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Supreme Court of Victoria |
![[AustLII]](111.1.gif)
Supreme Court of VictoriaLast Updated: 26 March 2014
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
IN THE MATTER OF BACCHUS DISTILLERY PTY LTD (ADMINISTRATORS APPOINTED) (ACN 065 961 711)
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JUDGE:
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WHERE HELD:
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Melbourne
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DATE OF HEARING:
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DATE OF JUDGMENT:
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CASE MAY BE CITED AS:
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CORPORATIONS – Administrators’ powers of sale – Corporations Act 2001 (Cth) s 437A(1)(c) – Property held on trust by company under administration – Patent – Company one of two beneficial coowners – Absence of consent to sale by other coowner.
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APPEARANCES:
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Counsel
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Solicitors
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Mr N O’Bryan AM SC with
Mr H Austin |
Mills Oakley Lawyers
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For the Defendant
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Piper Alderman
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1 Before the Court were two applications brought by Interlocutory Process. The first in time was filed by the administrators of Bacchus Distillery Pty Ltd, Bruno Anthony Secatore and Daniel Juratowitch, on 5 February 2014. They sought a declaration pursuant to s 447D(1) of the Corporations Act 2001, and r 54 of the Supreme Court (General Civil Procedure) Rules 2005, that they were entitled to sell an invention now registered as a patent.[1] Bacchus is the sole registered patentee. The invention had been utilised by Bacchus in the manufacture of clean wine spirits. The administrators took the view that the invention was an asset of Bacchus, which might be sold with other assets, including a processing plant. The administrators also sought declarations in relation to the application of proceeds from any such sale. They sought priority for claims by Bacchus, and in their own right, over the proceeds of sale.
2 The defendant, Neobev Pty Ltd, is the assignee of all rights to the invention previously held by Max Scott Consulting Pty Ltd and Max Scott. Shortly after the administrators were appointed, Scott claimed to be the sole inventor and contended that Bacchus held the patent on trust for his company. He claimed to be entitled to rectification of the Patent’s Register.
3 In early October 2013, and following the assignment to it of Scott’s patent interests, Neobev commenced a proceeding in the Federal Court of Australia in which it sought a declaration that Scott was the sole inventor and that Neobev was the sole legal owner of the patent. It sought rectification of the register. Bacchus brought a crossclaim against Neobev, Scott and his company for a declaration that Bacchus was the lawful owner of the patent. It also claimed an unconditional, irrevocable and transferable licence to use certain related confidential information.
4 On 16 February 2014, the Federal Court declared that Bacchus held the patent on trust for itself and Neobev as coowners.[2]
5 By its application filed 20 February 2014 in this court, Neobev sought an order pursuant to s 48 of the Trustee Act 1958, appointing it as trustee of the patent in substitution for Bacchus, or in addition to Bacchus, or an order pursuant to ss 51, 58 and/or 63 of the Trustee Act that the patent be assigned by Bacchus to itself and Neobev in equal shares.
6 Bacchus was incorporated in 1994 and operated as a small distillery. It produced a range of fortified wines, schnapps, liqueurs and cream liqueurs. Administrators were appointed by resolution of directors on 9 September 2013. The chief executive of Bacchus was Damian Hajdinjak.
7 Between 2002 and the appointment of administrators, Hajdinjak and Scott collaborated in the development and application of new technology for the production of clean wine spirit for use in the production of Bacchus products. The collaboration involved, on Scott’s side, the application of his invention and technical knowledge to design and construct a new processing plant for the production of clean wine spirit, and assist Bacchus in the commercialisation of the invention through the production of products by Bacchus. The design and construction of a processing plant was based on the invention.
8 In November 2004, Bacchus applied to the Commonwealth government for a grant under the ‘Commercial Ready Program’. The purpose of the grant, to be matched dollar for dollar by Bacchus, was to assist in the commercialisation of the invention. Such grants were confined to taxpaying corporations. Accordingly, an individual or trustee was ineligible.
