on the other. However, the distinction is
fundamental. If what comes into
the hands of a bankruptcy trustee is a
trustee’s right of recoupment, it is a right to take money from the trust
funds for
the benefit of the insolvent trustee’s estate. It is, in
effect, the payment of an amount owing to the trustee for the purposes
of
reimbursing the trustee’s personal estate. Such a payment is received by
the bankruptcy trustee as part of the bankrupt’s
personal estate and is
available to meet the claims of both trust and non-trust creditors. However,
the position is markedly different
when what the bankruptcy trustee receives is
merely a right or entitlement to have trust assets applied to discharge trust
debts.
That is a considerably more limited right.
- The
distinction between the right of recoupment (or reimbursement) on the one hand
and the right of exoneration on the other was emphasised
in In re Richardson
[1911] 2 KB 705. That case concerned a bankruptcy trustee’s
entitlement to the benefit of the insolvent trustee’s right of indemnity
from a beneficiary. At 711, Cozens-Hardy MR, in effect, held that where the
trustee has paid a trust debt out of his own money,
the right of reimbursement
is the trustee’s own property absolutely and, if the trustee is insolvent,
any bankruptcy trustee
might use that right of reimbursement for the benefit of
all of the creditors of the trustee’s estate. However, the right
of
exoneration is merely a power which is exercisable by the trustee solely for the
purposes of paying the expenses of the trust.
That latter conclusion is in
keeping with the remedy which would be awarded in an action to enforce the
right; being that the beneficiary
would be ordered to pay the creditor directly
once the debt has become owing Mitchell and Watterson, Subrogation, Law and
Practice (Oxford University Press, (Rev ed) 2007) at p 428; The Law of
Contribution and Reimbursement (Oxford University Press, 2003, para
[14.38]–[14-45]). Although in In Re Richardson the Master of the
Rolls was dealing with a trustee’s right of indemnity from a sui
juris beneficiary rather than any right of exoneration out of the trust
assets, the relevant distinction between exoneration and recoupment
necessarily
appears from his Lordship’s reasons.
- The
decision of In re Richardson also supports the proposition that, whilst
in a bankruptcy administration a right of exoneration might vest in the
bankruptcy trustee,
it does not change its character to become a right to use
trust funds to pay non-trust creditors. If the right of exoneration is
limited
in the trustee’s hands, it is equally limited in the hands of the
bankruptcy trustee. Neither the trustee nor, in
his stead, the bankruptcy
trustee, is entitled to use funds which are the subject of the right of
exoneration to discharge non-trust
liabilities (In re Richardson [1911] 2
KB 705 at 714, per Fletcher Moulton LJ). These principles hold true even though
in In Re Richardson the right of exoneration from the beneficiary may
have been wider in different circumstances.
- The
nature of the right of exoneration as a mere right or power to use trust funds
to meet debts incurred in the operation of the
trust, can also be detected in
the origins of the rights of trust creditors to be subrogated to that right on
the trustee’s
insolvency. This right evolved as a remedy in an
administration action where the creditors of the executors, were entitled to
prove
in the estate under the administration decree and, where their debts were
accepted, they would be paid directly out of the estate.
The trustee was not
entitled to assume beneficial ownership of the funds for the purposes of
discharging the trust debts (see the
discussion by HJA Ford in Trading Trusts
and Creditors’ Rights, (1981) 13 Melb LR 1, 18 – 19).
- In
the context of this consideration of the nature of the rights of recoupment and
exoneration, it is important to observe that there
is no “third
entitlement” of a trustee to indemnification for trust expenses and
liabilities out of the assets of the
trust estate. Particularly, there is no
right for the trustee to take from the trust a sum of money equivalent in amount
to the
existing trust debts and for the trustee to appropriate that money to
themselves with the intention of paying the trust debts out
of their own assets
which have been swelled by the trust funds. Prima facie, that would constitute
a breach of trust on the basis
that the trustee would be profiting from his
position by assuming beneficial ownership of trust property (In re
Johnson (1880) 15 Ch D 548 at 552). There does not appear to be any express
judicial authority for the existence of such a right save that the reasons of
Lush
J in Re Enhill Pty Ltd [1983] VicRp 52; [1983] 1 VR 561 at 568, might be taken as
inferentially supporting its existence. It is a view that was rejected by the
reasoned observations of
King CJ in Re Suco Gold at pp 105–106 who
held that, if the trustee takes trust funds into his possession for the purposes
of meeting trust debts, the
funds do not lose their character as trust property
(see also Re Matherson [1994] FCA 1021; (1994) 49 FCR 454 at 466.) Despite that, it
should be recognised that in Grime Carter & Co Pty Ltd v Whytes Furniture
(Dubbo) Pty Ltd [1983] 1 NSWLR 158, McLelland J identified that this
“third entitlement” of a trustee to appropriate funds beneficially
to themselves was
assumed to exist in the decision in Re Enhill. His
Honour said (at p 161):
In the judgment of the Full Court of the Supreme Court
of Victoria in Re Enhill Pty Ltd [1983] VicRp 52; (1982) 7 ACLR 8, the existence of this
third element in a trustee's entitlement to indemnity was certainly assumed, and
must be taken as having been
decided. In that case the court expressly declined
to follow the decision of Needham J in Re Byrne Australia Pty Ltd and the
Companies Act [1981] 1 NSWLR 394 (and see Byrne Australia Pty Ltd and the
Companies Act (No 2) [1981] 2 NSWLR 364) in which it had been held that a
trustee's entitlement to indemnity out of trust assets in respect of trust
liabilities did not authorize
appropriation of trust funds to the trustee's
general estate free of any obligation to apply them in satisfaction of trust
liabilities.
In each case a specific question before the court was whether trust
assets might be applied by the liquidator of a company which
was a trading
trustee, in satisfaction of the costs and expenses of the winding up, including
the liquidator's remuneration. This
question was decided in the negative in
Re Byrne Australia Pty Ltd and in the affirmative in Re Enhill Pty
Ltd.
- The
difficulty with his Honour’s approach was the acceptance of an implicit
assumption of the existence of a hitherto unknown
“third
entitlement” as part of the trustee’s right of indemnity in the
absence of any supporting authority or principled
analysis justifying its
existence. Whether that was a correct approach or not need not be considered
further as the decision in Grime Carter & Co predated that of the
South Australian Full Court decision in Re Suco Gold which eschewed the
existence of any such entitlement. Indeed, subsequently in Re ADM Franchise
Pty Ltd (1983) 7 ACLR 987, McLelland J recanted his earlier reliance on
Enhill. Instead, he followed Re Suco Gold and accepted that no
such third entitlement existed.
- An
accurate analysis of the nature and scope of the trustee’s right of
exoneration as opposed to the right of recoupment, was
undertaken by Farrell J
in Woodgate, in the matters of Bell Hire Services Pty Ltd (in liq) [2016]
FCA 1583 (Bell Hire Services). There, the liquidator of a corporate
trustee applied for directions under both the Corporations Act 2011
(Cth) and the Trustee Act 1925 (NSW). The insolvent
company’s sole undertaking had been that of conducting a business as
trustee of a family trust. No replacement
trustee had been appointed and the
company retained possession of the trust assets. In dealing with an argument as
to how the costs
of the winding up were to be paid, Farrell J succinctly
identified the distinction between the right of recoupment and the right
of
exoneration and the different ways in which they might be utilised by a
liquidator. At [36] – [37] her Honour said:
[36] The fact that the trustee enjoys an indemnity
secured generally over trust property and that it is proprietary in nature does
not automatically bring trust property within the general pool of
creditors’ claims in a winding up or the statutory order
of priority for
payment. A trustee company is not entitled, in exercise of its indemnity, to
appropriate trust property before payment
of a trust debt so that the amounts
appropriated become available to the company’s creditors generally in the
liquidation.
It is only if the creditors of the trust have been paid out of the
trustee company’s own funds that the company’s general
creditors are
entitled to be paid out of trust assets appropriated to satisfy the
trustee’s right of recoupment; the statutory
order of priority for payment
then applies. Unpaid trust creditors are entitled to stand in the shoes of the
trustee and to obtain
payment from the trust property; the right of subrogation
must be exercised in their favour; trust property is therefore not property
divisible among the trustee’s creditors generally and the statutory order
priority does not apply.
[37] It has been observed that careful attention must be paid to whether the
trustee’s indemnity is being asserted as a right
of recoupment or
exoneration. Where it is exoneration, the trustee may resort to trust property
only for the purpose of discharging
trust liabilities. “Company law
ends and trust law takes over” at a point earlier than where the right
being exercised is the right of recoupment: see the useful discussion in
D’Angelo, N “Commercial trusts in practice: the trust as a
surrogate company” (Paper presented at the Annual Commercial and
Corporate Law Conference, Supreme Court of New South Wales, 15 November 2016)
and in his book Commercial Trusts (LexisNexis Butterworths, 2014),
particularly at 5.124–5.127 under the heading “The true nature of
the exoneration limb:
a power to apply assets for the benefit of
creditors”. I endorse that view. It is inconsistent with principle to
apply the
statutory order of priority for payment of the company’s debts
out of its own property to the order of distribution of trust
property. That
this might result is two regimes (for trust property and property of the
company) is unfortunate, but it is something
which courts have had to
accommodate.
- Her
Honour’s exhortation to precision when identifying the nature of the
trustee’s right of indemnity is most appropriate
and, when an issue arises
concerning the manner in which the right of exoneration might be dealt with, it
is necessary to constantly
keep in mind her Honour’s adept description of
the very limited nature of that right being that “the trustee may resort
to trust property only for the purpose of discharging trust liabilities”.
The equitable lien which supports the rights of exoneration
or recoupment
- The
trustee’s right of indemnity (whether it be the right of
“recoupment” or “exoneration”) is protected
by an
equitable lien or charge which, subject to any term in the trust deed to the
contrary, entitles the trustee to retain possession
of the trust assets against
the beneficiaries (or possibly new trustees; as to which see Rothmore Farms
Pty Ltd v Belgravia Pty Ltd (1999) 2 I.T.E.L.R. 159, referred to in Hayton
D, Matthews P and Mitchell C, Law of Trusts and Trustees (18th
ed) (Butterworths: LexisNexis, 2010), para [81-33]) until the trustee’s
liabilities have been discharged. The lien is enforceable
against the trust
assets even after they have passed from the original trustee’s possession
and have vested in a new trustee.
It also has the effect of conferring a
priority in the administration of the trust in favour of the trustee over the
beneficiaries
(Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR
226 (Buckle) at 245 – 246; Re Exhall Coal Company (Limited)
[1866] EngR 131; (1866) 35 Beav 449 [55 ER 970]).
- The
impact of the existence of the right of indemnity and associated lien on the
trust assets is far from clear. In Buckle it was suggested that, despite
the existence of the trustee’s indemnity and lien, the beneficial interest
of the beneficiaries
in the assets of the trust remains
“unencumbered”, although the proprietary rights in respect of those
assets were ordered
in such a way that the trustee’s interest prevailed.
It was explained that, the assets which were held upon the terms of the
trust
were not “trust assets” to the extent to which they were subject to
the trustee’s right of indemnity because
the “trustee’s right
to exoneration or recoupment ‘takes priority over the rights in or in
reference to the assets
of beneficiaries or others who stand in that
situation’” (at 247). That said, the High Court also accepted that
the
trustee’s interest was a “beneficial interest” in the
trust assets to the extent of the value of the right of indemnity
and that a
court would authorise the sale of trust assets to satisfy the right to
recoupment or exoneration. In substance that is
effectively an equitable charge
over the “trust assets” which protects the trustee’s rights.
However, the Court
was clear that the trustee’s interest in the trust
assets did not amount to a security interest or right (at 247). Similar
views
were expressed in Octavo (at 367) where it was held that the effect of
the indemnity and lien is that the trust assets are subject to the beneficial
interests
of the trustee in priority to that of the beneficiaries. The
consequence of this was (at 370) that the trustee’s interest
in the trust
property amounted to a “proprietary interest” and was not property
held in trust for another person for
the purposes of s 116(2) of the
Bankruptcy Act. In Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 104
King CJ identified the “beneficial interest” as only consisting of
the right of indemnity and a supporting lien.
- After
a careful analysis of these issues by Robson J in Re Amerind Pty Ltd (in
liq) [2017] VSC 127 at [96] (Amerind), his Honour reached the
contrary conclusion, namely that the right of indemnity itself was “trust
property” and not a
personal asset of the trustee. As such, it was a
right which could only be used to meet trust debts rather than the personal
debts
of the trustee. In part, his Honour reached this conclusion on the basis
that the lien which supported the right of indemnity gave
the trustee (and the
creditors by subrogation) an interest in the trust assets and any money arising
from the enforcement of the
lien would necessarily be trust money (see
Amerind at [51], [53] and [256]). With respect to the learned Judge,
that reasoning tends to elevate the equitable lien above the right of
exoneration which the lien exists to protect. Additionally, the lien merely
impacts upon the beneficiaries’ beneficial ownership
of the trust assets
by affecting those rights to the extent to which the lien will be enforced by
the Court at the suit of the trustee.
As was said in Buckle, “to
the extent that the trust assets held by the trustee are subject to their
application to reimburse or exonerate the trustee,
they are not “trust
assets” or “trust property” in the sense that they are held
solely upon trusts imposing
fiduciary duties which bind the trustee in favour of
the beneficiaries.” (at 246; [48]). The comments in the unanimous
decision
of the High Court in CTP Custodian Pty Ltd v Commissioner of State
Revenue (Vic) [2005] HCA 53; (2005) 224 CLR 98, 120-121; [50]-[51] are to a similar effect.
There the High Court identified that the assets of the trust could not be
identified
until the rights of reimbursement and exoneration were satisfied. In
other words, the trust assets were those assets which were
held by the trustees
less the amount of value of the trustee’s right of indemnity. In this
respect Robson J’s view that
the trustee’s right of indemnity is
“trust property” does not seem to be entirely consistent with the
views of
the High Court as expressed in the two cases mentioned above.
- The
nature of the trustee’s right in the assets held on trust arising from the
right of indemnity has, historically, been regarded
as a “right”
over the assets which are held on trust and, as such, when ascertaining the
trust assets, the value of the
trustee’s charge is to be deducted from the
trust property as a whole (Re Exhall Coal Company (Limited) [1866] EngR 131; (1866)
35 Beav 449 [55 ER 970]). The concept of the “trust property as a
whole” is different to that of the “property belonging to the
beneficiaries”.
The latter can only be ascertained after the value of the
trustee’s charge is deducted from the former as the property which
is held
upon trust is subject to the incidents of the trustee’s office in priority
to the rights of the beneficiaries. One
of those incidents is the right of
indemnity which applies indifferently across all of the assets held on trust.
In this respect
the interest of the trustee in the assets held on trust is more
aptly identified as being a paramount beneficial interest in the
assets of the
trust rather than a security interest or part of the “trust
property” (Buckle at 247; Octavo at 367; Ong D, Ong on
Subrogation, The Federation Press, 2014 at p 17).
- Additionally,
as the lien which protects the right of exoneration is merely an equitable lien,
it is only enforceable by judicial
sale or by the appointment of a receiver and
the making of an order by the Court that the trustee is to be reimbursed or
exonerated.
A trustee has no further “ownership rights” which,
necessarily, would need to exist before a trustee would be entitled
to the
remedy of foreclosure or sale out of Court (Lemery Holdings Pty Ltd v
Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 at 553-554 at [18];
Melbourne Tramways Trust v Melbourne Tramway & Omnibus Company Ltd
[1887] VicLawRp 96; (1887) 13 VLR 487 at 490; Re Pumfrey (1882) 22 Ch D 255 at 262; In Re
Stucley [1906] 1 Ch 67). Given the above, it is difficult to ascertain how
these limited rights in the trustee could be described as amounting to
“trust
property” which is legally owned by the trustee but which
beneficially belongs to the beneficiaries and which is only to be
used for their
benefit.
- The
fluctuating and fluid nature of the right of indemnity and supporting lien is
reflected in its characteristic that it is not limited
to the assets in the
trust at the time when the trust liability was incurred, but applies over all
assets of the trust under the
control of the trustee (Dowse v Gorton
[1891] AC 190 at 206; Re Amerind Pty Ltd (in liq) [2017] VSC 127 at
[102]). Additionally, it is not limited temporally or in relation to any
specific asset of the trust and it does not apply differentially
to particular
assets of the trust (Octavo at 367).
- The
right of exoneration is also subject to the state of accounts as between the
trustee and the beneficiaries. If that is in favour
of the beneficiaries, there
is nothing to which any creditor might be subrogated. This was identified by
Jessel MR in In re Johnson (1880) 15 Ch D 548 at 552 – 3 where his
Lordship said:
But if the trustee has wronged the trust estate, that
is, if he has taken money out of the assets more than sufficient to pay the
debts, and instead of applying them to the payment of the debts has put them in
his own pocket, then it appears to me there is no
such equity, because the
cestuis que trust are not taking the benefit. The trustee having
pocketed the money, the title of the creditor, so to speak, to be put in the
place
of the trustee, is a title to get nothing, because nothing is due to the
trustee. It does not appear to me that in the case the
creditor, who has never
contracted for anything who has only got the benefit of this equity, if I may
say so, by means of the trustee,
through the lucky accident of there being a
trust, ought to be put in a better position than any other
creditor.
This passage highlights that a trustee’s entitlement to indemnity is
subject to the rule in Cherry v Boultbee [1839] EngR 1099; (1839) 4 Myl & Cr 442; 41 ER
171 which is sometimes mistakenly referred to as the “clear accounts
rule”. The effect of that rule is that a trustee’s
right of
indemnity might be limited by any “offsetting” liability which the
trustee owes to the trust estate. The extent
of the right of indemnity is the
net value of the expenses properly incurred less any amount which is owed by the
trustee to the
estate.
- During
the course of submissions, it was suggested that the “clear accounts
rule” only applied to tortious wrongs which
were committed by the trustee
and that there were no allegations in this case of any such wrongdoing which
would operate to limit
the trustee’s right of exoneration. That
submission understates the limits of the “clear accounts rule” or,
at
least, the more general rule of which the “clear accounts rule”
is but an example. There is no doubt that the general
principle operates in
circumstances where the trustee has engaged in a breach of trust which has
resulted in loss to the trust, such
that no right of indemnity exists until the
trustee remedies his default (RWG Management Ltd v Commissioner for Corporate
Affairs [1985] VicRp 42; [1985] VR 385 at 397 per Brooking J; Australian Securities and
Investment Commission v Letten (No. 17) [2011] FCA 1420; (2011) 286 ALR 346 at 353 [20] per
Gordon J). However, the rule also extends to any occasion where the trustee is
otherwise indebted to the “trust”.
The following passage from
Jacobs’ Law of Trusts (8th ed) at 514 identifies the rule as
extending to debts as well as tortious liabilities:
The trustee does not always have a right of indemnity.
In the first place, it is submitted that where the trustee is a debtor to the
trust (which can occur without any breach of trust), the indemnity cannot be
exercised without the debt first being repaid by the
trustee (unless the trust
instrument provides to the contrary): this follows from the rule in Cherry v
Boultbee. Hence, if there is any doubt about the matter, both the indemnity
and the lien protecting it may be suspended pending investigation
of the
trustee’s accounts.
- The
reference in that quote to the rule in Cherry v Boultbee might well be
taken as being a reference to a more general rule that “a person cannot
share in a fund in relation to which
he is also a debtor without first
contributing to the whole by paying his debt” (In re Akerman [1891]
3 Ch 212 at 219 (per Kekewich J) and recently, In re Kaupthing Singer &
Friedlander Ltd (No 2) [2011] UKSC 48; [2012] 1 AC 804 at 815. This wider rule applies to
all debts regardless of whether they are ascertained or ascertainable at the
relevant time.