9 Hajdinjak and Scott collaborated in the application for the grant and agreed that Bacchus would be identified as owner and become sole registered patentee. The application was successful, and on 31 January 2005 a Commercial Ready Grant Agreement was executed on behalf of the Commonwealth to commence on 1 February 2005, with a completion date of 30 June 2006. The maximum amount of the grant was $335,748.
10 The planned expenditure under the grant included ‘IP expenditure’, although it is not clear whether that expenditure related only to the patent application, or extended to confidential information in the nature of production knowhow. Under the agreement, Bacchus warranted that it had, or would have, all necessary rights to the intellectual property and technical information to conduct the project. Bacchus agreed to undertake the project, which meant that it was bound to match the grant dollar for dollar.
11 On 13 April 2005, F B Rice, patent attorneys, filed a provisional patent application for the invention in the name of Bacchus.
12 In April 2009, letters patent were granted to Bacchus for the invention in New Zealand, and on 16 June 2011, letters patent were granted for an Australian patent. Bacchus became the sole registered patentee. The inventors were identified as Scott and Hajdinjak.
13 Prior to the appointment of the administrators, the company had ceased all manufacturing operations. At the time of appointment, secured creditors were owed approximately $2.25 million; employees were owed, or entitled to benefits of, around $290,000; and unsecured creditors were owed almost $15 million.
14 The trial in the Federal Court commenced on 16 December 2013. About 10 days before the trial, Neobev amended its application and statement of claim to abandon the sole ownership claim, substituting a claim for coownership with Bacchus. Neobev was substantially successful in its claims and defences, and on 4 February 2014, the following declarations and orders were made:
THE COURT DECLARES THAT:
(b) The Respondent/Cross Claimant (Bacchus Distillery Pty Ltd (Administrators Appointed) (ACN 065 961 711) (“Bacchus”)) holds the ownership of the 593 Patent, and the invention the subject of that patent, on trust for itself and Neobev as coowners in equity.
THE COURT ORDERS THAT:
15 On the following day, the administrators filed their application in this court. Each side relied on the judgment and orders to support contradictory paradigms. No application was made to transfer this proceeding to the Federal Court. Each side urged that the applications be heard and determined in this court based on the judgment and reasons of the Federal Court, and such additional evidence as had been filed by the parties. It was common ground that the court was not required to determine the status of claims by secured creditors over the invention, or quantify various claims by Bacchus and the administrators for indemnity out of the proceeds of sale of the patent.
16 The administrators accepted that the evidence in support of claims for indemnity was incomplete and may require separate adjudication. They contended, however, they had advanced enough evidence to demonstrate substantial claims of a particular character. Neobev contended that such evidence as there was demonstrated the claims were invalid or misconceived. In my view, there was enough evidence to determine that the claims were substantial and, more importantly, whether they were of such a character as to give Bacchus, or the administrators, the desired priority.
17 A central issue, common to both applications, was whether Bacchus, or the administrators, had a power to sell the patent. While the administrators contended that they and Bacchus had standalone powers of sale, their case was substantially designed to establish powers derived from claims that would give the claimant priority over any claim by Neobev to one half of the proceeds of sale. In relation to the claim by Bacchus, the administrators relied on its right to be indemnified as trustee out of the trust property. As for their own claim, they relied on a lien. Unfortunately, the desire to achieve priority had the effect of diverting attention from the more rudimentary question as to whether Bacchus had a power of sale without resort to a right of indemnity.
18 The administrators propose to sell the business of Bacchus, including the invention, as a package. They believe a sale of the invention with the processing equipment will yield the best price. That assessment was not challenged. But the sale process has not commenced. The invention is yet to be valued. Thus, the administrators are in no position to say what value might be realised through a sale of the invention, as distinct from other assets. As presently advised, the administrators seem content to give potential purchasers an opportunity to attribute a value to the invention as part of a tender process. Neobev is understandably concerned about the allocation of price, if a sale is to take place. Any price allocation will have a direct bearing on Neobev’s entitlement to proceeds of sale. Neobev contended that there was no power of sale to be exercised by Bacchus or the administrators. It opposed any sale, and advanced a licensing arrangement to enable the administrators to offer a purchaser access to the patent rights.