In Re Rhodesia Goldfields Ltd [1910] 1 Ch 239, Swinfen
Eady J refused to allow a right of indemnity to be enforced until a claim that
the trustee was indebted to the trust had
been resolved. His Honour said at 247:
In my judgment the rule is of general application that
where an estate is being administered by the Court, or where a fund is being
distributed, a party cannot take anything out of the fund until he has made good
what he owes to the fund. It is immaterial whether
the amount is actually
ascertained or not. If it is not actually ascertained it must be ascertained in
order that the rights of
the parties may be adjusted, and it would be a strange
travesty of equity to hold that in distributing the fund Partridge was entitled
to be paid at once all that was due to him out of the company’s money, and
subsequently to find, after it had been established
that he owed money to the
fund, that the amount could not be recovered from him.
- This
passage was cited with approval by Ungoed-Thomas J in Selangor United Rubber
v Cradock (No 4) [1969] 1 WLR 1773 at 1778, and, more recently, by the House
of Lords in In re Kaupthing Singer & Friedlander Ltd (No 2) [2011] UKSC 48; [2012] 1
AC 804 at [18]. However, a contrary view as to the extent to which any claim
against the trustee had to be ascertained was suggested in the New
South Wales
Supreme Court (Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in
liq) [2002] NSWCA 29). Despite these interesting authorities, ultimately,
there does not appear to be any dispute as to what liabilities will be taken
into account when considering the balance of account between the trustee and the
beneficiary (Mitchell and Watterson, Subrogation, Law and Practice,
Oxford University Press, (Rev ed), 2007, p 432).
- In
the present matter, the evidence discloses that the trust debts total
$1,569,473.65 and, it is presumed that they were all incurred
in the proper, or
at least not-improper, performance of the trust. In the ordinary course, that
would result in Mr Lee being entitled
to exoneration from the trust assets in
that amount. However, it is said that Mr Lee is indebted to the trust in an
amount of $399,720.
The impact of that is to reduce the quantum of the right of
indemnity (exoneration) to $1,169,753.65 although in a pragmatic sense,
that
does not actually impact upon the worth of the indemnity as the value of the
trust assets is only $599,782.02. Consequently,
whilst there remain assets
which are held upon the terms of the trust, there no longer exists any
“trust assets” in the
sense of assets held only for the
beneficiaries and subject to the fiduciary duties of the trustees. The
trustee’s right of
exoneration has completely overwhelmed the rights of
the beneficiaries.
- This
side excursion into the scope of the clear accounts rule has a particular
relevance in the context of the insolvency administration
of a trustee. The
foregoing brief discussion discloses that the ascertainment of the scope of an
insolvent trustee’s right
of exoneration or recoupment may be no simple
matter. It will often require a consideration and understanding of the state of
the
accounts of the trust and of the personal accounts of the trustee as well as
an examination of the stewardship of the trust by the
trustee. These actions
will necessitate expense and effort and, where the insolvent trustee’s
accounts are not well maintained,
that may be a lengthy and expensive exercise.
This is a pertinent consideration when a Court is asked to give directions about
the
extent to which an insolvency administrator might be entitled to receive
benefits from any fund generated by them for the purposes
of utilising the right
of exoneration to meet the claims of creditors.
Creditors’ rights to subrogation
- Some
authorities which have examined the manner in which a trustee’s right of
indemnity might be dealt with on insolvency have
identified that the trust
creditors’ right of subrogation to the indemnity is important in
ascertaining whether the indemnity
can be used to meet the claims of non-trust
creditors. There is, no doubt, a clear tension between the existence of the
trust creditors’
right to subrogate themselves to the right of exoneration
and the proposition that it is available to be used to meet the claims
of all
creditors. Prima facie, if bankruptcy trustees are entitled to use the right of
exoneration to meet the claims of all creditors,
the trust creditors’
right to subrogation would be inutile.
- One
matter which requires emphasis at this point is that the trust creditors’
right of subrogation only arises in relation to
the trustee’s right of
exoneration. It does not, and cannot, arise in relation to the trustee’s
right of recoupment.
By definition, the trustee’s indebtedness to the
trust creditors will have been discharged to the extent to which the payment
by
the trustee of trust debts out his or her own funds has given rise to the right
of recoupment.
- It
is also of particular importance that the trust creditors’ rights of
subrogation to the trustee’s right of exoneration
only crystallise when
the trustee is insolvent or it is otherwise reasonable to assume that obtaining
a judgment against the trustee
would be pointless (Owen v Delamere (1871)
LR 15 Eq 134 at 139–140 per Sir James Bacon VC; Re Pumfrey
(1882) 22 Ch D 255 at 263 where Kay J identified that before the right of
subrogation arose, it had to be shown that the trustee could not pay and that
every reasonable means of making him pay had been exhausted). Prior to the
insolvency of the trustee or to the inability of the
trustee to pay, trust
creditors have no right to execute against the trust assets. Their only right
is to pursue the trustee in
an action for “debt”. However, in the
event of the trustee’s insolvency, they become entitled to be subrogated
to the trustee’s beneficial interest created by the right of indemnity
(Vacuum Oil Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319). A modern statement
of those principles was succinctly expressed by Wilson J in Zen Ridgeway Pty
Ltd v Adams [2009] QSC 117; [2009] 2 Qd R 298 at [12] – [13]:
[12] ... The creditor's right is derivative of the
trustee’s, and cannot exceed the extent of the trustee's legitimate claim
on the trust estate. Further, it is subject to whatever interests in the trust
assets the trustee has lawfully created in favour
of third parties.
[13] However, the right of access to the trust assets by way of subrogation is
inchoate unless the trustee is insolvent or it is
otherwise reasonable to assume
that obtaining a judgment against the trustee would be pointless. The
following passage from Deancrest Nominees Pty Ltd v Nixon is
apposite to this case:
‘... it has been held that a creditor does not have a right of subrogation
simply by virtue of the existence of a debt owed
to it by a trustee, but it must
reasonably appear, at least, that any attempt to recover the debt from the
trustee would be fruitless.
That is, the right of subrogation does not exist
simply as an alternative means by which a creditor may recover a debt owed by a
trustee. In the present case, there is nothing to suggest that the debt could
not reasonably be recovered by Deancrest from the trustees
concerned.’
(Footnotes omitted)
- It
was this principle, that the trust creditor’s right of subrogation only
arises on the trustee’s insolvency, that was
particularly important to the
conclusion of King CJ in Re Suco Gold at p 108 that the right of
exoneration could not be used to meet the claims of all creditors. There is
much force in his Honour’s
reasoning and, indeed, it complements the
precise identification of the right of exoneration as being merely a right to
meet the
claim of trust creditors out of the assets of the fund. Prior to
insolvency that is the only purpose for which the trustee could
have used the
right and, when insolvency intervenes, the creditors are entitled to seek an
order that the right be exercised for
their benefit. There is nothing which
suggests that the intervention of bankruptcy changes the nature of the right.
That being
so, it is difficult to see how the right might be used to meet the
claims of non-trust creditors.
- The
above analysis is also consistent with the nature of the remedy to which a trust
creditor is entitled when seeking to enforce
the right of subrogation. The
remedy is not for payment of a money sum from the trustee, but for a judicial
sale of trust assets
and the discharging of their debts with the proceeds (Re
Raybould; Raybould v Turner [1900] 1 Ch 199, 201-202).
Some authorities in more detail
- Given
the variety of conclusions which have been reached in the competing authorities
as to whether, on insolvency, a trustee’s
right of exoneration can be
utilised to meet the trustee’s personal creditors, it is necessary to
consider some of those decisions
in greater detail. Before doing so, however,
it is worth observing that, although, some authorities have sought to
distinguish Octavo on the basis that it did not deal with an insolvency
under the present iteration of the companies’ legislation (as opposed
to
the previous regime where certain provisions of the Bankruptcy Act were
incorporated), the substantive point of differentiation has not always been
clearly identified. Under s 116 of the Act the issue
is whether the right of
indemnity is “property of the bankrupt” and so divisible among the
general creditors. Under
the Corporations Act the question is whether it
is property of the company pursuant to s 555 and s 556. It is difficult to
discern that the relatively
minor differences in these regimes for administering
personal bankruptcies and corporate insolvencies, or differences in the
sequential
iterations of company legislation, generate any sufficient rationale
for recasting the nature of a trustee’s right of indemnity.
Whether the
right vests in a bankruptcy trustee or remains in a company under the control of
a liquidator does not seem to relevantly
impact on its nature nor the manner in
which it is able to be used. At the very least, there has been no sufficient
explanation
as to why that would be the case.
- Counsel
for the Bankruptcy Trustees relied upon the decision of Clyne J in Re
Doyle (1943) 13 ABC 128 as supporting the proposition that the right of
exoneration might be applied to meet the claims of non-trust creditors. That
decision,
however, proceeded upon the basis of some incorrect assumptions.
First, at p 132 it was thought that the beneficiaries would have a
continuing interest in seeing that any indemnity provided by them would
be
applied in payment of the trust creditors as those creditors had a right of
subrogation to the trustee’s indemnity from
the trust assets. However,
once a beneficiary has paid the trust creditor or paid to the trustee an amount
equivalent to the trust
debt (assuming that is how the indemnity operates), the
trustee’s right of exoneration from the trust assets no longer exists
and
the trust creditors have no rights of subrogation. Second, also at p
132, it was said that the trust creditors’ rights of subrogation to the
trust assets comes to an end if the beneficiary
assigns their interest in the
trust. Clyne J relied upon Ashburner’s Principles of Equity (2nd
ed) at p 161 in support of that proposition. However, such a proposition is not
consistent with the nature of the right of
exoneration and the entitlements of
the trust creditors, and it is not a proposition which appears at p 161 of the
text cited or
otherwise in that text. The decision is not of assistance in
relation to the right of exoneration from the trust assets.
- In
Octavo the insolvent trustee company, Coastline Distributors Pty Ltd,
whose only business was as trustee of a trust, had made payments to
Octavo
Investment Limited within the six month period prior to its winding up. It was
asserted by the appellant that the payments
were not voidable preferences
because they were made out of “trust funds” in the course of the
trust business and not
from Coastline’s “own money”, such that
the transaction was beyond the scope of s 122 of the Bankruptcy Act as
applied by s 293 of the Companies Act 1961 (Qld). That was
rejected by the High Court which identified (at pp 367–368) that the
beneficial interest which the trust creditors
have by way of subrogation in the
assets held by the insolvent trustee forms part of the property of the bankrupt
which is divisible
amongst the creditors. It held that in order for the payment
to be void as against the bankruptcy trustee, it did not need to be
a payment
from the bankrupt’s own money. Alternatively, it held that a payment out
of trust assets in respect of which a bankrupt
had the legal estate and a
beneficial interest by reason of the right of indemnity, may well have been a
payment out of the bankrupt’s
own money (at p 368). In this latter
respect the majority said (at 369):
Even if we are mistaken in this conclusion, the words
“from his own money” may well be satisfied if a trustee makes
payments
to a creditor out of trust assets in respect of which he has not only
the legal estate but also a beneficial interest to secure his
right to an
indemnity.
- In
rejecting the argument that, what the liquidator was seeking to do by the action
was to render void the surrender of the right
of indemnity and associated lien,
the plurality said at p 369:
Section 122 applies, amongst other transactions, to
a payment made by a prospective bankrupt to a creditor which has the effect of
giving that creditor a preference, priority or advantage over other creditors.
If the present payments had not been made by Coastline
to Octavo then the
liquidator of Coastline would have had access to the charge over those moneys
for the benefit of all its creditors.
The payments therefore were to the
prejudice of the creditors generally and it is those payments which attract
s 122.
Those comments might be taken as suggesting that the right of indemnity was
available to be used to meet the claims of trust creditors
and non-trust
creditors alike. However, it is far more probable that the comments were
intended only to apply to the trust creditors
given that the trustee, Coastline
Pty Ltd, only operated as a trust and had no non-trust creditors.
- The
Court then turned its attention to whether the money paid to Octavo Pty Ltd was
“trust property” and, therefore, was
not property divisible amongst
Coastline’s creditors. It identified that the trustee’s right to be
indemnified from
the trust assets together with the associated lien meant that
the trustee’s interest was a proprietary interest in the assets
held on
trust but was not, itself, trust property. The fact that the assets over which
the trustee’s right existed were trust
assets did not render the
trustee’s right of indemnity a “trust asset” as well. At p
370, their Honours said:
The fact that the trust property itself cannot be taken
in execution by the creditors of the trustee is not to the point. Those
creditors
are nevertheless subrogated to the rights of the trustee in relation
to that property, and in the event of the trustee becoming bankrupt,
it is those
rights which are to be realized in their favour.
- That
conclusion was sufficient to allow the Court to hold (in the case of a personal
bankruptcy) that a trustee in bankruptcy becomes
vested of the insolvent
trustee’s beneficial interest in the trust estate such that any previous
payments by the trustee to
trust creditors using the right of indemnity attracts
the operation of s 122 of the Bankruptcy Act. It also held that the
payment by the trustee to a trust creditor out of the assets of the trust in
reliance upon the right of exoneration
was a payment which was apt to be
rendered void by s 122 because it was a use of the trustee’s beneficial
interest in the assets held on trust rather than the trust assets themselves.
The plurality said at p 371:
We take the view that the passing to the trustee in
bankruptcy of the trustee’s beneficial interest in the trust estate, even
if that is all that passes, is sufficient to attract the operation of s 122 of
the Bankruptcy Act. Once it is recognized that a trustee may enjoy a
right of indemnity over trust property in respect of liabilities incurred by him
in the administration of the trust, it follows that the creditors of a trust
business may have resort to the assets of the trust
to the extent of the
liabilities incurred by the trustee. Section 122 is apt in the case of an
individual trading trustee to render void as against the trustee in bankruptcy a
payment out of the trust
property in circumstances which have the effect of
giving the payee a preference, priority or advantage over other
creditors.
- It
is apparent from the reasons of the plurality, that, although the right of
exoneration was a right over the assets held on trust,
the right itself was not
trust property. It is also apparent that the Court held that the right of
exoneration was capable of being
used by the trustee in bankruptcy to meet the
claims of the trust creditors who were otherwise entitled to be subrogated to
that
right. This was certainly the view of Needham J in Re Byrne Australia
Pty Ltd [1981] 1 NSWLR 394 at 398, who correctly identified that there was
no suggestion in Octavo that there were any creditors other than the
creditors of the trust business and no suggestion that the proprietary interest
which
the trustee had in the trust fund was property divisible among creditors
other than those who had a right to be subrogated to the
trustee’s right
of indemnity.
- When
considered in the above light, there is nothing unusual or unorthodox in the
High Court’s reasoning, nor is it inconsistent
with the limited nature of
the right of exoneration which is only a right to apply trust property to meet
trust debts. The High
Court merely identified that the bankrupt trustee’s
right to exoneration in respect of trust debts is property of the bankrupt
which
vests in the trustee in bankruptcy and which is available to meet the claims of
those who might otherwise have been subrogated
to that right; namely the trust
creditors.
- The
authorities which shortly followed Octavo were concerned with the manner
in which the right of indemnity might be used in a winding up and, in
particular, whether it might
be used to meet the costs, expenses and
remuneration incurred by a liquidator of corporate trustees.
- The
first was the decision in Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394,
where Needham J at 398 correctly identified that Octavo was not authority
“for the proposition that, where a trustee company carries on business
with a trust fund and incurs liabilities
and then is wound up, the whole of the
trust fund is property divisible amongst all the company’s creditors,
whether trust
creditors or not.” His Honour accurately identified that
the indemnity right (being the right of exoneration) was inexorably
linked to
the existence of trust creditors who had a right of subrogation to the trust
assets for the purposes of having their debts
paid. That being so, his Honour
concluded that the right of indemnity could only be used to meet the liabilities
of the trust creditors.
As the liquidator, at least at that point in time,
could not be said to be a “trust creditor”, he was not entitled to
be paid his costs and remuneration out of the proceeds of the right of
indemnity. That position was subsequently confirmed in Re Byrne Australia
Pty Ltd (No.2) [1981] 2 NSWLR 364.
- The
decision of the Full Court of the Supreme Court of Victoria in Re Enhill Pty
Ltd [1983] VicRp 52; [1983] VR 561 soon followed but, there, the Court adopted a
significantly different approach. In that case directions were sought
concerning the
entitlement of the liquidator of an insolvent corporate trustee
to be paid his costs, expenses and remuneration of winding up out
of the
proceeds of the sale of trust assets and in priority to all creditors. The
trustee company had only carried on business as
a trustee and all of its debts
were incurred in that capacity. In his reasons, Young CJ held that the majority
in Octavo did not impose any limitation on the use to which the trustee
in bankruptcy or liquidator could apply the proceeds of the right of
indemnity.
Some may argue that such a view overlooks the indication by the High Court that
the right of exoneration was to be applied
to those entitled to be subrogated to
it; namely trust creditors. The Chief Justice determined that the right of
indemnity could
be put to a much wider use. He said (at p564):
In these circumstances to hold that a trustee in
bankruptcy could only apply the proceeds of the right of indemnity towards some
only
of the bankrupt’s creditors, viz. creditors of the trust business,
would deny the very purpose of the right to indemnity which
is to exonerate the
trustee’s personal estate. In a case like the present therefore the
proceeds of the trustee’s lien
are available for division among the
bankrupt’s creditors generally, not only among creditors of the trust
business, and in
the case of a company in liquidation are subject to the control
of the liquidator under s292.
It should be observed that the learned Chief Justice did not explain how it was
that the lien might be converted into “proceeds”
which were
divisible amongst creditors. As identified above, the lien merely existed such
that the trustee might enforce the right
of exoneration by obtaining an order
for sale and the discharging of the claims of the trust creditors. However,
that process would
not result in funds coming into the possession of the trust
company for distribution amongst creditors. That said, in Enhill there
was no clear indication whether the right of indemnity being considered was the
right of exoneration or the right of recoupment.
Were it the latter, the
observations of the learned Chief Justice would be appropriate. That said, the
facts set out in the reasons
of the Chief Justice at p 562 would suggest that
all that was in issue was the right of exoneration. On that basis, there is an
absence in the learned Chief Justice’s reasons of any explanation of how
the right to apply the assets of the trust to discharge
the trust liabilities
might be converted into money in which the trustee has a beneficial interest so
as to be used to discharge
the debts of all creditors.
- With
respect to the first sentence of the passage from the reasons of the Chief
Justice quoted above, the rationale relied on does
not appear to support the
conclusion. The Chief Justice suggests that the right of indemnity would not
exonerate the trustee’s
personal estate if it could not be applied to the
discharge of all of the trustee’s creditors. However, the indemnity being
considered was to exonerate the trustee from trust debts and not from the
trustee’s personal debts. If the right of exoneration
were used to
satisfy non-trust debts, it would necessarily leave the trust debts unpaid or
partly unpaid. If that were so, the right
of exoneration would not have
achieved its purpose.
- Nevertheless,
Young CJ determined that the effect of the occurrence of the bankruptcy was to
“separate” the bankrupt’s
estate from the trust estate and, it
would appear, that necessarily defeated the trust creditors’ right of
subrogation (at
564 – 565). One might speculate that the learned Chief
Justice assumed that the lien was much like any other security for
indebtedness
which might be separately enforced so as to enable the recovery of funds. In
fact, all that the lien protected was
the right to have the trust funds applied
to meet the trustee’s personal liability to trust creditors.
- The
other substantive judgment in that case was delivered by Lush J who founded his
conclusion upon the footing that the trustee’s
right of exoneration was
the right to take funds from the assets of the trust and hold them beneficially
for the purposes of meeting
the liabilities of the trust (see pages 567 –
568). If that were correct, a trustee would be entitled to take proceeds out
of
the trust and appropriate them to herself or himself at which point they would
become the absolute beneficial owner of them.