19 The starting point of the case advanced on both sides was the recently declared status of Bacchus as trustee of the patent. Having regard to the decision of Besanko J in the Federal Court, that is not surprising. A trust had been declared, giving legal effect to a conversation in 2005. The declaration and reasons for judgment did not purport to define the terms of the trust. The Federal Court declined to do so on the case before it.
20 In order to determine whether Bacchus has a power of sale, it is necessary to ascertain the nature and terms of the trust, and in particular, any right of Bacchus to deal with the patent that is now characterised as trust property. That task is not assisted by analysis undertaken through the prism of legal consequence, involving concepts far from the minds of the participants. Nor is it assisted by asking what a trustee may or may not do with trust property, without regard to the intention of the parties who established the trust, and what they agreed, expressly or impliedly, might be done.
21 The administrators’ case for a power of sale commenced with the contention that Bacchus had the right to sell the patent as a business asset, or to generate funds out of which it might properly recoup expenditure incurred in the development, commercialisation and protection of the patent. The power of sale residing in Bacchus was said to arise, firstly, by reason of a finding by Besanko J that the invention had been assigned to Bacchus with all ‘associated rights’.[3] That was because one such ‘associated right’ was a power of sale. That contention, in effect, sought to invoke the rights of a patentee under s 13 of the Patents Act 1990 (Cth) without regard to the rights of a coowner under s 16 of the Patents Act.
22 Neobev contended that Bacchus held the patent as bare trustee for Neobev and itself, without any power to sell or otherwise deal with the patent without its consent. Neobev argued that the effect of the judgment in the Federal Court was to place Neobev in the same position as a copatentee under the Patents Act, as if the register had been rectified. Section 13 provides:
Exclusive rights given by patent(1) Subject to this Act, a patent gives the patentee the exclusive rights, during the term of the patent, to exploit the invention and to authorise another person to exploit the invention.
(2) The exclusive rights are personal property and are capable of assignment and of devolution by law.
(3) A patent has effect throughout the patent area.
23 Section 16 of the Patents Act provides:
Coownership of patents(1) Subject to any agreement to the contrary, where there are 2 or more patentees:
(a) each of them is entitled to an equal undivided share in the patent; and
(b) each of them is entitled to exercise the exclusive rights given by the patent for his or her own benefit without accounting to the others; and
(c) none of them can grant a licence under the patent, or assign an interest in it, without the consent of the others.
(2) Where a patented product, or a product of a patented method or process, is sold by any of 2 or more patentees, the buyer, and a person claiming through the buyer, may deal with the product as if it had been sold by all the patentees.
(3) This section does not affect the rights or obligations of a trustee or of the legal representative of a deceased person, or rights or obligations arising out of either of those relationships.
24 The administrators also contended that Bacchus had an implied power of sale, arising from the circumstances in which the invention had been assigned to it and deployed in its business. They contended, in effect, that because of the manner in which Scott and Hajdinjak had deployed the invention in the business, and made the processing plant dependent on it, they must be taken to have agreed, or at least intended, that the invention would be treated as though an asset of the business. On that basis, they submitted, Bacchus had an implied power to sell the invention as a business asset.
25 The administrators also contended that the power of sale could be exercised by Bacchus to recoup its expenditure on the trust property in priority over any claim that Neobev might have to the proceeds. For reasons given below, I am satisfied that Bacchus has a power of sale over the patent, notwithstanding coownership with Neobev. It must, of course, account to Neobev for its share of the proceeds after satisfying prior claims. I am also satisfied, for reasons given below, that the administrators have a power of sale over the patent under s 437A(1)(c) of the Corporations Act, whether or not Bacchus has any such power.