His Honour seemed to rely upon
certain comments in Re Johnson for this proposition, however, in that
case Lord Jessel MR did not identify any right of a trustee to remove money from
the trust
and appropriate it to themselves. On the contrary, his Lordship
seemingly identified that such conduct would be a breach of trust
which would,
by the operation of the “clear accounts rule”, thereby impinge upon
any future right of indemnity. Additionally,
the identification of the
trustee’s right by Lush J, appears to be at odds with the trust
creditors’ right of subrogation
on the insolvency of the trustee; Owen
v Delamere (1871) LR 15 Eq 134 at 139 – 140; per Sir James
Bacon VC. None of the authorities cited by Lush J appear to support the notion
that trustees have a right to pay themselves
out of the assets of the trust for
the purposes of on-payment to the trust creditors. It would appear from the
passage at p 569
(lines 39–48) of Lush J’s reasons that his Honour
fell into error by equating the trustee’s right of exoneration
with the
much wider entitlements in relation to the right of recoupment. Whilst the
trustee’s right of recoupment is a wholly
personal right of the trustee to
be used for replenishing the trustee’s estate after the trustee has
personally discharged
the trust liabilities, the same cannot be said of the
right of exoneration.
- As
a result of the approach adopted by Lush J, his Honour determined that the
trustee’s right of indemnity, whether that be
recoupment or exoneration,
was the trustee’s “personal property” which was a
chose-in-action capable of passing to a liquidator or a bankruptcy
trustee. His Honour further concluded that the right of indemnity or its
proceeds
would be available to meet the claims of both trust and non-trust
creditors. However, somewhat inconsistently, his Honour held that
the trust
creditors had a right to be subrogated to the trustee’s lien in respect of
the trust liabilities in the case of insolvency
or even prior to insolvency in
some cases (Re Raybould [1900] 1 Ch 199). That would seem to negate the
suggestion that the right could be utilised to meet the claims of all creditors.
It was also unusual
that his Honour relied upon the decision of the Court of
Appeal (UK) in Jennings v Mather [1902] 1 KB 1 in support of his
conclusion as that case supports the proposition that, on the insolvency of the
trustee, the right of indemnity
is to be used only to meet the debts of the
trust creditors (see, in particular, the discussion of Stirling J at p 7).
- Despite
the undoubted eminence of the members of the Court in Re Enhill, the
decision has not been widely supported since it was delivered. Its essential
difficulty lies in its conflation of the right
of recoupment with the right of
exoneration which leads to the erroneous assumption that a trustee has a right
to appropriate funds
to themselves beneficially for the intended purposes of
meeting trust debts. As has been previously identified, McLelland J in Re
ADM Franchise Pty Ltd (1983) 7 ACLR 987, rejected that suggestion and there
is an absence of authority or principle to support it.
- In
the line of significant authority on this topic, the next relevant decision is
that of the Full Court of the Supreme Court of South
Australia in Re Suco
Gold Pty Ltd (1983) 33 SASR 99. That decision is discussed elsewhere in
these reasons and it not necessary to consider it in detail here. However, the
following
conclusions can be taken from the various judgments of the
Court:
(a) First (at p 104), the
beneficial interest of the trustee in the right of indemnity and the supporting
lien passed to the liquidator and was property
divisible among the
company’s creditors.
(b) Second (at p 105), that the right of indemnity out of the
trust assets has the twin aspects of the right of recoupment and the right of
exoneration,
with the latter being the right to use trust assets to discharge
the trust liabilities.
(c) Third (at p 105), that a trustee has no right to transfer
trust property to itself in an amount which is sufficient to meet unsatisfied
trust debts.
(d) Fourth (at p 108), where a trustee takes money out of a trust
into his own possession for the purposes of paying trust debts, that money
retains its
character as trust property such that it may only be used for the
purposes of meeting the debts of the trust.
(e) Fifth (at p 108), on insolvency the right of exoneration is
not available to meet the claims of non-trust creditors.
(f) Sixth (at p 109), that the liquidator is bound to apply the priority
provisions of the company’s legislation to the payment of trust
debts by
use of the right of exoneration (this proposition has been rejected by a number
of subsequent authorities).
(g) Seventh (at p 110), the costs, expenses and remuneration of a
liquidator arise from the carrying on of the business of the trust and, as such,
that they
are to be “regarded” as trust debts payable out of
the trust assets or right of exoneration. It seems that the payment of the
costs, expenses and remuneration
of the trustee were to have priority over the
claims of other trust creditors because they were subject to the priority regime
of
the Companies Act. This conclusion is a little unusual given that, if
the liquidator’s expenses and remuneration were treated as trust debts, it
is not easy to see how they would not rank pari passu with the other
trust creditors.
- The
relatively recent decision of Brereton J in Re Independent Contractor
Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305 FLR 222 is important in
the present context. That case involved the liquidation of a corporate trustee
which operated a trust business of
making persons (called
“contractors”) available to third party customers such that the
“contractors” would
perform services for those customers. The
asserted beneficiaries of the trust were the various contractors (or entities
controlled
by those persons) who provided the services to the third parties on
behalf of the trustee company. The trustee company received
payments in respect
of the work of the contractors and purportedly held those funds on trust. It
made regular payments from the
trust funds to the contractors as beneficiaries,
presumably in proportion to the work undertaken by them. The trustee company
had
operated upon the presumption that the contractors were not its
“employees” and, consequently, it made no deduction for
superannuation contributions in respect of those persons. Its conclusions in
that respect were wrong. It did have an obligation
to make superannuation
contributions and, having failed to do so, became liable to a superannuation
guarantee charge to the Australian
Tax Office (ATO). The company was placed
into liquidation. The ATO lodged a proof of debt which, in part, related to the
superannuation
guarantee charge. The contractors also lodged claims for amounts
which they asserted belonged to them as beneficiaries. The liquidator
applied
to the Court for directions that he would be justified in distributing the
balance of the trust assets to the ATO in partial
satisfaction of the
superannuation guarantee charge or, alternatively, to the contractors who had
provided services on behalf of
the company. This necessitated a consideration
by the Court of the nature of the trustee’s right of indemnity and,
further,
of the applicability of the statutory priority regime in s 556 of the
Corporations Act to the exercise of the right of exoneration.
- In
a relatively brief judgment on this topic, Brereton J held that the liability of
the trustee to pay the superannuation guarantee
charge was a debt or liability
incurred in the operation of the trust for which the trustee was entitled to
indemnification. That
being so, the first question which arose was whether that
ATO debt or liability was entitled to priority in accordance with s 556(1)(e)
of
the Corporations Act. Brereton J identified that a subsidiary question
was whether “s 556 applied to the rights of trust creditors in respect of
trust property” (at p 229 [20]). In answering that subsidiary question
his Honour considered the decision of the Full Court
in Re Suco Gold Pty
Ltd. He observed that the conclusion of King CJ that liabilities were to be
paid from the trust property in the order laid down in the
priority provisions
of the relevant company legislation was “virtually universally accepted to
be incorrect”. His Honour
held that s 556 was only concerned with the
distribution of assets “beneficially owned by a company and available for
division
between its general creditors”. Apparently, his Honour did not
regard the trustee’s right of exoneration to be property
owned by the
company and divisible between the general creditors. In his view the company in
liquidation, as trustee, had a right
of indemnity from, and lien over, the trust
assets for liabilities it incurred in acting as trustee and that those rights
had priority
to the interests of the beneficiaries (at p 231 [25]). He further
held that, as all the company liabilities were incurred by the
company in its
capacity as trustee, all creditors were to be subrogated to the
liquidator’s lien such that the statutory priority
did not apply in
respect of the trust assets and the creditors participated pari passu
after providing for the costs of administration including the liquidator’s
remuneration and expenses (pp 231- 232; [25]).
- In
essence, Brereton J rejected the notion that the trustee’s right of
indemnity was property of the company which might be
utilised in the winding up
and in accordance with the priority provisions. He determined that the right of
indemnity (exoneration)
was a “trust asset” which was to be shared
between the trust creditors. From one perspective that might be said to be
at
odds with the views reached by the High Court in Savage and
Octavo. That aside, it is important that Brereton J characterised the
right of indemnity (exoneration) as the trustee’s entitlement
to
“resort to and apply trust assets for the discharge of liabilities
incurred in the authorised conduct of the trust”
(at p 227 [11]). In that
sense, his Honour accurately observed that the use of the right by the
liquidator was limited to discharging
the liabilities owed to trust creditors.
For that reason, the result of his Honour’s reasoning on this point is
consistent
with the result reached in Octavo.
- Although
the decision in Bell Hire Services has been referred to earlier in these
reasons, it is appropriate to consider it in slightly more detail. That case
concerned an application
for directions by the liquidator of a company whose
only business had been to act as trustee of a family trust. In the course of
so
acting it carried on a business and incurred substantial debts. As mentioned
earlier, Farrell J identified the nature of the
right of exoneration as being
the entitlement of the trustee to resort to trust property only for the
purpose of discharging trust liabilities. Her Honour determined, albeit not
without some doubt, that Re Suco Gold should be followed such that
the costs of the winding up application and the remuneration of the liquidator
were payable out of the
trust estate as a “trust debt”. However, it
was correctly observed that if the costs of the winding up were, in fact,
an
incident of the trust business, they would rank pari passu with the other
trust creditors and s 556 of the Corporations Act would not apply. Her
Honour accepted that this was contrary to the result in Re Suco Gold
but was “consistent with the otherwise orthodox principles discussed
by King CJ” in that case. In this latter respect,
her Honour indicated
that she preferred the approach of Brereton J in Independent Contract
Services. Of course, here, her Honour was only referring to the application
of the priority provisions in s 556 in relation to the right of
exoneration.
From her reasons it is apparent that her Honour followed Re Suco
Gold to the extent that it held the right of exoneration was not trust
property, and not the contrary view of Brereton J in Independent Contract
Services. As between the costs of the winding up application and the
liquidator’s remuneration, her Honour was of the view that the latter
had
priority.
- An
extensive review of the authorities was undertaken by Robson J in Re Amerind
Pty Ltd (in liq) [2017] VSC 127, where his Honour reached the conclusion, in
relation to the provisions of the Corporations Act, that an insolvent
trustee’s right of indemnity from trust assets is not property of the
company for the purposes of s 433(3)
and s 556 of the Corporations Act.
Again, that appears to be contrary to the conclusions of the High Court in
Savage and Octavo although it must be said that Robson J sought to
distinguish the latter decision on a number of different grounds, not in the
least
being that the decision in Octavo applied a different statutory
regime to the one which his Honour was considering. However, whilst it may be
correct that different
statutory schemes were being considered, it is not
particularly easy to ascertain how those differences alter the nature of the
right
of exoneration as a trustee’s own property.
- The
facts in Amerind were not complex. The company acted solely in its
capacity as the trustee of the “Panel Veneer Processes Trading
Trust”
which manufactured and distributed decorative and architectural
finishes. After experiencing financial difficulties, the company
was placed
into administration, a secured creditor appointed receivers and, subsequently,
the company’s creditors resolved
that it be wound up. After the
realisation of the secured assets and the repayment of the security holders, the
receivers retained
a surplus of funds and sought directions as to its
appropriate distribution. An initial question was whether the surplus in the
hands of the receivers was “trust property”? On this issue his
Honour preferred the approach of Brereton J in Independent Contractor
Services and observed that the trustee’s right of indemnity and
related lien do not become property of the company so as to be available
to meet
non-trust liabilities of the company. It was only available to satisfy the
liabilities incurred on behalf of the trust (see
paras [53], [79], [94]). At
that latter paragraph his Honour said:
[94] In my opinion for the reasons discussed below, the
proper course for me is to adopt the reasoning of Brereton J in Re
Independent, being that s 556 of the Corporations Act only applies to
property of the company and does not apply to trust assets, that the
trustee’s right of indemnity is not property
of the company, and that
where there are multiple creditors of the trust, the creditors share pari
passu in the right to be subrogated to the trustee’s equitable lien to
enforce the trustee’s indemnity. Similar reasoning
also applies to s
433.
- Robson
J undertook a lengthy and considered analysis of the relevant authorities and
his conclusions can be found in his observations
in paragraph [96] of his
reasons:
[96] For the following reasons, I do not accept that the
corporate trustee’s right of indemnity (and lien) is not property held
in
trust, but that it is the corporate trustee’s own beneficial
‘personal property.’ The right of indemnity is
over trust assets.
The indemnity must be used to meet trust liabilities. The indemnity is not an
exclusive right of the trustee.
It may be exercised by the trust creditors
through the right of subrogation. The indemnity is a right to be indemnified
against
claims by trust creditors. That requires that the indemnity be used to
meet trust liabilities. The indemnity is not a personal
asset of the trustee.
It is trust property.
- In
the course of his judgment, his Honour identified four lines of reasoning which
led him to conclude that the trustee’s right
of indemnity over trust
assets was trust property which was only available to meet trust liabilities.
They were:
(a) (At [100]) That it is always in the
interests of the trust that trust assets be used to meet trust liabilities and
that is particularly
so where a trading trust has goodwill which needs to be
protected or enhanced. This reasoning is analogous to that of Salmond J
in
Official Assignee v Jarvis [1922] NZGazLawRp 213; [1923] NZLR 1009 which concerned the situation
where an indemnifying party has an interest in the extinction of the liability
to which the indemnity
relates (see also Re Richardson).
(b) (At [101]) that trust assets ought not to be available to meet liabilities
to non-trust creditors because the right of indemnity
to which the trustee is
entitled is that the trust assets are only to be used for authorised purposes;
namely, the extinguishment
of trust debts. Were it otherwise, the trustee would
be utilising trust property for their own benefit or the benefit of third
parties.
Moreover, because the trust creditors are entitled to be subrogated to
the trustee’s rights of indemnity, the indemnity cannot
be regarded solely
as a personal asset of the trustee but is subject to the equitable rights of the
trust creditors. This reasoning
effectively adopts some of the reasoning of
King CJ in Re Suco Gold although it is not harmonious with the conclusion
that the right of exoneration is a trust asset.
(c) (At [102]) That the trust property is subject to the trustees’
indemnity and supporting lien and the creditors of the
trust have a similar
charge over the trust assets under their right of subrogation. Those rights of
the trust creditors were proprietary
rights in the assets such that the right of
indemnity cannot be property of the trustee which might be used to pay its
personal creditors.
This effectively applies to the reasoning of Brereton J in
Re Independent Contractor Services.
(d) (At [103]) That the trustee’s right is one of “indemnity”
which required the trustee to become free of the
claim of the trust creditor.
That could not occur if the right of indemnity was used in part, to discharge
the liabilities owed
to non-trust creditors.
- His
Honour subsequently concluded:
[255] In my opinion, all four grounds of reasoning
support the proposition that the right of indemnity that an insolvent trustee
has
over trust assets that arises through its incurring debts on behalf of the
trust, constitutes a charge in favour of the trustee over
all the assets of the
trust that may also be exercised and enforced by the unpaid creditors of the
trustee, where the liability to
the creditors by the trustee caused the
emergence of the indemnity. All four grounds lead to the conclusion that where
an insolvent
trustee has a right of exoneration from the trust assets that right
does not form part of his personal estate but must be exercised
and applied for
the benefit of the trust to reduce the proprietary right of creditors over the
assets of the trust estate and to
achieve a true indemnification of the trustee
from claims of the trust creditors.
- In
the result, his Honour held that the right of exoneration was not the
property of the insolvent company for the purposes of being used to meet the
claims of the non-trust creditors, but was trust
property. The fact that trust
creditors were entitled to be subrogated to the trustee’s indemnity
necessarily precluded the
right of indemnity from being properly described as
the property of the trustee. It might be observed, however, that the fact that
the trust creditors had a proprietary interest in the right, tends to negate the
suggestion that the right was, itself, trust property.
- The
prima facie inconsistency between the ratio in Octavo, to the
effect that the right of indemnity of a trustee was not trust property but
property of the trustee which was capable of passing
to an external insolvency
administrator, and the conclusions reached in Re Independent Contractor
Services and Re Amerind is patent. Although that apparent
inconsistency is ameliorated somewhat by the various grounds on which
Octavo was sought to be distinguished by Robson J in Re Amerind,
it is not necessary to consider those grounds further in these reasons.
- Since
the hearing of argument in this matter, her Honour Markovic J, has delivered
judgment in Kite v Mooney; In the matter of Mooney’s Contractors Pty
Ltd (in liq) (No.2) [2017] FCA 653 (Kite v Mooney). That case also
concerned an application by liquidators of a corporate trustee for directions as
to the manner in which they might
deal with the trustee’s right of
exoneration. In her reasons, (at [70] – [137]) her Honour undertook an
exhaustive and
careful analysis of the authorities on the question of whether or
not the priorities regime in the Corporations Act applied to the exercise
of the trustee’s right of exoneration. At para [140] Markovic J indicated
her preference for the approach
of Brereton J in Independent Contractor
Services as followed by Robson J in Re Amerind, to the effect that
the right of exoneration was trust property such that the priority provisions
did not apply to the manner in
which it was exercised. Having reached that
conclusion her Honour relied upon the “salvage principle”
established by
the decision in Re Universal Distributing Co (in liq)
[1933] HCA 2; (1933) 48 CLR 171 (Re Universal Distributing) and, perhaps, the
decision of Re Berkeley Applegate (Investment Consultants) Ltd (in liq)
[1989] Ch 32 (Berkeley Applegate) to order that the
liquidator’s costs, expenses and remuneration were a first charge on the
assets of the trust (to the extent
to which they were incurred in the
administration of the trust).
Conclusion with respect to the ability to use the right of
exoneration for meeting non-trust creditor’s claims
- It
is possible to detect in the various authorities, some of which are considered
above, that the courts have struggled to deal with
two diverging considerations.
On the one hand, the right of exoneration is essentially a power associated with
the administration
of the trust relationship, with its main objective being the
discharge of liabilities which the trustee has incurred on behalf of
the
beneficiaries. In form, and in substance, it is a power to use funds for a
singular purpose and the creditors of the trust have
a corresponding entitlement
to be subrogated to that power. On the other hand, as a number of authorities
including Octavo have found, the power or right rather clearly falls
within the wide description of “property of the bankrupt” or
“property
of the company” as those phrases are used in the Act and
the Corporations Act. That conclusion would seem to necessitate the use
of that property for division amongst all of the creditors of the trustee and
in
accordance with the relevant priority regimes. The contradiction which arises
is that the right of exoneration is property which
can only be used for the
purposes of meeting the claims of trust creditors (whom themselves have an
entitlement of subrogation to
the right) but the various insolvency regimes
appear to include it with the definition of property of the insolvent trustee
which
might then be divided amongst all creditors. Given that conundrum, the
conclusion that the right of exoneration remains trust property
and, therefore,
only capable of being used to meet the claims of trust creditors, becomes
palatable. Indeed, were it not for the
decisions in Savage and
Octavo and the force of the authorities which have followed
Octavo, that is a conclusion which a court might readily reach.
- However,
the conundrum identified above may be more apparent than real. If the precise
nature of the right of exoneration is kept
steadily in mind, its singular
purpose, to be used to meet only the claims of trust creditors, can be
reconciled with its characterisation
as property of the bankrupt or company
within the context of the relevant insolvency regimes. In essence, the right of
exoneration
is a right of a limited nature and, even when it passes to the
bankruptcy trustee, it cannot be exercised other than by causing trust
funds to
be applied to meet trust debts. In the course of any insolvency administration
the external administrator is entitled to
exercise the powers of the insolvent
trustee to the extent to which they will benefit the estate. That will include
the realisation
of property where that is possible. The right of exoneration
however is not capable of being realised, although it can be used in
the
administration to cause or require the payment of the debts of the trust
creditors. In this respect, the distinction between
the concepts in the
bankruptcy legislation of “property of the bankrupt which is divisible
among the creditors” and of
the “proceeds” of the property has
to be maintained. It is the “proceeds” of the realisation process
which
are applied proportionately as required by the operation of s 108 or in
the priority dictated by s 109. There is nothing in Division
4 of Part VI,
“Realisation of Property”, which would prevent a bankruptcy trustee
from exercising a power of the bankrupt
which had the effect of directly
benefiting some creditors over others, albeit with indirect benefits flowing to
the remaining creditors.
- The
decision of the High Court in Octavo in relation to the provisions of the
Bankruptcy Act (albeit in a corporate insolvency context) is binding on
this Court. That decision concerned whether or not the trustee’s
right of
indemnity was “property divisible amongst the creditors” within the
meaning of s 116(1)(a) of the Act. It cannot
be seriously doubted that the High
Court concluded that the right of indemnity was not a trust asset and was,
therefore, property
“divisible amongst the creditors”. However, the
High Court did not suggest that the right of exoneration amounted to
“proceeds of property of the bankrupt” which were to be applied as
required by ss 108 and 109. In fact, the Court was
clear that the right of
exoneration was only to be used to meet the claims of the trust creditors who
were entitled to be subrogated
to the right. That conclusion is entirely
consistent with the recognition of the right as a limited right or power of the
trustee
to apply trust funds only for the purpose of discharging trust
liabilities. That is so whether it is exercised by the trustee prior
to
bankruptcy or by the bankruptcy trustees subsequent to a sequestration order
being made. The bankrupt, as trustee, had no power,
pursuant to that right, to
appropriate funds in an amount equal to the liabilities which had been incurred
as trustee so as then
to be in a position to use them to meet the claims of all
creditors. Further, there is nothing in the Bankruptcy Act which, upon
the making of the sequestration order, transmogrified the right of exoneration
into such a right.
- It
is instructive to consider what the position would be if, shortly prior to
bankruptcy, the original trustee was replaced and the
new trustee was in
possession of the trust assets when the sequestration order was made. In those
circumstances the bankruptcy trustees
would be required to apply to the court
for an order that the trust assets be applied in payment of the trust debts or
an order that
the new trustee indemnify the former trustee from liability for
those debts. If necessary, an order for the judicial sale of some
of the trust
assets could be made along with an order appointing receivers to carry out the
sale. The Bankruptcy Trustees would not
be entitled to the payment of an amount
of money (see Lemery Holdings [2008] NSWSC 1344; (2008) 74 NSWLR 550 at [18]). In Re
Pumfrey (1881) 22 Ch D 255 it was held that the trustee who seeks to enforce
the lien is required to apply to the court for an order to that effect (at 262)
(see also Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, 663). The equitable lien
which arises does not exist to enforce the payment of money to the erstwhile
trustee, but to secure the
right to have the trust funds applied in discharge of
the trust debts. In addition, the trust creditors themselves might seek an
order, relying upon their right of subrogation, for payment to them out of the
trust assets. That is not something which the Bankruptcy
Trustees could oppose.
- It
follows that even though the right of exoneration is the “property of the
bankrupt” of which the bankruptcy trustees
took possession, the only use
to which it can be put in the course of the administration of the bankruptcy is
to discharge liabilities
owing to trust creditors. It is not capable of being
used to meet the claims of non-trust creditors although they will benefit by
having the claims on the remaining property of the bankrupt reduced.
- When
the right of exoneration is identified in this manner, the authorities to which
reference has been made are capable of greater
reconciliation in outcome if not
also reasoning. This approach is concordant with the High Court’s
decision in Octavo and consistent with the outcomes in Re Suco Gold
Pty Ltd (in liq) and Re Amerind Pty Ltd (in liq).
- The
above reasoning coheres with the existence of the trust creditor’s rights
of subrogation. When the limited nature of the
right of exoneration is fully
appreciated, full respect is accorded to the established “favoured”
position of trust creditors
on a trustee’s insolvency. In the course of
submissions the Bankruptcy Trustees submitted that the trust creditors obtained
this benefit by “mere happenstance” or it being a “lucky
incidence” of doing business with a person who happened
to be a trustee.
They relied upon that as a substantiation for the conclusion that the right of
exoneration should be available
to all creditors. There are a number of answers
to this proposition. First, if, as a matter of law, it is the case that the
special
rights of trust creditors to be subrogated to the trustee’s right
of indemnity afford them an advantage in the insolvency context,
there is no
reason to deny them that right on some perceived notion of general
“fairness”. Second, it is not apparent
that those who traded with
Mr Lee’s Subway franchise were not aware that he was conducting business
as a trustee. The trading
trust has become a ubiquitous part of modern commerce
such that it may well be that the trust creditors, or some of them, knew of
their rights and entitlements. Even though the franchisor was not a creditor in
the administration of Mr Lee’s estate, given
the size of its business
around Australia, it is most likely that it was acutely aware of the nature of
its rights arising from trading
with its franchisee, Mr Lee, who operated his
business as a trustee. Third, the “favoured position” of trust
creditors
is now so well established that it is not appropriate for a Court at
first instance to ignore it. If any reform is required in this
area it is
clearly a matter for the legislature. Fourth, it is simply not possible to use
a power to pay trust creditors out of
trust funds, to meet the claim of
non-trust creditors.
- The
above analysis is also coherent with the manner in which other forms of property
of the trustee might be dealt with in insolvency.
For example, in Re
Richardson shows that a trustee’s right of indemnity from a
beneficiary might be treated in a similar fashion to the right of exoneration
out of trust assets even though its enforcement will only directly benefit a
particular trust creditor. A similar result would occur
if a right of
contribution from a co-trustee in respect of trust debts or liabilities was
sought to be enforced by a bankruptcy trustee.
In that scenario, the co-trustee
would be entitled to pay the trust creditors directly to discharge the trust
debts. The bankruptcy
trustee could not beneficially receive funds from the
co-trustee and disburse them among all of the insolvent trustee’s
creditors.
That would leave the co-trustee remaining partially liable to the
trust creditors despite having paid the full amount of his or
her contribution.
- It
follows that the right of indemnity from a beneficiary and the right of
contribution from a co-trustee have similar characteristics
to the right of
exoneration out of the trust assets in that they will be enforced by the
bankruptcy trustees even though they will
only result in payments being received
by trust creditors. They are all “rights” or “powers”
with respect
to property albeit of a limited nature with the result being that
they cannot be realised or turned into “proceeds” which
might be
distributed amongst all creditors.
A possible parallel with s 117 of the Act
- The
manner in which the bankruptcy trustees must deal with the right of exoneration
in the course of the administration of the bankrupt’s
estate is also not
dissimilar to the manner in which they would deal with a right of indemnity
under a policy of insurance which
is within the scope of s 117 of the Act. That
section provides:
(1) Where:
(a) a bankrupt is or was insured under a contract of insurance against
liabilities to third parties; and
(b) a liability against which he or she is or was so insured has been incurred
(whether before or after he or she became a bankrupt);
the right of the bankrupt to indemnity under the policy vests in the trustee and
any amount received by the trustee from the insurer
under the policy in respect
of the liability shall, if the liability has not already been satisfied, be paid
in full forthwith to
the third party to whom it has been incurred.
...
- In
s 117(1) the right of the bankrupt to indemnity under the policy vests in the
bankruptcy trustee which is consistent with s 116(1)
in that the
bankrupt’s rights to be indemnified in respect of third party claims fall
within the concept of “property
of the bankrupt”. Putting aside for
one moment the effect of s 117, most contractual rights of a bankrupt under
policies of
insurance and their coextensive choses in action would pass
to the trustee in bankruptcy as part of the general assets divisible amongst
creditors (see Re Harrington Motor Co Ltd; Ex parte Chaplin [1928] 1 Ch
105; Hood’s Trustees v Southern Union General Insurance Co of
Australasia Ltd [1928] 1 Ch 793). In most cases, those rights or choses
in action would be capable of being turned into money which would then form
part of the “proceeds of the property of the bankrupt”
and be
available for apportioning amongst the creditors. It follows that, but for the
operation of s 117, any money received by
a bankruptcy trustee under a policy of
liability insurance would be divided amongst all the creditors including the
third party in
respect of whose liability the bankrupt was insured. The major
impact of s 117 is that it imposes limits on the use to which certain
property
of the bankrupt can be put and requires that money received under the policy be
paid forthwith only to the party, the liability
to whom was indemnified.
- In
the course of the administration of a bankrupt’s estate, a bankruptcy
trustee would be obliged to enforce against the bankrupt’s
insurer any
claim under a policy which might meet the claim of a third party against the
estate. Whilst the right of indemnity under
the policy may only result in one
creditor’s claim being satisfied, it would nevertheless be the duty of the
bankruptcy trustee
to ensure that occurred. Necessarily, the meeting of that
creditor’s claim by use of the insurance funds will reduce the totality
of
the claims upon the remainder of the bankrupt’s estate and, to that
extent, this operates to the benefit of all creditors.
A liquidator of an
insolvent corporation has similar obligations under s 562 of the Corporations
Act.
- This
reference to the operation of s 117 is not to suggest that a trustee’s
right of exoneration is the equivalent of a bankrupt’s
right of indemnity
under a policy of liability insurance, even though there are parallels. It is
merely to identify that there are
occasions where the bankruptcy trustee is
required to deal with property of a limited nature which enures for the benefit
of a single
creditor.
The “property of the bankrupt”
- It
is apparent from the above discussion that this Court must accept that the right
of exoneration is a right which falls within the
scope of the expression
“property of the bankrupt” as it is used in s 58(1)(a) of the Act.
If there is any difference,
it is also property which falls within the
expression “property divisible among creditors” within the meaning
of s 116(1)(a)
and (b) (see Rogers v Asset Loan Co (2006) 4 ABC(NS) 293
at [37] citing Cummings v Claremont Petroleum NL (1986) 185 CLR 124 and
Cirillo v Citicorp Australia Ltd [2004] SASC 293 at [75]–[79]). A
trustee’s right to use the trust funds to meet trust debts incurred in the
performance of a trust is, at least,
a capacity to exercise power “in,
over or in respect of property” which might have been exercised for the
bankrupt’s
own benefit within the meaning of s 116(1)(b). That conclusion
is in accordance with the decision in Octavo to the extent that it held
that a trustee’s right of indemnity was property of the bankrupt within
the meaning of ss 58 and
116 of the Act.
- Even
if Octavo was not binding, as a matter of principle it is difficult to
accede to the proposition that a right in respect of the trust assets
which
could be exercised by the bankrupt for the purposes of discharging his or her
personal liabilities would be “trust property”
and hence not within
the scope of ss 58 and 116(1). The mere fact that the use of the right might be
limited by reference to specific
debts, does not support the conclusion that the
right is not “property of the bankrupt”. Moreover, the fact that
the
trust creditors have entitlements of subrogation to the right and a
corresponding lien to enforce it, makes it less likely that it
could be regarded
as being held solely for the benefit of the beneficiaries and therefore a
“trust asset” or part of
the trust.
- It
should also be remembered that the bankruptcy trustee takes the property of the
bankrupt subject to any equities affecting it (Sonenoco (No.77) Pty Ltd v
Silva [1989] FCA 89; (1989) 24 FCR 105 at 124-5). In the case of the right of exoneration,
that includes the rights of the trust creditors to be subrogated to the rights
of the trustee including the ability to exercise the equitable lien. Again,
that tends to negate any suggestion that the right is
trust property or that it
can be used to the detriment of the trust creditors’ rights of
subrogation.
- Nor
does the fact that the right is secured by an equitable lien over the trust
assets take the right beyond the scope of ss 58 and
116 and render it an asset
of the trust as suggested in Re Amerind. The equitable lien merely
secures the ability of the trustee to exercise the right whenever the trust
assets are removed from the
trustee’s possession or where the
beneficiaries demand payment of their entitlements without making provision for
discharging
the trustee’s liabilities.
- It
follows that the right of exoneration is a right which is “property of the
bankrupt” and which is, prima facie, divisible among the creditors
of the bankrupt within the meaning of s 116(1)(b). That is so, regardless of
the fact that it is
not capable of being realised and that it can only be
exercised in a limited way by requiring that the trust assets be used to
discharge
the claims of the trust creditors. It is not “trust
property” within s 116(2)(a).
Did bankruptcy change the nature of the right of
exoneration?
- In
the course of oral argument, Counsel for the Deputy Commissioner of Taxation
submitted that the operation of the bankruptcy regime
altered the nature of the
right of exoneration in the hands of the Bankruptcy Trustees, such that it
became available for “distribution”
amongst all creditors. It was
submitted that, in their hands, the right of exoneration could be used to obtain
payment of money
out of the trust funds in an amount equal to the claims of the
trust creditors and those funds might then be used to meet the claims
of all
creditors. This, it was submitted, arose either as a result of the insolvency
regime “cutting through” otherwise
established rights, or that the
“overarching theme” of the insolvency regime had the effect of
rendering the rights in
the hands of the bankruptcy trustee wider than they were
in the hands of the bankrupt. No specific provision of the Act was identified
as having this transformative effect upon the bankrupt’s property and
rights as they vested in the Bankruptcy Trustees. The
Deputy
Commissioner’s submission was supported, to some extent, by Counsel for
the Bankruptcy Trustees although on slightly
different grounds. Mr Eade
submitted that the position in relation to the right of exoneration was similar
to the position of a
contractual right of indemnity where the person to be
indemnified has become insolvent. In such circumstances, so the argument went,
the bankrupt’s contractual right of indemnity in relation to a particular
debt can be applied for the benefit of all creditors
unless the indemnifier had
an interest in seeing that the indemnified debt was discharged. Reliance was
placed on the decision of
the Court of Appeal in Re Law Guarantee Trust and
Accident Society Ltd: Liverpool Mortgage Insurance Co’s Case [1914] 2
Ch 617. That case concerned the construction of a re-insurance contract and, it
is noted, Buckley LJ identified that the particular issue
turned upon the
construction of the language of the contract. After discussing the construction
of that language, at 633, his Lordship
considered the position in relation to
equitable obligations to indemnify and said:
The equitable doctrine is that the party to be
indemnified can call upon the party bound to indemnify him specifically to
perform
his obligation, and to pay him the full amount which the creditor is
entitled to receive, and that whether having received it he
applies it in
payment of that creditor or not is a matter with which the party giving the
indemnity is not concerned. ... The case
is otherwise where the party giving
the indemnity is concerned with the application of the money which he pays.
This was the case
in Re Richardson. The wife who was bound to indemnify
was there concerned in seeing that the money which she paid went to the lessor
so as to relieve
the property of which she was beneficial owner from the
consequences of non-payment of rent and damages for breach of covenant.
(Footnotes omitted).
Kennedy LJ agreed that there was nothing in the reinsurance contract which
required the payment of the indemnity to the debenture
holders and that was
especially so given that they were not parties to the contract of indemnity and
the indemnifier had no interest
in seeing how the indemnity moneys were
applied.
- In
the present matter there is no “contract” of indemnity. The subject
matter under discussion is the right of exoneration.
There is only one method
by which the right can be exercised and that is by the application of trust
funds to paying the claims
of trust creditors. It is not a contract which can
be construed to require payment to the person indemnified of an amount of money
equal to that needed to meet the liability to a third party. That is a critical
difference between the present situation and that
which arose in the
Liverpool Mortgage Insurance Co’s Case [1914] 2 Ch 617.
- Additionally,
the trust creditors have a right of subrogation to the right of exoneration and
accompanying lien. In effect, that
means that they have a right to be
subrogated to the proprietary interest of the trustee in the assets of the
trust. They are entitled
to orders that their debt be paid directly out of the
trust funds without those monies passing through the hands of the trustee (Re
Evans, Evans v Evans [1887] 34 Ch D 397). There is nothing in the
authorities to suggest that the equitable right of subrogation dissipates upon
the trustee’s insolvency.
The contrary is true. Those rights of
subrogation are inchoate until insolvency or the trustee is otherwise unable to
pay the trust
debts. The crystallisation of those equitable rights upon the
trustee’s insolvency is not consistent with the notion that
the
trustee’s right to have the trust assets applied in discharge of the trust
debts is abrogated by the trustee’s insolvency.
Were the
Commissioner’s submission to be accepted, the insolvency of the trustee
would be both the occasion for the crystallising
of the right of subrogation and
the reason for its destruction.
- The
Deputy Commissioner’s submission also overlooks the fact that any property
received by a bankruptcy trustee is subject to
all of the liabilities and
equitable interests existing prior to the bankruptcy (Re Clarke; Ex parte
Beardmore [1894] 2 QB 393; Whyte v Williams [1903] ArgusLawRp 44; (1903) 29 VLR 69; 9 ALR
98). In relation to the right of exoneration, one of those equitable interests
is the trust creditors’ entitlement to be subrogated
to it. In accordance
with the well-established authorities, that interest is not diminished by the
trustee’s bankruptcy.
- No
other authority was cited to the Court and none has been located which supports
the contention that, on the bankruptcy or winding
up of a trustee, the right of
exoneration evolves into a broader right from which the trustee or company
liquidator can obtain a
direct payment of an amount equal to the debts in
respect of which the right of exoneration exists. Such a notion is inconsistent
with the various decisions concerning the right of indemnity given that, if such
a principle existed, the contentious matters in
those authorities would not have
arisen. It was also specifically rejected by McLelland J in Re ADM Franchise
Pty Ltd (1983) 7 ACLR 987 at 988-989.
- It
follows that the submission that a trustee’s right of exoneration is
broadened by the bankruptcy of the trustee should be
rejected. In the hands of
the Bankruptcy Trustees the right remained as it was in the trustee’s
hands, namely a right to apply
trust funds in discharge of trust
debts.
The use to which the right of exoneration may be put under the
Bankruptcy Act
- Pursuant
to s 58(1) of the Act, upon the debtor becoming bankrupt, the property of the
bankrupt vests in the bankruptcy trustee or,
if the trustee is appointed by the
creditors, the property vests on the date of that appointment (s 132(1)). Once
the bankruptcy
trustee has possession of the property or it is otherwise vested
in them, they are required to administer the estate. Division 4
of Part VI of
the Act affords a bankruptcy trustee powers for undertaking that task. By s 134
numerous specific powers are granted
to enable the bankruptcy trustee to deal
with the property, including the power to generate funds in various ways such as
by leasing,
carrying on a business, and charging or mortgaging any property. It
is worth observing that, whilst s 116(1)(b) specifically includes
within the
description “property divisible amongst the creditors of the
trustee”, the “capacity...to exercise powers
in, over or in respect
of property”, there is no specific power granted by s 134 authorising the
exercise of those powers for
the purposes of generating funds. It may be that
the entitlement to exercise the bankrupt’s powers in the administration of
the bankrupt’s estate arises from the more general authorisations in s
134(1)(n) to “superintend the management of the
whole, or part, of the
property of bankrupt” or in s 134(1)(o) to “administer the property
of the bankrupt in any other
way”. It is also relevant that s 134(3)
affords the bankruptcy trustee a wide discretion as to the manner in which the
estate
is administered by providing, “Subject to this Act, the trustee may
use his or her own discretion in the administration of
the estate.”
- In
the administration of the estate, a bankruptcy trustee is bound to deal with the
assets that come into their hands with a view
to achieving the maximum return
from them so as to best satisfy the claims of the creditors (see Adsett v
Berlouis [1992] FCA 368; (1992) 37 FCR 201 at 209 citing with approval the observations of
Smithers J in Mannigel v Aitken (1983) 77 FLR 406 at 408 – 409).
In the present matter, the relevant subject matter of the bankrupt’s
estate is a right
to use trust funds (not otherwise available for use in the
bankruptcy) for the purposes of meeting the claims of the bankrupt’s
trust’s creditors and that is all that the Bankruptcy Trustees might do
with it. That is not undertaking a sale of the right
nor its conversion into
funds. Put simply, the right is not one which is capable of being
“realised” so as to produce
a monetary return. Quite rightly, no
argument was made to this Court that the money to be paid from the trust assets
to trust creditors
could be characterised as “proceeds” within the
scope of the expression “proceeds of the property of the bankrupt”
as it is used in s 108 and s 109(1) of the Act.
- This
approach to the orderly administration of the bankrupt’s estate is
consistent with the approach which would be taken in
relation to other forms of
restricted or limited property. It would be the approach adopted by a
bankruptcy trustee in relation
to an entitlement to claim on a policy of
insurance which is subject to the limitations imposed by s 117 of the Act. It
is also
the approach which would be adopted if the bankrupt trustee had a right
of indemnity against a beneficiary such as that which arose
in Re Richardson.