26 In addition to the claims based upon a power of sale residing in Bacchus, or an independent power under s 437A to sell the patent, the administrators claimed a right to sell the patent to recoup expenditure under a Universal Distributing lien, in priority over any claim that Neobev has to the proceeds of sale.[4] In the alternative, the administrators sought an order for sale under s 63 of the Trustee Act 1958.
The judgment
27 In his reasons for judgment, Besanko J concluded, on the question of ownership:[5]
Trusts had been registered up to that time by the Patent Office; but this section intended that notices of trusts, as distinct from documents which created trusts in Equity, were not to be sent to the Comptroller and entered upon the register.
28 At trial in the Federal Court, Neobev sought specific performance of a royalty agreement it claimed was recorded in a document prepared in March 2012. Neobev sought to protect its interests by ensuring that Bacchus was bound to procure a purchaser of the patent to agree to continue to pay the royalty that had been paid by Bacchus to Scott. Besanko J concluded that the term of the agreement was vague and uncertain, and void for that reason. His Honour also held that Neobev’s related confidential information was incapable of assignment.
29 On 23 January 2014, Besanko J heard submissions from the parties on final orders to be made in light of the reasons delivered on 16 January 2014. His Honour noted in further reasons for judgment, dated 4 February 2014, that each party had put forward a draft set of orders. Neobev sought an order under s 192 of the Patents Act to rectify the register of patents to record it as a coowner of the patent. Importantly, his Honour concluded:[6]
The consequences and effects of a finding that there is a trust over the 593 Patent were not the subject of evidence or detailed submissions at trial. Neobev did submit at trial that, if I was to make a finding that there was a trust, then I should go on to order that the Register of Patents be rectified to show it as a coowner of the 593 Patent. There was some debate between myself and counsel for Neobev about what it was that Neobev contended was the error or omission in the Register that engaged s 192.
30 Some of the arguments advanced by the parties in this court had been rehearsed before Besanko J. For example, his Honour noted that the administrators asserted a right to sell the trust property and pay liabilities out of the proceeds of sale. Neobev had submitted that Bacchus did not have the power of sale because, among other reasons, there was an agreement that the patent was to be held in the name of Bacchus, not a third party. Questions were also raised about the appropriateness of Bacchus continuing as trustee. Neobev submitted in the Federal Court there was nothing standing in the way of an order for rectification, and the justice of the case required such an order. Besanko J held:[7]
31 Thus, the ‘associated rights’ contention of the administrators flies in the face of the Federal Court refusal to rectify the register, just as Neobev’s contention, that it should be treated as if a registered copatentee, is inconsistent.
32 Neobev correctly defined the threshold question as the need to identify the nature and terms of the trust that Besanko J found to exist. It submitted there were no pleadings in the Federal Court which raised those questions, nor had they been addressed directly in evidence. The hearing of the applications in this court was, according to Neobev, the appropriate occasion to define the trust. It argued that the nature and terms of the trust could be discerned from the circumstances in which it came into existence. It submitted that all necessary facts were to be found in the reasons for judgment of Besanko J.
33 There was, however, additional evidence before this court providing insight into the nature and terms of the trust. That evidence was contained in five affidavits sworn by Mr Secatore. Of particular assistance was his uncontested evidence relating to the dependency of the production equipment on the invention. He also exhibited various accounts and vouchers to explain the way in which expenses were characterised, incurred or recouped by Bacchus. He exhibited invoices from Scott and his company, documents relating to the Commonwealth grant application, and the March 2012 agreement.
34 Neobev’s primary paradigm was that it should be treated as if a copatentee for the purpose of s 16 of the Patents Act. Besanko J pointed out, however, that the effects and consequences of the finding that there was a trust were not the subject of evidence and detailed submissions at trial, and declined to make any such order. Neobev conceded that the register had not been rectified because of the absence of a precise identification of the issues and evidence in the Federal Court proceeding.