The right would need to be enforced against the beneficiary for the benefit
of the single trust creditor with the non-trust creditors
only deriving the
indirect benefit of a reduction of the total quantum of claims against the
trustee’s personal estate. Yet
a similar situation would arise where the
bankrupt trustee’s right was one for contribution from a co-trustee in
relation to
trust debts. In the course of the administration that right of
indemnity would be enforced only for the direct benefit of the trust
creditors.
- For
the purposes of s 108 of the Act it is the “proceeds of the property of
the bankrupt” which are to be used to pay
the creditors and, if they are
insufficient, the creditors are to be paid proportionately. From what has been
identified above,
no “proceeds” can be derived from the right of
exoneration. The consequence is that the right is not subject to either
the
provisions concerning distribution of proceeds under s 108, nor the priority
provisions of s 109. In the context of the provisions
of the Act, the right can
only be used to meet the claims of trust creditors.
Whether the right of exoneration ought to be exhausted before
dividends are paid?
- A
further matter on which the Bankruptcy Trustees seek directions is whether the
right of exoneration should be exhausted before dividends
are paid to creditors
from the proceeds of property under s 108. It was submitted that the right of
exoneration should first be
used to discharge the claims of trust creditors,
prior to any distribution of the “proceeds” of the bankrupt’s
property. If that occurs, the “trust creditors” will, at best, only
participate in the bankrupt’s personal estate
for the remaining amount of
their debt.
- The
administration of the bankrupt’s estate will necessitate the exercising of
the right of exoneration by the Bankruptcy Trustees
and the realisation of
property capable of being turned into money. Once those tasks are completed the
Bankruptcy Trustees will
be in a position to ascertain the value of the estate
which is available for distribution. Until that stage is reached, it is
impossible
for the bankruptcy trustees to make the priority payments required by
s 109 or to declare a dividend under s 140. Therefore, it
logically follows
that the right of exoneration must be exercised before any consideration is
given to making a distribution to creditors
under s 109.
- Although
it has been held that the trust creditors’ rights of subrogation to the
right of exoneration does not make them “secured
creditors”
(Buckle at 247), they are certainly akin to secured creditors in some
respects. In a very real sense, the amount which remains owing to
the trust
creditors by the insolvent trustee is the total amount of their debt less the
value of their subrogated right of indemnity.
In the context of legislation
where the creditors are to be treated equally, it would be an unusual situation
were the trust creditors
to be able to assert the full amount of their claim so
as to participate in the proceeds of the property of the bankrupt, only to
be
entitled to turn around and seek an additional payment from the trust assets.
- In
addition, significant administrative difficulty would arise if the trust
creditors were able to receive dividends from the personal
estate of the
bankrupt prior to receiving the benefit of their right of subrogation. Were
that to occur, it would follow that a
right of “recoupment” to the
extent of the amount paid to the trust creditors from the personal estate would
arise or
vest in the bankrupt’s estate. The bankruptcy trustees would
then be required to realise that right of recoupment which would
lead to the
establishing of a further fund for distribution amongst all of the creditors,
including the trust creditors. That, in
turn, would lead to a further right of
recoupment arising and the scenario would continue almost ad infinitum.
It is not likely that the legislature would have intended such an absurd
result.
- Consequently,
the administration of the estate should occur by the trust creditors’
claims being paid out of the right of exoneration
prior to their participation
in the receipt of any dividends under s 108 and s 109 from the assets of Mr
Lee’s personal estate.
Although not founded upon the same reasoning, this
was the approach adopted by King CJ in Re Suco Gold (at 109 – 110).
- In
relation to this question, the Bankruptcy Trustees asserted the existence of a
difficulty arising from the fact that Mr Lee was
a “debtor” to the
trust in the sum of $399,729 which resulted from a loan which he, as trustee,
made to himself in his
personal capacity. It was suggested that this would
complicate the manner in which the bankrupt’s estate might be
administered.
Putting aside whether or not Mr Lee’s utilisation of the
funds was a breach of trust, the amount said to be owing to the
“trust”
by Mr Lee is negated by the greater amount of his right of
exoneration. Put more accurately, the right of exoneration is reduced
by the
amount which Mr Lee “owes” to the “trust”. As has been
identified earlier, the state of the account
as between Mr Lee and the
beneficiaries, is such that Mr Lee’s right of exoneration from the assets
of the trust has a value
of $599,782.02. Mr Lee did not remain a debtor to the
trust.
Whether the priority regime in s 109 applies to the use of the
right of exoneration?
- Yet
a further issue on which the Bankruptcy Trustees seek advice is whether s 109
applies to the exercise of the right of exoneration
in favour of the trust
creditors. This was particularly important to the Deputy Commissioner of
Taxation who has claimed priority
for the payment of the Superannuation
Guarantee Charge under s 109(1)(e) of the Act. That provision
provides:
109 Priority payments
(1) Subject to this Act, the trustee must,
before applying the proceeds of the property of the bankrupt in making any other
payments,
apply those proceeds in the following order:
...
(e) fifth, in payment of amounts
(including amounts payable by way of allowance or reimbursement under a contract
of employment or
under an industrial instrument, but not including amounts in
respect of long service leave, extended leave, annual leave, recreation
leave or
sick leave), not exceeding in the case of any one employee $1,500 or such
greater amount as is prescribed by the regulations
for the purposes of this
paragraph, due to or in respect of any employee of the bankrupt, whether
remunerated by salary, wages, commission
or otherwise, in respect of services
rendered to or for the bankrupt before the date of the
bankruptcy;
- The
Bankruptcy Trustees do not contest that the amount claimed by the Deputy
Commissioner falls within the scope of s 109(1)(e).
However, they do assert
that the amount for which priority is permitted is limited to $100,969.52 and a
non-priority amount remains
in approximately the sum of $27,605.36. It does not
appear that the Deputy Commissioner contests that the limitation applies to
that
extent. It follows that the only question is whether the priority regime
applies to the exercise by the Bankruptcy Trustees
of the right of exoneration?
If it does, the Deputy Commissioner will be entitled to priority over the other
trust creditors.
- As
has been shown earlier in these reasons, the right of exoneration which vested
in the Bankrupt Trustees was merely the power to
apply, or cause to have
applied, trust property to the discharge of trust debts. It is not property
which might be sold so as to
produce “proceeds” which can be applied
as prescribed by s 109. Nor can it be logically said that the trust funds to
be
applied to the discharge of the trust debts are, themselves,
“proceeds” of the right of indemnity. The trust funds
are not
derived from the sale or disposal of the right of indemnity. They are, until
they are utilised by the exercise of the right
of exoneration, trust assets
which s 116(2) provides are not within the description of the “property of
the bankrupt”.
It follows that s 109 cannot apply to the exercise of the
power of exoneration in the hands of the Bankruptcy Trustees.
- In
Re Independent Contractor Services, Brereton J reached the same
conclusion by a different route. His Honour described the conclusion reached in
Re Suco Gold that the corporate trustee’s right of exoneration was
to be applied pursuant to the priorities provisions of the Corporations
Act as “virtually universally accepted to be incorrect” (see
also the comments of Robson J in Re Amerind at [55] – [94]). His
Honour held that the priority provisions were only applicable to the
distribution of assets which were
beneficially owned by the insolvent trustee
and available for division between its general creditors (at pp 230-231, [23])
and that
the right of exoneration was trust property. Whilst the first part of
his Honour’s conclusion may be correct, the second part
is more
problematic. As indicated earlier in these reasons, it is difficult to read the
conclusions of the High Court in Octavo as meaning anything other than
that the right of exoneration is property which is beneficially owned by the
trustee. That appears
to be at odds with the assumptions underlying Brereton
J’s conclusions.
- Perhaps
a different path to the same ultimate conclusion is to acknowledge the
correctness of the proposition identified so clearly
by Farrell J in Bell
Hire Services at [37] to the effect that the right of exoneration is merely
a limited right to pay trust debts from property which is not owned
by the
trustee; namely the trust funds. Once that point is realised it follows that
the payment to the trust creditors is not a
payment from the property of the
company as is contemplated by ss 555 and 556 of the Corporations Act.
- The
determination in Re Suco Gold that the priority provisions applied in
respect of the discharging of trust creditor’s claims by use of the right
of exoneration,
has not enjoyed widespread support. On occasion it has been
suggested that such a principle would only apply where the trustee company
acted
solely as trustee and had no other liabilities of its own (see the analysis of
Campbell J in Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003)
59 NSWLR 361 at 422-429; [194]- [217], although that approach was rightly
questioned by Riordan J in Freelance Global v Bensted Ltd (in liq) [2016]
VSC 181 at [82]).
- In
the Full Court of this Court in Bruton Holdings Pty Ltd (in liq) v Federal
Commissioner of Taxation [2011] FCAFC 79; (2011) 193 FCR 442 at 449; [27], it was observed,
in the context of the liquidation of a corporate trustee, that the suggestion
that the priority provisions would
govern the distribution of trust assets where
the assets were insufficient to meet the claims of all trust creditors was
somewhat
difficult. Indeed, it appears that there is good reason for accepting
the view that the priority provisions (of either the Corporations Act or
the Bankruptcy Act) only apply to the distribution of
“proceeds” of the assets which are beneficially owned by the
insolvent trustee (see
Jacobs’ Law of Trusts in Australia,
8th edition, Lexis Nexis Butterworths, Australia, 2016 at para
[21.15]; McPherson J, “The Insolvent Trading Trust” in Finn
PD (ed), Essays in Equity, 142 at 154; Lerinda Pty Ltd v Laertes
Investments Pty Ltd [2010] 2 Qd R 312 at 316-317, [14]; Re Stansfield DIY
Wealth Pty Ltd (in liq) [2014] NSWSC 1484; (2014) 291 FLR 17 at 25, [29]). However, it must be
acknowledged that the provisions of ss 555 and 556 of the Corporations
Act do not expressly identify that what is distributed by the force of those
sections are the “proceeds” of the property
of the company. The
provisions of ss 108 and 109 of the Bankruptcy Act are more explicit and
easily allow for the conclusion that property which cannot be turned into
proceeds is not within their scope.
Nevertheless, it would appear that ss 555
and 556 do contemplate the payment of debts by use of the company’s
property. That
can only occur if that property is realised by sale or otherwise
and “proceeds”, in the form of money, are produced.
It would seem
to follow that if the property in question was not capable of being realised, it
would not be within the scope of
ss 555 and 556. A trustee’s right of
exoneration is such property.
- The
question of whether or not the priority provisions applied to the disbursement
of trust funds to trust creditors was considered
at length by Robson J in Re
Amerind (see paragraph [94ff]). His Honour adopted the view that the right
of indemnity was a “trust asset” and, for that reason,
the priority
provisions of the Corporations Act would not apply and the funds ought to
be distributed pari passu amongst trust creditors. He did so in reliance
upon the decision of Brereton J in Re Independent Contractors and on the
basis that he was not bound by Re Enhill or Re Suco Gold. This
approach was subsequently adopted by Markovic J, in Mooney’s
Contractors Pty Ltd (2017) FCA 653 at [140].
- A
crucial, albeit implicit, foundation of the decisions in Independent
Contractor Services and Re Amerind, is that the decision of the High
Court in Octavo does not preclude the conclusion that a trustee’s
right of indemnity is “trust property”, as opposed to property
of
the company. As the passages from Octavo which have been cited earlier
in these reasons reveal, that is not terribly easy to sustain. When the
majority of the High Court
in Octavo identified (at the top of p 370)
that the trustee’s right of exoneration “will pass to the trustee in
bankruptcy for
the benefit of creditors of the trust trading operation”,
they could not have meant anything other than that the right was
property
divisible amongst the creditors of the bankrupt and, therefore, not trust
property. If the right of exoneration were trust
property, it would not pass to
the trustee in bankruptcy. It is, with respect, sufficiently clear that the
High Court accepted that
as the right of exoneration is exercisable for the
purposes of relieving the personal liability of the trustee, it is not held
solely
for the interests of the beneficiaries and, therefore, it is not properly
characterised as “trust property”. As that
decision concerned the
construction of the Bankruptcy Act, this court is bound by it in relation
to the matters under consideration.
- The
only conclusion which is open is that although the right of exoneration is not
trust property and it passes to the bankruptcy
trustee on the making of the
sequestration, it can only be used in the administration of the bankrupt’s
estate by requiring
the discharge of the debts owing to the trust creditors to
be paid from the trust funds. Moreover, regardless of what the position
might
be in the corporate insolvency context pursuant to ss 555 and 556 of the
Corporations Act, under the Act the priority provisions of ss 108 and 109
apply only to the “proceeds of the property of the bankrupt”.
The
right of exoneration is incapable of producing “proceeds” within the
meaning of those sections such that, whilst
it may be property of the bankrupt,
it is not property which is capable of being turned into “proceeds”
for distribution
pursuant to s 108 and s 109 of the Act.
- It
follows that the answer to the Bankruptcy Trustees’ question in this
respect is that s 109 of the Act does not control the
manner in which the
Bankruptcy Trustees are entitled to utilise the right of exoneration in
discharging the claims of the trust creditors.
Whether the trust creditors take pari passu
- Counsel
for the Bankruptcy Trustees made the further submission that, if s 109 did not
apply to the exercise of the right of exoneration,
then it ought to be applied
in such a manner that each of the trust creditors should be paid an amount which
is proportionate to
the amount which their debt compares to the totality of
trust debts; that is pari passu. Such an approach is one which is
adopted by the learned authors of Jacob’s Law of Trusts in
Australia (Lexis Nexis Butterworths, 8th edition, 2016) at 523,
[21-15] and is consistent with the general equitable principle that the
distribution of an insolvent’s
property should proceed on the footing of
equality amongst creditors of equal degree.
- An
alternative approach, which was identified in the course of submissions, is that
priority ought to be given to the trust creditors
in the order in which their
debts arose. That view was advanced by Williams QC in an article,
“Winding Up of Trading Trusts: Rights of Creditors and
Beneficiaries” (1983) 57 ALJR 273, 277, although it is not one which
has attracted any judicial support. Needless to say, the temporal fortuity of
the incurring of
debts to creditors does not appear to be a sound basis for
prioritising their repayment where, as between the trustee and the creditors
or
those creditors inter se, no relevant competing equitable interests
arise. At the time such trust debts are incurred (being prior to the
trustee’s insolvency)
the trust creditors merely have the rights of
creditors at common law, neither more nor less. A creditor who may be
“first
in time” does not then obtain any entitlement to be
subrogated to the right of exoneration and supporting lien. That right
of
subrogation is inchoate until the trustee has been shown to be unable to pay the
debt or becomes insolvent. It is only then that
the trust creditors’
rights crystallise and they do so simultaneously. The right of each of the
trust creditors is in respect
of the undifferentiated whole of the trust assets
irrespective of when the assets were acquired or when the debts were incurred.
In other words, apart from differences in value, the nature and content of their
rights of subrogation are identical with the consequence
being that none can
claim any superior entitlement to the trust assets. That being so, it naturally
follows that any distribution
of the fund available to meet the right of
exoneration must occur pari passu.
- It
is appropriate at this juncture to observe that it may be that the
crystallisation of the right of subrogation is deferred to an
even later point
in time where, upon the taking of accounts, it transpires that there is a
balance on the account as between the
trustee and the beneficiary in favour of
the trustee (Jacob’s Law of Trusts (8th ed), 2016; para
[21.15]). If that is the relevant occasion for identifying when the right of
subrogation arises, any trust creditor
existing at that point in time would be
entitled to participate in it.
- A
practical reason for rejecting the prioritisation of trust debts on a temporal
basis is that it is likely to result in significant
administrative difficulty
where, as between the trustee and a trust creditor, the ultimate liability is
the end product of a running
account. That may well be the position in relation
to a debt owed to the Deputy Commissioner of Taxation in respect of the
superannuation
guarantee charge. In such circumstances, there would be great
difficulty in ascertaining, when, as between the various creditors,
the
respective liabilities actually arose.
- In
Bell Hire Services Farrell J also concluded that the exercise of the
right of exoneration by the liquidator of a trustee required discharging trust
creditors in a pari passu manner given that they would all have been
equally entitled to exercise their subrogated right to a lien over the trust
assets.
Whilst, as her Honour observed (at [37]), it may be unfortunate that
this gives rise to two regimes for the payment of debts in the
administration of
an insolvent trustee’s estate, that was the necessary consequence of
recognising the now well-established,
equitable entitlements of trust
creditors.
- In
the result, the approach identified by Brereton J in Re Independent Contract
Services (and by McMurdo J in Lerinda Pty Ltd v Laertes Investments Pty
Ltd [2010] 2 Qd R 312 at 315) to the effect that there should be equality
amongst all creditors of equal degree, should be adopted, such that the
discharging
of trust debts by the application of the right of exoneration should
occur pari passu.
Trust creditors bringing payment from trust assets to
account
- The
Bankruptcy Trustees also seek directions as to the manner in which the personal
estate of the bankrupt should be distributed as
between trust creditors and
non-trust creditors. Submissions on this issue were predicated upon the basis
that the trust creditors
have been entitled to the application of the right of
exoneration to the exclusion of non-trust creditors. The question which then
arises is whether the rights of trust creditors to benefit from the personal
estate of the bankrupt trustee are to be deferred until
the non-trust creditors
have received the same proportionate payment as the trust creditors have from
the right of exoneration?
In other words, ought the trust creditors, when
participating in the distribution of the proceeds of the bankrupt’s
personal
estate, bring into “hotchpot” the amount which they have
received by use of the trustee’s right of exoneration.
- The
Bankruptcy Trustees identified this to be yet another difficult issue in this
application. They submitted that the better view
was that the trust creditors
are not required to bring into account any payment received from the right of
indemnity when participating
in the distribution of the proceeds of the property
of the bankrupt. The foundation of this submission was that the right of
exoneration
was trust property and, therefore, not part of a “common
fund” for the purposes of the hotchpot principle.
- There
is relatively little authority on this topic, but the weight of it supports the
view that the “hotchpot” principle
should apply where trust
creditors have been able to benefit from the property of the bankrupt to the
exclusion of non-trust creditors.
In relation to its application in the winding
up of an insolvent trading trust; McPherson J, writing extrajudicially in
“The Insolvent Trading Trust” in Finn PD (ed), Essays in
Equity (Law Book Co, 1985, 142 at 158), said:
Hence, a person who is a creditor of the company in
consequence of its activities as a trading trustee is entitled to prove in the
winding-up together with the private creditors of the company; but he is not
entitled to receive a dividend from the private assets
of the company until the
dividend paid to other creditors at least equals that paid to the trust
creditors out of the trust funds.
(Re Oriental Inland Steam Co. (1874)
30 LT 317; affd 9 Ch App 557; Re Standard Insurance Co [1968] Qd R 118,
applying Banco de Portugal v Waddell (1880) 5 App Cas 161 at 168. Cf
also the Rule in Cherry v Boultbee [1839] EngR 1099; (1839) 4 My & Cr 442, discussed
McPherson, op cit pp 366-367). That, in the end, is what is meant by saying
that it is only by the “lucky accident”
(Re Johnson (1880) 15
Ch D 548 at 552-553, per Jessell MR) of there being a trust that a trust
creditor is put in a better position than any other creditor of the
company. In
practice it will confer on him no advantage unless in the end the assets of the
trust produce a dividend that amounts
to more than that payable out of the
private assets to the general private creditors of the insolvent company.
- Such
an approach accords with the maxim that “equity is equality”
(Akers v Deputy Commissioner of Taxation [2014] FCAFC 57; (2014) 223 FCR 8 at [135]) and
the general insolvency principle that, to the extent possible, all creditors of
a bankrupt are to be treated equally in the
administration and distribution of
the bankrupt’s estate.
- Both
the application of “hotchpot” principle and its historical
development were considered by the Privy Council in Cleaver v Delta American
Reinsurance Company (in liq) [2001] UKPC 6; [2001] 2 AC 328. That case concerned the
liquidation in the United Kingdom of a foreign corporation which was also in the
process of being liquidated
elsewhere. It is fair to say that the transaction
which was the subject of the litigation had a moderate degree of complexity to
it. However, the “hotchpot” principles relating to cross-border
insolvencies are relatively easy to identify. They
provide that a creditor who
has obtained a benefit from the distribution of the property of an insolvent
company in a foreign jurisdiction,
is not entitled to receive a dividend from
the English liquidation of the same company unless it brought into hotchpot
their foreign
dividend. It was observed that the rule only applied where the
foreign benefit had been derived from a “common fund”
as was the
situation in that case. If the benefit had been obtained from assets which were
not otherwise available to the “common
fund”, the rule had no
application. That principle is often reflected in the fact that secured
creditors are not subject to
the hotchpot principle in an insolvency context as
property which is the subject of security has never been regarded as being part
of a “common fund” which is distributable amongst all creditors.
For that reason, a secured creditor might estimate
the value of their security
and prove, unimpeded, in the liquidation or insolvency for any balance owing
(see Cleaver esp at p 340; [26]).
- An
adumbrated history of the hotchpot principle can be found in the decision of
Barrett J in Australian Securities and Investments Commission v Idylic
Solutions Ltd [2009] NSWSC 1306; (2009) 76 ACSR 129 at 138-139. Relevantly, for present
purposes, it is only necessary to refer to paragraph [60] of his Honour’s
reasons:
[60] The hotchpot concept is a reflection of the maxim
“equality is equity” (with “equality”, in an appropriate
case, understood as proportionate equality), supplemented by the maxim “he
who seeks equity must do equity”. The equality
(or proportionate
equality) that equity in general will promote can only be struck after a person
seeking the benefit of it has,
as a preliminary, borne whatever burden equity
demands be borne in order to ensure that the ultimate equality (or proportionate
equality)
is not distorted by the effects of unconscientious retention of
separately received benefit.
- The
Bankruptcy Trustees submitted that the hotchpot principle did not apply in the
present case because the right of exoneration was
not property which formed part
of the personal estate of the bankrupt such that the trust creditors were not
benefiting from the
"common fund" which is distributed under ss 108 and 109.
However, for the reasons which have been stated above, that submission
also
cannot be accepted. The right of exoneration is part of the bankrupt’s
personal property which was divisible amongst
the creditors and which vested in
the Bankruptcy Trustees on the making of the sequestration order. The payments
to the trust creditors
via the right of exoneration are, therefore, payments out
of a “common fund”. That remains so, even though the debts
to trust
creditors are discharged in part by the use of trust funds.
- Although
the Bankruptcy Trustees submitted that the trust creditors were “secured
creditors” for the purposes of the Bankruptcy Act, the authorities
are to the contrary (see Buckle at 247; Lerinda Pty Ltd v Laertes
Investments Pty Ltd [2010] 2 Qd R 312). Indeed, it can be remarked that if
they were secured creditors, the fifty or so authorities cited by the Bankruptcy
Trustees for
the purposes of the application would have been otiose as there
could have been no argument as to which creditors were entitled to
priority.
- The
same result is reached by an application of s 108 of the Act. That section has
two aspects to it. First, that all debts proved
in a bankruptcy must rank
equally. The second is the legislative direction to discharge the debts of the
bankrupt proportionately
if the proceeds of the property of the bankrupt are
insufficient to meet them in full. It follows that when the Bankruptcy Trustees
attend to the distribution of the “proceeds” of the property of the
bankrupt they are required, to the best of their
ability, to ensure that the
debts proved in the bankruptcy are paid proportionately and, unless otherwise
provided for, equally.
Where, in the course of the administration the trust
creditors have received partial payment of their debts by use of the right
of
exoneration, the legislative direction necessarily requires that the
“proceeds” are to be applied in favour of the
non-trust creditors
until that point is reached where their debts have been paid in the same
proportion as the trust creditors’
debts. Thereafter, the remainder of
the proceeds, if any, are to be applied proportionately across all debts. This
application
of s 108 of the Act to the circumstances of an insolvent trustee
reflects both the hotchpot principle and the overriding scheme of
the
Bankruptcy Act that the bankrupt’s creditors are to be treated
equally.
Use of the right of indemnity to meet the costs, expenses and
remuneration of the Bankruptcy Trustees
- Yet
a further direction sought by the applicants is that they be entitled to be paid
their costs, expenses and remuneration of the
bankruptcy administration from the
proceeds of the right of exoneration or directly from the trust assets. They
seek approval for
the payment of:
(a) $139,137.04 (being an amount already
paid pursuant to creditors’ approval);
(b) $36,894.96 (the amount incurred to date but unpaid); and
(c) $15,000 (in respect of future remuneration until the finalisation of the
bankruptcy).
- Whilst
there may be a question about whether approval is required for the payment of
the costs, expenses and remuneration of the Bankruptcy
Trustees, given that the
intention is to utilise the trust assets to meet those financial imposts, it is
an appropriate subject for
this Court to consider pursuant to the power granted
to the Court by ss 90-15 and 90-20(1)(a) of the Insolvency Practice
Schedule.
- The
entitlement of a bankruptcy trustee to recover the reasonable costs and expenses
of their administration of a bankrupt estate
as well as a reasonable
remuneration arises under the general law (see McDonald v Young [2012]
FCAFC 127 at [67]- [68]; Wilson v Official Trustee in Bankruptcy [2000]
FCA 1251). Those entitlements are accorded priority to the claims of the
bankrupt’s creditors by s 109(1)(a) of the Act but only in respect
of the
distribution of the “proceeds of the property of the bankrupt”. In
this application, the Bankruptcy Trustees
seek an order or direction that they
be entitled to meet their costs, expenses and their remuneration from the money
which was, or
is to be, obtained from the sale of the trust assets; being the
Subway franchise. They submit that those funds, which are held in
their
accounts, are the proceeds of Mr Lee’s right of exoneration and should be
used to discharge their claimed entitlements.
- As
is apparent from the earlier discussions in these reasons, the right of
exoneration is not property from which a bankruptcy trustee
is able to obtain
“proceeds” which can be distributed under s 109. Whilst some
authorities have held that the right
is a trust asset, the better view is that
it is property of the trustee, albeit of a limited nature. That being said, the
nature
of that right is uncertain and, for that reason, the Courts have
experienced some difficulty in identifying a principled path by
which the
entitlements of bankruptcy trustees and liquidators might be met when the only
available asset is a trustee’s right
of exoneration.
- Before
considering the authorities, it is appropriate to acknowledge that the payment
to insolvency practitioners of their costs,
expenses and remuneration with
respect to insolvency administrations is, unquestionably, a most significant
matter. Although bankruptcy
trustees no doubt undertake their work as part of
their professional practice, it is work which has an important public interest
element. It is in the interests of both society as a whole, and of the economy,
that insolvent estates be properly administered
in a way that is economically
efficient for the creditors and the bankrupt. That is true whether the bankrupt
is a trustee or otherwise.
The importance attached to the payment of the
bankruptcy trustees’ entitlements by the Legislature is manifest in the
priority
that they have in the application of the proceeds of the property of
the bankrupt pursuant to s 109. In the circumstances where
the bankrupt is a
trustee, however, particular difficulties arise. Under the Act, property which
the bankrupt held on trust is not
property divisible amongst the creditors nor
can it be used to pay the bankruptcy trustees. Nevertheless, the importance
attached
to the work of bankruptcy trustees and liquidators, has seemingly
encouraged successive courts to ascertain ways and means of ensuring
that, to
some extent, the entitlements of bankruptcy trustees or liquidators are paid
from trust assets or from the right of exoneration.
There is, however, no
consistency in how this is achieved.
- Despite
the above, it must also be accepted that, from time to time, an insolvency
administration may not result in a bankruptcy trustee
or liquidator being paid
their full entitlements. That is an inherent hazard of the nature of their
undertaking. Often, the extent
to which an insolvency practitioner will recover
a suitable return from an administration will depend upon the structure and
value
of the estate or company being administered and, on occasion, no amount of
due diligence will protect the insolvency practitioner
from loss. That is an
unfortunate risk, but it is not the role of the court to remediate that if it
cannot be achieved within established
principles.
- A
trichotomy has formed in the various authorities concerning the rights of
insolvency administrators to recover their costs, expenses
and remuneration from
trust assets. The first category of cases are those which attempt to discern
something within the relevant
insolvency regime which might permit the use of
trust property or the right of exoneration to satisfy the entitlements of the
liquidators
or bankruptcy trustees in priority to other creditors. The decision
of King CJ in Re Suco Gold falls into that category. There, the Chief
Justice held that s 292 of the Companies Act 1962 (SA) gave the
liquidator’s costs, expenses and remuneration priority by, first,
“regarding” them as trust debts and,
second, by holding that s 292
applied to the payment of trust debts. Other cases have found alternative
justifications in the statutory
regimes. Exemplars of that include the judgment
of Jacobs J in Re Suco Gold and those of Lush J in Re Enhill. Some
cases, of which Bell Hire Services is one, have reached the conclusion
that there is nothing in the legislation which affords any priority to the
claims of the liquidators.
In the decisions of Needham J in Re Byrne
Australia Pty Ltd and Re Byrne Australia Pty Ltd (No 2) his Honour
considered the statutory regime in detail but ultimately concluded that it did
not permit the expenses of the administration
to be met from the trust assets at
all.
- The
second category of cases rely upon the inherent or statutory supervisory power
of the courts over trustees and trusts to justify
the payment of costs, expenses
and remuneration to the insolvency administrator. The power relied upon is said
to arise from the
general law of equity which enabled the courts to vary the
rigid principle that trustees were to act voluntarily where the circumstances
warranted the paying of remuneration; (Re Freeman’s Settlement Trusts
(1887) 37 Ch D 148; Nissen v Grunden [1912] HCA 35; (1912) 14 CLR 297); or from the
powers in various State statutes conferring a similar authority (s 101 of the
Trusts Act 1974 (Qld) is relevant in this particular case). The decision
of Black J in MF Global Limited (in liq) (No 2) [2012] NSWSC 1426 is an
example of this as is the decision of Campbell J in Re Application of
Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297. Whilst, that general power to authorise the
payment of remuneration may be appropriate in the regulation of the rights of
trustees
and beneficiaries inter se on the basis that it would be
unconscientious for the beneficiaries to obtain the benefit of any exceptional
voluntary exertions
of the trustee, the same cannot be said of the alteration of
rights as between the liquidator of a trustee and creditors of that
trustee.
Another difficulty with this approach is that it directs the payment of costs,
expenses and remuneration to the insolvency
administrator rather than to the
trustee of the trust. This tends to significantly broaden the scope of power
purportedly being
exercised. In such cases, the exercise of power is not the
mere approval of the reasonableness of payments, the validity of which
is
accepted. It is the exercise of a power which depends upon the circumstances of
the case and which impacts upon trust and non-trust
creditors alike, all of whom
are not usually represented at the hearing of an application. Whilst the
pragmatism of such an approach
cannot be doubted, especially in the case of
relatively small administrations, the underlying doctrinal justification is more
obscure.
- The
third category of cases are those which justify the appropriation to the
liquidator or bankruptcy trustee of trust funds to meet
their entitlements by
reason of the benefit derived by the trust creditors from the exertions of the
insolvency administrators.
The cases in this category include, Berkeley
Applegate and Re Universal Distributing and those which have
followed them, not in the least of which are the decisions of Black J in Re
Trio Capital Ltd (in liq) [2012] NSWSC 597; (2012) 88 ACSR 700 and Re Dungowan Manly Pty
Ltd (in liq) [2015] NSWSC 491; (2015) 105 ACSR 648. It can be readily accepted that this
category consists of two parallel principles, one being equitable (Berkeley
Applegate) and the other (Re Universal Distributing) probably
originating at common law. (Cf the treatment of the Re Universal
Distributing principle by the High Court in Stewart v Atco Controls Pty
Ltd (in liq) [2014] HCA 15; (2014) 252 CLR 307 although that consideration tended to focus
on the equitable charge which arose to protect the entitlement rather than the
salvage
principles from which the entitlement originated).
- Whilst
these three disparate strands of reasoning appear in the authorities, it is not
infrequently the case that the differences
between them, and in particular,
between the second and third categories is not always maintained. Indeed,
resort is often had to
the principles in Berkeley Applegate and Re
Universal Distributors to support conclusions which are primarily reached on
basis of the first and second categories.
Some authorities concerning the right to recover costs,
expenses and remuneration
- The
following authorities provide an illustration of the various and diverse
approaches to the justifications for payment of an insolvency
administrator’s costs, expenses and remuneration from trust assets.
- The
decision in Re Enhill Pty Ltd has been briefly considered above. There
the Court dealt with the winding up of an insolvent corporate trustee pursuant
to the provisions
of the Companies Act 1961 (Vic). It took the view that
the “proceeds of the trustee’s lien are available for division
amongst the bankrupt’s
creditors generally, not only among creditors of
the trust business, and in the case of a company in liquidation are subject to
the
control of the liquidator under s.292” (at 564 per Young CJ; see also
569 per Lush J). The approach in Re Enhill was to regard the right of
exoneration as a right in the trustee to beneficially appropriate trust funds to
itself in an amount equal
to the liabilities incurred in the performance of the
trust regardless of whether or not the funds would be used to discharge those
liabilities. It was a logical extension of that conclusion that such funds were
property divisible amongst all of the trustee’s
creditors and, indeed,
property from which the liquidator’s priority claim for remuneration and
expenses might be paid under
the Companies Act 1961 (Vic). As explained
earlier in these reasons, the foundation of the decision has subsequently been
shown to be in error by McLelland
J in Re ADM Franchise Pty Ltd (1983) 7
ACLR 987.
- The
decision in Re Suco Gold provides a stark exemplar of the difficulty
encountered when the court accurately identifies the limited nature of the right
of exoneration,
but then attempts to meet the claims of the external
administrators of the insolvent trustee from that right. There, the Court
correctly
identified the right of exoneration as being the entitlement to
discharge trust liabilities by use of trust funds (at 105, per King
CJ), with
the consequence that the trustee had no right to use or apply the trust property
for any other purpose. At 107-108, King
CJ said:
It seems to me, however, that the right of indemnity can
only produce proceeds for division among the creditors generally if the trustee
has discharged the liabilities incurred in the performance of the trust and is
therefore entitled to recoup himself out of the trust
property. If he has not
discharged the liabilities, the right of indemnity entitles him to resort to the
trust property only for
the purposes of discharging those liabilities. He may
apply the trust monies directly to payment of the trust creditors or he may
take
it into his own possession for that purpose. If he takes the trust property
into his possession to satisfy his right to be
indemnified in respect of unpaid
trust liabilities, it seems to me that the property retains its character as
trust property and
may be used only for the purpose of discharging the
liabilities incurred in the performance of the trust.
Given that conclusion, it is surprising that the Court allowed the
liquidator’s costs, expenses and remuneration to be paid
from funds which
could be used “only” for the purposes of discharging trust
creditors. Somewhat incongruously, after
rejecting the decision in Re
Enhill in so far as it held that the right of exoneration was property which
was able to be used to meet the claims of all creditors, King CJ relied
upon it as being “highly persuasive authority for the proposition that the
liquidator’s costs, expenses
and remuneration may be paid out of the trust
property”. That was particularly unusual given that the conclusion in
Re Enhill, that the trust assets might be used to meet the
liquidator’s costs, expenses and remuneration, was only reached as a
consequence
of the determination that the right of exoneration beneficially
placed trust funds at the disposal of the trustee. That point of
principle had
been expressly rejected by King CJ and the other members of the Court.
Nevertheless, after stating that there were
strong practical considerations in
favour of allowing the use of trust funds to meet the liquidator’s
expenses and remuneration,
King CJ held that it could be “justified by
reference to the obligations of the trustee company arising out of the carrying
on of the business authorised by the trusts” and that on winding up the
company’s debts may only be paid in accordance
with the provisions of the
Companies Act 1961 (Vic). That necessarily required a liquidator to
incur costs and expenses and be paid remuneration. The learned Chief Justice
then
referred to the existing provision of the Companies Act, s 292 which
provided for the payment of the expenses and remuneration of the liquidator in
priority to other unsecured debts and
said (at p 110):
As the company’s obligation as trustee to pay the
trust debts incurred in carrying out the trust cannot be performed unless
the
liquidation proceeds, it seems to me to be reasonable to regard the expenses
mentioned above as debts of the company incurred in discharging the duties
imposed by the trust and as covered by the trustee’s right of indemnity.
(Emphasis added)
The learned Chief Justice was, no doubt, troubled by the approach of effectively
“deeming” liabilities to be “trust
debts”, with the
consequence that he identified an alternative basis upon which the trust funds
could be used to meet the liquidator’s
claims:
If the reasoning is wrong I would, like Lush J in
Enhill Pty Ltd be prepared to rely on the principle enunciated by Dixon J
in Re Universal Distributing Co Ltd (in liquidation).
(Citations omitted)
As appears from the discussion which follows, recent authorities have
identified the twin principles in Re Universal Distributing Co and
Berkeley Applegate as providing a more solid foundation for granting
relief to insolvency distributors.
- The
orders made by the Court in Re Suco Gold (see p 111) were to the effect
that the cost, expenses and remuneration of the liquidators and the costs of the
winding up application
were to be paid in priority to the trust creditors.
Unfortunately, the primary basis on which the Court held that the
liquidator’s
costs, expenses and remuneration were to be paid from the
trust assets; being that they were to be “regarded” as trust
debts;
does not adequately explain how it is that they were to be accorded priority
over the other trust creditors. If it were the
case that the liquidator’s
costs, expenses and remuneration were trust debts, it would necessarily follow
that they would rank
pari passu with all other trust debts.
- In
Re Suco Gold, Jacobs J agreed with the Chief Justice as to the
entitlement of the liquidators to be paid from the trust assets or right of
exoneration.
His Honour relied upon a construction of s 292 of the Companies
Act 1962 (SA) as permitting the use of trust assets for the meeting of those
expenses. He held (at p 113) that the right of trust creditors
to prove in the
liquidation was specifically identified in the provisions of the Companies
Act to be subject to the priority regime:
Looking at the whole legislative scheme, therefore, I
can find nothing in the language or structure of the legislation to deny the
proposition that, in a case such as this, s 292 can operate upon the trust
assets to provide for the remuneration of the liquidator
in priority to other
claims, more particularly as the other provisions of s 292 would seem clearly to
be available to regulate the
rights of creditors inter se. To hold
otherwise would defeat, or at least frustrate, the legislation. The liquidator
is appointed by the Court, and is answerable
to the Court, and is clearly
entitled to remuneration for his services whether fixed by the Court or by the
creditors whose proofs
have been admitted. He would not be available to act at
all unless the Act is allowed to speak according to its tenor; and indeed,
unless the Act so speaks, the Court itself would be in no better position to
recover the costs and expenses of the winding up, if
the winding up were
undertaken by the Court without the intervention of a liquidator. I cannot think
that the legislature intended
such a result, and I am not persuaded that the
language of the Act, or the general law, compels such a
result.
His Honour concluded (at p 115) that the priority regime in the Companies
Act applied to the insolvent trustee’s right of exoneration and,
therefore, it was available for meeting the liquidator’s
claims. Whilst
it is difficult to discern in his Honour’s reasons how it might be that
the trustee’s right to apply
trust funds only in discharge of the
trust creditor’s debts might be reformulated into a right to use trust
money for other purposes, perhaps
the answer is in Lush J’s observations
(ibid) that, “I prefer to rest my decision upon what appears to me to be
the manifest
intention of the legislation, derived from the structure and
language of the Act”.
- Whilst
the outcome in Re Suco Gold in relation to the costs, expenses and
remuneration of the liquidator is pragmatic, undoubted tension remained between
the nature
of the right of exoneration and the ability to use it for those
purposes. The conclusion of Jacobs J appears to come perilously
close to
contravening the prescription which exists in the statutory insolvency regimes
(albeit implicitly in the Corporations Law) that trust assets are not to
be used to meet the claims of ordinary creditors and the costs and expenses of
the administration of
the insolvency.
- An
important decision in this context is that of Brereton J in Re Independent
Contractor Services (Aust) Pty Ltd (in liq) [2016] NSWSC 106; (2016) 305 FLR 222. It has been
discussed above and, it will be recalled, in it his Honour determined that the
right of exoneration was a trust asset
to which s 556 of the Corporations Act
did not apply. The further question considered by Brereton J concerned the
ability to utilise the assets of the trust to meet the
liquidator’s costs,
expenses and remuneration. Given that his Honour accepted that property which
is not beneficially owned
by a company is not available to meet the claims of
its creditors (Re Australian Home Finance Pty Ltd [1956] VicLawRp 1; [1956] VLR 1; (1955) 63
Arg LR 247; Re Kayford Ltd [1975] 1 All ER 604), it is somewhat counter
intuitive that he determined that the funds might be used to meet the
liquidator’s claims. In this
respect his Honour made the rather broad
statement that:
[27] The liquidators of a company which is the trustee
of the trading trust and has no other activities, are entitled to be paid
their
costs and expenses, whether for administering the trust or for “general
liquidation work”, out of the trust assets.
His Honour referenced the following cases as supporting that proposition: Re
Suco Gold Pty Ltd (In Liq) (1983) 33 SASR 99; Grime Carter & Co Pty
Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158; Re French
Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361; 184 FLR 280
at [201]; Bastion v Gideon Investments Pty Ltd (in liq) [2000] NSWSC 939; (2000) 35 ACSR
466 at [70]; In the matter of North Food Catering Pty Ltd (2014) 32 ACLC
14-049; Re AAA Financial Intelligence Ltd (in liq) ACN 093 616 445 (in
liq) [2014] NSWSC 1004 at [13]. His Honour had made an almost identical
comment in the last of these cases where he had described the statement as being
the “first
principle” to be applied when considering claims by
liquidators for their costs, expenses and remuneration from trust assets
held by
an insolvent trustee company. It seems to be implicit in his Honour’s
statement of principle that the insolvent trustee
company has remained as
trustee despite the winding up order and has retained ownership of the assets
which were the subject of the
trust.
- The
reliance by his Honour on Re Suco Gold as supporting that “first
principle” necessarily suggests that it should be more accurately stated
as being that the costs,
expenses and liability for remuneration arising out of
the liquidation are trust debts of the trustee and must be met by the
exercise of the right of exoneration from the trust assets. The difficulty
with this is that the approach in Re Suco Gold which deems the
liquidator’s imposts to be “trust debts”, does not afford any
sound basis for according the payments
to the liquidator any priority over the
other trust creditors. In fact, in his subsequent decision in Re Independent
Contractor Services, Brereton J himself asserted that Re Suco Gold
was in error in applying the priority provisions of the Corporations Act 2001
(Cth) to payments out of the assets of the trust. Despite all of that, it
seems to be implicit in the comments of Brereton J in Re AAA Financial
above that, not only are the assets of the trust available to meet the
costs, expenses and remuneration of the liquidator, but that
the liquidator is
entitled to priority over the other trust creditors.
- Justice
Brereton also specifically cited Grime Carter and Co v Whytes Furniture
(Dubbo) Pty Ltd [1983] 1 NSWLR 158, a decision of McLelland J, in support of
the proposition that the liquidator was entitled to recover amounts in relation
to the
costs, expenses and remuneration from the trust assets. However, that
decision and its reasoning must be doubted given McLelland
J’s subsequent
judgment in Re ADM Franchise Pty Ltd (1983) 7 ACLR 987, where he
repudiated the underlying reasoning which led him to the conclusion in Grime
Carter & Co that the trust assets were available to meet the costs,
expenses and remuneration of a liquidator.
- His
Honour further relied upon the decision of Campbell J in Re French Caledonia
Travel Services Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361; [201] in support of
his first principle. That decision, however, merely relied upon the approach of
King CJ in Re Suco Gold to the effect that the costs and expenses in the
liquidation process should be “regarded” as debts of the trustee
incurred
in discharging the trustee’s duties. The decision of Austin J in
Bastion v Gideon Investments Pty Ltd (in liq) [2000] NSWSC 939; (2000) 35 ACSR 466, [70]
was also cited by Brereton J in support of his first principle. Again, there is
some inconsistency in that Austin J purported
to follow the inconsistent
decisions of Enhill and Suco Gold, neither of which formed
the basis of Brereton J’s conclusion that the right of exoneration was a
trust asset.
- Lastly,
Brereton J relied upon his earlier decision in In the matter of North Food
Catering Pty Ltd (2014) 32 ACLC 14-049. There he referred to a number of
authorities which had adopted a variety of approaches to support the payment of
the costs, expenses
and remuneration of liquidators of trustee companies and
said:
- Those
cases appear to me to establish clearly enough that in the present case the
liquidators are entitled to be paid their remuneration,
whether for
administering the trust assets or for general liquidation work, out of the trust
assets, since the company has no assets
other than trust
assets.
Unfortunately, his Honour did not identify which of the various foundational
principles caused him to reach that conclusion. His
Honour did refer to the
decision of Black J in Re MF Global Australia Ltd (in liq) (No 2) [2012]
NSWSC 1426, which, in part, adopted the approach of Campbell J in Re
Application of Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297, which, itself, relied upon the
inherent power of a Court to allow a trustee’s costs, expenses and
remuneration out of the
assets of a trust.
- From
this brief review of the “first principle” of Brereton J in AAA
Financial (which was repeated in Re Independent Contractors), it is
apparent that the authorities on which his Honour relied are, themselves, based
upon a variety of inconsistent foundations.
That is not to say that his
Honour’s first principle is not broadly correct. However, a more precise
focus upon the underlying
rationale for the principle might assist in
elucidating its boundaries. In particular, an understanding of its juridical
basis would
disclose whether liquidators should be entitled to be paid out of
the trust assets per se or only those assets in respect of which the
insolvent trustee has a right of exoneration. The terms in which the first
principle
are stated suggest that liquidators of a trustee company which had no
right of exoneration would, nevertheless, be entitled to recover
their claims
for their work in the winding up out of the trust assets. It would be most
unusual were the first principle to extend
that far and no case suggests that
the beneficial interest of beneficiaries in trust assets ought to be applied in
this manner.
- The
decision of Farrell J in Bell Hire Services is also important in this
context and particularly so given that her Honour identified that the insolvent
trustee’s right of
exoneration was merely the right to cause the trust
assets to be applied to discharge trust debts. However, it appears that her
Honour adopted the view that the power to order that the liquidators be paid
their costs, expenses and remuneration was unconnected
with the right of
exoneration and that the discretion of the Court to make an order in this
respect was at large. At paragraph [22]
her Honour said:
[22] The liquidator's remuneration and expenses in
respect of work relating to trust assets which is properly done for the purpose
of winding up the company's affairs should be paid out of non-trust property of
a trustee company to the extent that such property
is available. However, if
non-trust property is not available and a liquidator would not otherwise be
required to undertake that
work, it would normally be appropriate for the cost
of the work to be paid from trust assets: see Re AAA Financial Intelligence
Ltd (in liq ACN 093 616 445) [2014] NSWSC 1004 (AAA) per Brereton J at
[13].
This approach appears to be inconsistent with her Honour's consideration of how
the costs of the winding up application ought to
be dealt with. Her Honour held
that those costs had to be treated as trust debts in accordance with the
decision in Re Suco Gold, but that they did not enjoy any priority over
other trust debts such that they ranked pari passu with other trust
creditors.
- A
careful review of the significant authorities concerning the entitlement of a
liquidator of a corporate trustee to be paid their
costs, expenses and
remuneration from trust assets was recently undertaken by Robson J in Re
Mamounia Pty Ltd (in liq) [2017] VSC 230 at [111] – [162]. There is
no need for that discussion to be repeated here. Importantly, his Honour
ultimately determined at [169]
that the correct approach was to apply the
principles established in Re Universal Distributing which entitled the
liquidator of a trustee company to access trust assets for his reasonable
expenses and remuneration incurred in
taking steps to investigate and conduct
certain public examinations to ascertain and assess the validity of the claims
by certain
creditors and the related parties against the trust assets as well as
the existence of any claims against various entities. This
was founded upon his
Honour’s earlier identification (at [111]) that the principle to be
derived from Re Universal Distributing permitted payment from the fund of
money created by the liquidator of so much of the remuneration “fixed for
work done in the
winding up which was referable to the calling in and conversion
of the assets producing the fund” and which would include expenses
reasonably incurred in the care, preservation and realisation of the property.
- The
exact nature of the principles which underlie the Court’s power to permit
the external administrator of an insolvent trustee
to recover from trust assets
its costs, expenses and remuneration in priority to the trust creditors, does
not emerge from the disparate
authorities on this topic. That is not surprising
given that the antecedent question of what are the rights of the insolvency
administrator
to access the right of exoneration or the trust assets is, itself,
uncertain. Nevertheless, what is clear is the appreciation that
the
administration in the insolvency of a trustee necessarily has the consequence
that trust creditors will have their claims met
or dealt with in one way or
another. In the circumstances where no new trustee is appointed, the
discharging of such debts can only
occur through the liquidation process which,
in itself, will often involve substantial work in administering the trust. The
net
result is that trust creditors will be paid, in whole or in part, as a
consequence of the work undertaken by the insolvency administrator.
- In
Re Universal Distributing the company being wound up had issued
debentures which were secured by a floating charge over all of its undertaking.
Its assets
were insufficient to meet the claims of the debenture holders, yet
the liquidator sought to be allowed his remuneration and disbursements
from the
proceeds realised in the sale of those assets. The debenture holders objected
to the granting of this priority to the liquidator
at the expense of their
secured entitlements. Central to the decision of Dixon J was the notion that,
regardless of how the assets
were realised, the cost of doing so would
inevitably be borne by the debenture holders. If they were realised at the suit
of the
holders themselves, they would bear the realisation costs as they could
only ever receive the net proceeds of sale after the Court
appointed
receivers’ costs had been deducted. Necessarily, that foundational
conclusion resulted in a distinction being drawn
between the work which was
necessary to be carried out in the preservation and realisation of the secured
assets on the one hand,
and the conduct of the winding up on the other. In this
respect Dixon J concluded at pp 174 - 175:
In applying this principle, only those expenses appear
to have been thrown against the fund belonging to the debenture-holders which
have been reasonably incurred in the care, preservation and realisation of the
property. In the present case the liquidator has employed
a material part of his
time and energies in recovering moneys, both uncalled capital and debts, which
enure for the debenture-holder,
and in so far as these services increase the
remuneration which he receives, I see no reason why the burden should not be
thrown
upon the proceeds. The question is not whether moneys available for
unsecured creditors should be relieved at the expense of the
security. In such a
case it may be said that the service of collecting enough to discharge the
debenture must in any event be performed
in order that a surplus may then arise
in which the unsecured creditors may participate. The question in the present
case is whether
the liquidator can charge against the fund passing through his
hands, as between himself and the person to whom it is payable, so
much of the
remuneration fixed for work done in the winding up as is referable to the
calling in and conversion of the assets producing
the fund. I see no reason why
remuneration for work done for the exclusive purpose of raising the fund should
not be charged upon
it.
- The
principle in Re Universal Distributing has been applied in a variety of
cases to justify the payment to a liquidator or a bankruptcy trustee their
costs, expenses and remuneration
in relation to the realisation of trust funds
which are otherwise subject to the subrogated lien of trust creditors. In Re
Dungowan Manly Pty Ltd (in liq) [2015] NSWSC 491; (2015) 105 ACSR 648 at [85] Black J
suggested that the Re Universal Distributing principle extended the
liquidators entitlement to recover expenses for work performed for the purpose
of “identifying or attempting
to identify trust assets; recovering or
attempting to recover trust assets; realising or attempting to realise trust
assets; protecting
or attempting to protect trust assets; distributing trust
assets to the persons beneficially entitled to them”. He did so
by
reference to the comments of Finkelstein J in 13 Coromandel Place Pty Ltd v
CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377 at [34]. It is, perhaps,
arguable that the comments of Finkelstein J were actually directed to the
related principle in Berkeley Applegate rather than that in Re
Universal Distributing, although Finkelstein J, himself, may not have
differentiated between them. Whether or not that is so may not matter given
that
any difference in the range of activities for which compensation might be
allowed within the scope each principle is probably insignificant.
- In
the recent decision of Freelance Global v Bensted Ltd (in liq) [2016] VSC
181 at [64], Riordan J considered that the Universal Distributing
principle entitled a liquidator of a trust company who has acted reasonably, to
be indemnified out of the trust assets for their
costs and expenses in
“identifying or attempting to identify trust assets; recovering or
attempting to recover trust assets;
realising or attempting to realise trust
assets; protecting or attempting to protect trust assets; and distributing trust
assets
to the persons beneficially entitled to them” (see also the
discussion by Markovic J in Kite v Mooney (No 2) at [142]ff). In
Dixon v Wieselmann [2013] VSC 118; (2013) 93 ACSR 576 at 588; [41], Robson J identified
that it was not necessary to demonstrate that the work and expenses actually had
the consequence of adding value
or benefiting the persons interested in the
property. What was necessary in order to establish the entitlement to
remuneration and
the recovery of costs was that the work was necessary, that the
costs were reasonably incurred, and that there was a sufficient nexus
with the
“salvage objective”.
- It
has been observed that the right created by the Universal Distributing
principles gives the entity undertaking the work in the realisation of the
assets a charge over the proceeds derived by their work
(Stewart v Atco
Controls Pty Ltd (in liq) [2014] HCA 15; (2014) 252 CLR 307; Coumanios v Giunti
[2017] FCA 678 at [75]).
- Many
of the cases to which reference has been made have also relied upon the somewhat
parallel equitable principle which was applied
by Mr Edward Nugee QC sitting as
a Deputy High Court Judge in Re Berkeley Applegate (Investment Consultants)
Ltd (in liq) [1989] Ch 32. In that matter the liquidator of an insolvent
trustee company, before incurring substantial expenses, took the precautionary
step
of seeking advice from the Court as to his entitlement to an indemnity out
of the assets held on trust for his costs, expenses and
remuneration. In his
reasons, at pp 49 – 50, His Honour considered a number of authorities
concerning the application of the
maxim that “he who seeks equity must do
equity”. He regarded that maxim as meaning that “a person who comes
to
seek the aid of a court of equity to enforce a claim must be prepared to
submit in such proceedings to any directions which the known
principles of a
court of equity may make it proper to give” (Halsbury’s Laws of
England, “Equitable Jurisdiction” Vol 47(2), paragraph [110]).
He identified that, in the case before him, the debenture holders
required the
assistance of a court of equity to secure their rights and, on that basis, he
said (at p 50):
“As a condition of giving effect to their
equitable rights, the court has in my judgment a discretion to ensure that a
proper
allowance is made to the liquidator. His skill and labour may not have
added directly to the value of the underlying assets in which
the investors have
equitable interests; but he has added to the to the estate in the sense of
carrying out the work which was necessary
before the estate could be realised
for the benefit of the investors. As was the case in Scott v Nesbitt
[1808] EngR 39; (1808) 14 Ves 438, [1803–13] All ER Rep 216, if the liquidator had not
done this work it is inevitable that the work, or at all events a great
deal of
it, would have had to be done by someone else, and on an application to the
court a receiver would have been appointed whose
expenses and fees would
necessarily have had to be borne by the trust assets. On the evidence before me,
the beneficial interests
of the investors could not have been established
without some such investigation as has been carried out by the
liquidator.
His Honour then stated that the allowing of a fair compensation to the
liquidator was a proper application of the rule that, “he
who seeks equity
must do equity”. His Honour continued (at pp 50 – 51):
The authorities establish, in my judgment, a general
principle that where a person seeks to enforce a claim to an equitable interest
in property, the court has a discretion to require as a condition of giving
effect to that equitable interest that an allowance be
made for costs incurred
and for skill and labour expended in connection with the administration of the
property. It is a discretion
which will be sparingly exercised; but factors
which will operate in favour of its being exercised include the fact that if the
work
had not been done by the person to whom the allowance is sought to be made,
it would have had to be done either by the person entitled
to the equitable
interest (as in Re Marine Mansions Co (1867) LR 4 Eq 601 and similar
cases) or by a receiver appointed by the court whose fees would have been borne
by the trust property (as in Scott v Nesbitt [1808] EngR 39; (1808) 14 Ves 438,
[1803–13] All ER Rep 216), and the fact that the work has been of
substantial benefit to the trust property and to the persons
interested in it in
equity (as in Boardman v Phipps [1966] UKHL 2; [1966] 3 All ER 721, [1967] 2 AC 46). In
my judgment this is a case in which the jurisdiction can properly be
exercised.
- His
Honour observed that this principle had a variety of applications and was akin
to the salvage doctrine. In this respect the underlying
rationale was similar
to that relied upon by Dixon J in Re Universal Distributing. His Honour
also noted that the principle applied so as to afford to the person actually
undertaking the work in question the benefit
of the entitlement to reimbursement
and remuneration. That overcame the difficulty that, if the amount of the costs
and remuneration
was paid to the insolvent corporate trustee, they would have to
be applied in accordance with the requirements of the insolvency
provisions. In
the result, his Honour allowed the liquidator his proper expenses and
remuneration out of the fund which had been
created.
- Many
of the authorities on which Mr Nugee QC relied concerned the rights of debenture
holders in the context of a corporate liquidation,
and the competing claims of
liquidators who had undertaken work in the realisation of the company’s
property including that
covered by securities. (See In re Marine Mansions Co
(1867) LR 4 Eq 601; In re Oriental Hotels Co (1871) LR 12 Eq 126;
In Re Regent’s Canal Ironworks Co (1875) 3 CH D 411 amongst
others). Needless to say, in such situations the secured creditors are
interested to be paid their debts out of the realisations
obtained by the
liquidator and, to that extent, it is undeniable that the actions of the
liquidators enure for their benefit. However,
the same clarity in respect of
the receipt of a benefit by the trust creditors does not always translate to the
tripartite situation
of a trust (trustee, beneficiary and creditor) where a
corporate trustee is being wound up or an individual trustee’s affairs
are
being administered in bankruptcy. In Berkeley Applegate the trustee,
along with the trust, was being wound up for the benefit of the investor /
beneficiaries in the mortgage scheme. The
expenses incurred in the winding up
of the trust were necessarily incurred as part of its administration and it was
appropriate that
the liquidators received their costs, expenses and remuneration
out of the trust assets such that the burden appropriately fell upon
the
beneficiaries. The position is quite different when the trustee is being wound
up or their estate is being administered, yet
the trust, itself, remains solvent
and is intended to continue in existence. In that scenario, the identification
of assets, their
realisation for the purposes of creating a fund from which the
right of exoneration might be used, and the payment of creditors is
primarily
for the benefit of the trust creditors rather than the beneficiaries. It would
follow from the general principles identified
by Mr Nugee QC that the
liquidators’ costs, expenses and remuneration should be borne by the trust
creditors who will benefit
from being paid from the right of exoneration, rather
than permitting the liquidators to take additional funds from the trust assets.
That said, it is foreseeable that arguments might be made in a converse scenario
that the payment of trust creditors might advance
the interests of the both
beneficiaries and the trust creditors, depending upon the circumstances of the
case.
- In
13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30
ACSR 377, Finkelstein J considered the scenario where a trustee and its trusts
were being wound up for the benefit of the beneficiaries as
well as the
creditors. His Honour noted that the principles in Berkeley Applegate
and Re Universal Distributing required that attention be directed to
identifying the entities for whose benefit the work by the liquidator was
conducted. In that
case, it was held that to the extent to which the work was
done by the liquidator in what was, effectively, the administration of
the
trust, the costs, expenses and remuneration were to be paid out of the trust
assets (at p 385). To the extent to which the work
done was in the ordinary
winding up of the company, referred to by his Honour as “general
liquidation matters”, it was
to be paid for out of the assets beneficially
owned by the company. Where the company in liquidation only acted as a trustee
of
the relevant trust, and the trust itself is insolvent, it might be
that much of the work involved in “general liquidation matters” was
necessary
in the proper administration of the trust and, therefore, chargeable
against the trust assets. On the other hand, where the insolvent
trustee has
only non-trust creditors but insufficient assets of its own to meet the costs,
expenses and remuneration of a liquidator
or bankruptcy trustee, it is difficult
to identify any basis on which an order might be made permitting recourse to the
trust assets
or the right of exoneration to satisfy the shortfall.
- The
parallel principles found in Berkeley Applegate and Re Universal
Distributing provide a much surer foundation to support an order that an
insolvency administrator have recourse to trust assets or to the right
of
exoneration to meet the costs, expenses and remuneration of their
administration. Generally, there will be no need to distinguish
between the two
principles as they each cover the relevant expenses under consideration. It
should, however, be kept in mind that
much will depend upon the circumstances of
the case. In most cases where the trust, itself, is insolvent in the sense that
the right
of exoneration overwhelms the beneficiaries’ interests in the
assets held on trust, no great difficulty arises. The insolvency
regimes
require that the trust creditors be paid in the course of the liquidation or
administration and, for that to occur, the trust
itself needs to be wound up.
Consequently, the insolvency administrators are entitled to be paid from the
fund they create for the
purposes of applying the right of exoneration. Where,
in such a case, the only business of the trustee was to operate the trust,
there
are good arguments in favour of the view that all the costs of the
administration can be paid out of the fund created to meet
the right of
exoneration (Combis in the matter of Reehal Holdings Pty Ltd (in liq)
[2017] FCA 793 at [29]). Where, however, the insolvent trustee has other
non-trust creditors, only those amounts referable to the creation of a fund and
the payment of trust creditors might be met from the fund so created. Further,
where a right of exoneration does not exist at all,
there are likely to be
strong arguments to the effect that the liquidators will not be entitled to
access any trust funds to meet
their costs, expenses and remuneration of the
administration.
The application of the Berkeley Applegate/Universal
Distributing principles in the present matter
- Here
the question as to whether the burden of the Bankruptcy Trustees’ imposts
ought to fall on the trust creditors or the beneficiaries
does not need to be
decided. The right of exoneration overwhelms the value of any property held
upon the terms of the trust with
the consequence that there are no remaining
“trust assets” in which any beneficiary has an interest. That being
so, the
only property relevant to the work undertaken for the purposes of
meeting the trust creditors’ claims is the right of exoneration
and the
“fund” of money created pursuant to that right. It follows that the
burden of meeting the Bankruptcy Trustee’s
imposts will fall on the trust
creditors for whose benefit that work will enure.
- Necessarily,
the scope and value of the right of exoneration and the use to which it might be
put can only be known after substantial
work is completed in relation to the
insolvent trustee’s affairs. Such work, includes identifying the assets
of the trustee
and distinguishing between those which are beneficially owned and
those which are held on trust; identifying the liabilities of the
trustee and
distinguishing between the trust and non-trust liabilities; recovering the trust
assets which are sufficient to meet
the right of exoneration; realising or
attempting to realise trust assets; ascertaining the state of account as between
the trustee
and the beneficiaries; and, if there is a balance in favour of the
trustee, exercising the right of exoneration from the fund of
money created.
Unless this work is undertaken the right of exoneration cannot be applied in
favour of the trust creditors. Any
receiver appointed by the Court at the suit
of the trust creditors would need to perform those tasks in order to secure
payment to
those entitled. In cases such as the present, the intervention of
the trustee’s insolvency has prevented the trustee from
being able to
discharge the trust debts and the Act obliges the Bankruptcy Trustees to assume
the trustee’s responsibility
and discharge the trust debts. Regardless of
how the matter is viewed, the work identified had to be completed and paid for
in order
that the trust creditors’ claims are met.
- This
is also a case where the trust creditors require the assistance of the Court to
secure their rights to the extent to which they
assert that they are entitled to
payment from the trust assets by use of the right of indemnity. In their
capacity as creditors
they may claim in the bankruptcy in the usual way.
However, in order to secure their advantage as trust creditors they need to rely
upon the trustee’s equitable right of exoneration and the additional
equitable entitlement to be subrogated to that right.
It should be kept in mind
that the right of subrogation is more of a remedy than it is a right and, being
a remedy available in
equity, it is only granted where the court considers
appropriate (Lerinda Pty Ltd v Laertes Investments Pty Ltd [2010] 2 Qd R
312 at [7]). Although the process of obtaining the court’s assistance in
the enforcement of their rights is modified by the statutory
bankruptcy regime
for proving debts, the trust creditors are still required to assert their
entitlements in equity to achieve their
preferential treatment. Additionally,
outside of the proving of debts in bankruptcy, the enforcement of the lien over
the trust
assets, on which the trust creditors necessarily rely, would require
the assistance of the Court.
- From
the facts just identified it is apparent that the Berkeley Applegate
principle is applicable to the present matter. The Court can require, as a
condition of the trust creditors being paid by the exercise
of the right of
exoneration, that the costs, expenses and remuneration of the Bankruptcy
Trustees relating to their payment be met
from the pool of funds
“created” by the Bankruptcy Trustees. Those imposts are to be paid
in priority from the funds
which have been made available to satisfy the right
of exoneration. This is not to suggest that the right of exoneration can be
put
to any unauthorised use. However before that right can be exercised, a pool of
funds is required to be established from which
the payments to the trust
creditors can be made. The bankruptcy trustee or liquidator whose work has
created that fund is entitled
to be paid from it the reasonable costs, expenses
and remuneration for doing so. The fulfilment of that entitlement is imposed in
equity upon the trust creditors and their right to receive payment pursuant to
the subrogated right of exoneration.
- The
above analysis has occurred within the scope of the Berkeley Applegate
principles, however, the same result would be reached by the application of the
decision in Re Universal Distributing. The work which was done by the
Bankruptcy Trustees was necessary to ensure that the trust creditors received
the benefit of their
subrogated right of exoneration. The appointment of the
Bankruptcy Trustees following the intervention of the trustee’s
insolvency,
created the relevant “necessity” which required them to
administer the trust so as to create the pool of funds from which
the trust
creditors’ claims could be met. The legislative imperatives required that
work to be done, at least, for the purposes
of ascertaining the assets of the
bankrupt which might be used to meet the claims of creditors. If that had not
been undertaken
by the Bankruptcy Trustees the trust creditors would have been
required to make an application to the Court for an order that their
lien be
enforced, that receivers be appointed to take possession of trust property and
that they sell it. The Court’s leave
would be required to make such an
application and, where there exists a bankruptcy trustee who is able and willing
to act to undertake
the statutory duties, it might be unusual were a Court to
upset the orderly administration of the estate by granting leave. If a
receiver
was appointed, a necessary part of their obligations would be the identification
of all of the trustee’s creditors
and distinguishing between the trust and
non-trust creditors. The receiver would also have to, effectively, undertake an
account
in relation to the trust to ascertain the extent of the trustee’s
right of exoneration, if any. If a right of exoneration
existed, the receiver
would then have to realise the available trust assets so as to aggregate funds
which might be used to meet
the trust creditors’ claims. As the
circumstances required the Bankruptcy Trustee to perform all of these tasks, the
“salvage
principle” in Re Universal Distributing applies such
that the trust creditors are not entitled to receive the benefit of the right of
exoneration without accounting to the
Bankruptcy Trustees in respect of their
costs, expenses and remuneration relating to that entitlement. The Bankruptcy
Trustees are
entitled to a charge on the fund of money created to preserve their
entitlement as against the trust creditors.
- The
consequence of the above is that the Re Berkeley Applegate and
Universal Distributing principles provide similar outcomes. Either
provides a more rational path to an order entitling the Bankruptcy Trustees
their costs,
expenses and remuneration than do the approaches of deeming those
imposts to be priority trust debts or, by an expansive construction
of the
powers of the Court to allow trustees remuneration from the trust
assets.
Scope of the work for which costs, expenses and remuneration
should be allowed
- It
follows from the above discussion that the work in respect of which the
Bankruptcy Trustees are entitled to their costs, expenses
and remuneration in
priority to the claims of the trust creditors, is that which was undertaken to
ensure that the right of exoneration
could be used to meet the claims of trust
creditors. It includes work concerned with:
(a) the identification of the
trustee’s assets and liabilities and distinguishing between trust and
non-trust assets;
(b) the identification of trust creditors and distinguishing between them and
non-trust creditors;
(c) the ascertaining of the state of the accounts between the beneficiaries and
the trustee;
(d) the recovering or attempts to recover trust assets;
(e) the securing of trust assets (or their value);
(f) the realisation or the attempted realisation of trust assets to create a
fund to meet the right of exoneration;
(g) the distribution of funds which are the subject of the right of exoneration
to those who are entitled to them;
(h) any matter in the administration of the trust which is ancillary to the
above to the extent to which it was reasonably necessary
to be undertaken for
the purposes of the identified tasks.
- The
benefit which the trust creditors receive from the work of the bankruptcy
trustees in cases of this kind includes the ascertainment
of their debts and the
accumulation of funds from which the debts might be paid. Work may well have
been performed to that end which
does not result in an accretion to the pool of
funds. Indeed, work may well be performed which actually results in a
diminution
of the value of that fund. The reasonable pursuit of recovery action
against a trustee or a third party which does not succeed is
a good example.
Nevertheless, so long as the action was reasonably taken in an attempt to
realise the assets so as to create funds
from which the trust creditors might be
paid, the associated costs, expenses and remuneration are recoverable by the
insolvency administrators.
Reasonableness of remuneration
- The
Bankruptcy Trustees also seek directions or relief in relation to the
reasonableness of their remuneration, expenses and charges.
Given the
relatively small size of this estate and the relatively modest amounts involved
it is not inappropriate that the Court
determine this matter as part of the
wider application. However, a court would often be justified in refusing to
give a direction
of this nature when it is sought as an addendum to a much more
substantive and complicated application as is the case here. Recent
authorities
mandate that the courts must necessarily give careful and complete consideration
to any applications by insolvency practitioners
in respect of their remuneration
and reimbursement. That is so whether the application is made in a personal or
a corporate insolvency.
Those authorities identify that courts are now much
more astute to carefully examine such claims and, it follows, an appropriate
amount of time is required in any hearing to allow the applicants to justify
them.
- The
total of the “remuneration” in respect of which directions are
sought is $191,032 though it is presumed that this
includes costs and expenses
as well. It seems that the liquidators have already met some of their claims
from the funds held in
the personal estate of Mr Lee or, to the extent to which
they relate to the utilisation of the right of exoneration, from the trust
funds
in their possession.
- As
is appropriate in the insolvency administration of a trustee or erstwhile
trustee, the Bankruptcy Trustees have maintained two
separate operating accounts
or ledgers in respect of their remuneration, costs and expenses. One is
attributable to work in relation
to the trust funds and the other to work done
on the bankrupt’s personal estate. Costs, charges and remuneration claims
have
been appropriately apportioned to those accounts. The evidence before the
court discloses that 46.76% of the total cost, expense
and remuneration relates
to the work done in relation to the trust funds. That apportionment ought to be
accepted and, on the basis
that the percentage conforms to what has been said in
the above discussions, the relevant amount can be paid from the funds in the
hands of the Bankruptcy Trustees which represents the pool of funds to be used
to satisfy the right of exoneration.
- The
Bankruptcy Trustees have sought to calculate their remuneration on a time
costing basis. In recent years, this method has been
the subject of some
controversy with Brereton J questioning its appropriateness (Re AAA Financial
Intelligence Ltd (in liq) [2014] NSWSC 1270 at [45] at [53]; Re
Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 106; (2016) 305
FLR 222 at 233-234; [31]- [33] and Re Hillion Protection Pty Ltd (in liq)
[2014] NSWSC 1299). As one of Australia’s leading corporations lawyers
whose learning and experience in this area is unrivalled, his Honour’s
views require the utmost respect. Indeed, they would resonate with the views of
any experienced legal or insolvency practitioner.
Recent experience has shown
that charging on a time-costing basis can lead to situations where any financial
benefit to a liquidation
is dwarfed by the insolvency practitioner’s
costs. That is not to say that such an outcome is necessarily inappropriate.
It is frequently the case that insolvency administrators are confronted with
extremely complex corporate and financial arrangements
which are exacerbated by
poor compliance with appropriate accounting standards. In such circumstances it
is not surprising that
the cost of merely ascertaining the nature, structure and
financial state of the undertaking is a most expensive exercise. Nevertheless,
the “time costing” basis of charging for such work can, and often
does, lead to poor and inefficient practices within
legal and accounting
offices. That being so, in order for a liquidator or bankruptcy trustee to
convince a Court of the appropriateness
of their time costed claims, they will
necessarily be required to establish the reasonableness of the work done, the
length of time
that the work was done, and the rates at which various staff are
charged. However, the production to the court of vast amounts of
data
disclosing individual entries for individual pieces of work with associated
assertions of time spent and charge out rates is
unlikely to be sufficient.
More often than not, much of that information has limited meaning without an
appropriate analysis of
the nature of the work done and an explanation for its
necessity.
- Recently,
in Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr
[2017] 118 ASCR 333, on appeal from Brereton J, the New South Wales Court of
Appeal considered the principles to be applied on an application for the
approval of liquidator’s remuneration under the Corporations Act
2001 (Cth). Whilst the consideration by that Court of s 473(3) and (10) of
the Corporations Act is not directly referable to the court’s
discretion in the present matter, the principles there identified have more than
a
passing relevance. At first instance Brereton J favoured the calculation of
remuneration on an ad valorem basis rather than on a time costing basis.
His Honour considered that to be appropriate in circumstances where the time
costed value
of the liquidator’s work was proportionately excessive when
compared to the resulting benefits to the company. The Court of
Appeal
(consisting of Bathurst CJ, Beezley P, Gleeson JA, Barrett AJA and Beach AJA)
acknowledged that it was well settled that the
onus is on the liquidator to
establish that the remuneration claimed is reasonable and that the court is to
determine the appropriateness
of the remuneration on a consideration of the
material before it and by bringing an independent mind to bear on all relevant
issues
(at [54]). It noted that, in making that determination, proportionality
is a “well recognised factor in considering the question
of
reasonableness” (at [55]). The question of proportionality must be
considered in terms of the work done when compared to
the size of the property,
the subject of the insolvency administration or the benefit to be obtained from
that work. Moreover, the
work which has been performed must be appropriately
proportionate to the difficulty and importance of the task in the context in
which it is to be performed. In considering the reasonableness of the
remuneration claimed, the percentage that the remuneration
constitutes of the
total realisation in the administration is a useful objective measure. On the
other hand the Court of Appeal
accepted that the mere fact that work performed
does not significantly, or at all, augment the funds available for distributions
does not necessarily negate a liquidator’s claim to be remunerated for it.
That is particularly so in cases where it was reasonable
to pursue recovery
action albeit that the proceedings were not successful (at [58]). In such
circumstances it cannot be said that
a “time costing” approach will
always be inappropriate even though the criticisms of that approach must be kept
in mind.
- In
this matter the total amount of the costs, expenses and remuneration claimed by
the Bankruptcy Trustees are large when compared
to the size of the estate,
although the work undertaken appears to have been necessary. On the basis that
the calculations provided
in submissions broadly coincides with the entitlements
of the Bankruptcy Trustees pursuant to the Berkeley Applegate and
Universal Distributing principles, it is appropriate to make the
direction that the Bankruptcy Trustees are entitled to receive 46.76% of
$191,032 or $89,326.56
from the proceeds of sale of the Subway business in
partial discharge of their claim for costs, expenses and remuneration of the
administration of the estate of Mr Lee. The remainder of the Bankruptcy
Trustees’ costs, expenses and remuneration are payable
from the proceeds
of the sale of the assets in Mr Lee’s personal estate.
Declaration as to the reasonableness of the Bankruptcy
Trustee’s conduct
- Not
content with the above directions and relief, the Bankruptcy Trustees also seek
the making of declarations which will afford them
relief from their conduct in
causing the payment of the sum of $139,137.04 to themselves from the funds which
are available to meet
the claims of trust creditors. The power to make the
declaration arises under s 76 of the Trusts Act 1973 (Qld) although they
can only be made on the basis that Bankruptcy Trustees have acted honestly and
reasonably.
- It
is appropriate to make the declaration sought. The Bankruptcy Trustees and
their legal advisers have acted reasonably and honestly
throughout the
administration. As these reasons establish, the law in this area is both
uncertain and complex. Even if it was the
case that the wide variety of cases
on the various topics could not be reconciled, there was certainly sufficiently
strong authority
which justified the payment of the sum of $139,137.04 for the
costs, expenses and remuneration. That remains so despite the fact
that the
Bankruptcy Trustees may have to return some money to the trust. They will,
however, be able to obtain payment for the remaining
costs, expenses and
remuneration from the personal estate of Mr Lee to the extent to which there are
funds available after the payment
of the priority debts.
A question not answered
- After
the oral hearing of this matter Markovic J handed down her decision in Kite v
Mooney and, at the request of the Court, the parties provided written
submissions in relation to the effect of that decision. Without leave
of the
Court, the Commissioner of Taxation filed additional submissions relating to the
question of the characterisation of money
which was received by the Bankruptcy
Trustees from the Commissioner as a void preference. The provision of those
additional submissions
did not occur with the consent of the applicants. It is
not appropriate for a party to make additional written submissions to the
Court
in such circumstances. The practice of parties providing gratuitous written
submissions to the Court in addition to those
in respect of which leave is given
is not to be encouraged. As was said by McHugh ACJ and Gummow, Callinan and
Heydon JJ in NT Power Generation Pty Ltd v Power and Water Authority
(2004) 219 CLR 90 at [192] in relation to such conduct:
This is unsatisfactory. It is impermissible to file
further submissions without leave, and this cannot be evaded by adding on to
submissions
filed with leave other material for which leave should have been
obtained.
(Footnotes omitted)
See also Seafish Tasmania Pelagic Pty Ltd v Burke, Minister for the
Sustainability, Environment, Water, Population and Communities [2013] FCA
782 at [4] where, in relation to those observations of the High Court, Logan J
said:
[4] Those observations, though made in relation to the
exercise of appellate jurisdiction, are no less pertinent in relation to the
exercise of original jurisdiction. There is an important principle which
underlies those observations. That is, the judicial power
of the Commonwealth
must be exercised in open court, save in respect of a restricted class of case
(of which the trial was not one)
which may truly be dealt with in chambers, and
fairly.
- It
is not doubted that that the provision of the additional submissions was done
with the best of intentions and in an attempt to
fully resolve all matters
concerning the administration of the estate of Mr Lee. However, the point
sought to be raised by the Commissioner
would impact upon the rights of the
trust creditors. Those persons would not have been aware from the material
served upon them
for the hearing of this matter that this point was to be
agitated in the course of the hearing. They are entitled to fair notice
of
it.
- In
those circumstances, and in accordance with the principles referred to above, it
is not appropriate for the additional question
to be agitated. The matter can
be relisted for argument with respect to this further issue after all parties
who might be affected
by it are duly notified.
I certify that the preceding two hundred and
six (206) numbered paragraphs are a true copy of the Reasons for Judgment herein
of the
Honourable Justice
Derrington . |
Associate:
Dated: 18 August 2017
SCHEDULE OF
PARTIES
|
QUD 198 of 2017
|
|
|
|
Fourth Respondent: |
BEVMONT PTY LTD AS TRUSTEE FOR THE LEE FAMILY TRUST |
Fifth Respondent: |
WARWICK GORDON LEE |
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