35 Another paradigm advanced by Neobev was that the trust under which the patent is held by Bacchus is a bare trust. It submitted that such a trustee has no power to sell trust property. Furthermore, a power of sale must be express or implied, conferred by the trust instrument, or the power of trust is conferred by statute or granted by order of the court. Neobev submitted that such a trustee is bound to preserve trust property in specie for the benefit of the beneficiaries, namely itself and Neobev. It contended that Bacchus had no express power of sale, there was no apparent basis to assert an implied power of sale, the administrators had no power of sale under s 437A of the Corporations Act, and there was no occasion for the exercise of discretion under s 63 of the Trustee Act.
36 In the absence of a trust instrument, the first, and perhaps most important, fact circumstance informing the nature and terms of the trust is the assignment to Bacchus and its status as sole registered patentee. Neobev submitted that sole ownership and registration as patentee was not a necessary requirement for the Commonwealth grant; all that was necessary was that Bacchus have access to the intellectual property. Thus, Neobev argued, it would have been perfectly adequate for Bacchus to have had a licence to exploit the process, ‘but it was perceived that the grant application would be more attractive to the Commonwealth if it was put on the basis Bacchus was the sole patentee and that was done’. Neobev submitted that the purposes for which the trust were created was to present Bacchus to the Commonwealth as the party entitled to exploit the invention, develop products and a new business based on a new piece of technology. It submitted that none of that required Bacchus to have a power of sale.
37 Neobev argued that the terms of the trust were discernible from ‘the real arrangement’ between the parties. There was, according to Neobev, an agreement under which Scott and Bacchus would own the technology in equal shares but would present a different arrangement to the Commonwealth. It contended that there was nothing in the agreement between them to give rise to an implied right of sale or dealing.
38 Neobev argued that the purpose of the grant was to assist in the commercialisation of the invention. That is no doubt correct. But Neobev went on to contend that Bacchus did not purport to carry on business as trustee of the patent, but traded in its own right. By so contending, Neobev sought to draw a distinction between the status of Bacchus as trustee of the patent, and Bacchus in a different capacity carrying on business in its own right, exploiting the invention to produce products and derive income. Such a characterisation of the trust is a coincidence of Neobev’s contention that the patent is held by Bacchus as bare trustee.
39 To differentiate between the capacity in which Bacchus held the patent and its commercialisation activity is artificial and unpersuasive. On the available evidence, including the findings of fact made by Besanko J, Hajdinjak and Scott agreed that Bacchus would become the registered owner of the invention in order to commercialise the invention as part of its business undertaking. Bacchus would incur expenses, and no doubt claim those expenses as deductions against income. It would also make claims under the Commonwealth Agreement on the basis of its expenditure, and match the claims with its own funds. There was no evidence of any distinction between patent application and maintenance expenditure on the one hand, and commercialisation expenditure on the other. There was an absence of any evidence that Bacchus had multiple personalities when dealing with the patent as legal owner, trustee and in the commercialisation of its products. There was no evidence that those who were found to have established the trust considered their relationship with Bacchus to be on such terms.
40 Neobev sought to deflect the consequence of having invested Bacchus with the status of sole patentee, obliged to incur expenses in the commercialisation of the patent in its own right, by contending that once the Commonwealth grant had expired, the trust had no further useful purpose to serve. In other words, the registration of Bacchus as sole patentee was intended to be transient, or went beyond the purposes for which the trust was created. Such a contention is inconsistent with the decision of Besanko J, who held the trust to be subsisting. The contention reflected the artificiality of an attempt to analyse the nature and terms of the trust from a mere declaration of its existence.
41 Thus, Neobev argued that a power to deal with the patent on its own account could not be implied, because it would be regarded as a gross breach of trust. It submitted that it would be a most surprising term of the trust that the party which happened to be named as patentee on the register was free to utilise the whole of the trust property, to offer it as security for its own borrowings without reference to its fellow beneficiary, or to sell it. Such action, it submitted, would effectively destroy the trust property for the trustee’s own benefit. These submissions are circular, assuming the validity of Neobev’s paradigms — that it ought to be treated as if a registered copatentee, or that the trust was a bare trust with no power of sale — and ignored the evidence of what Bacchus was permitted to do by those who established the trust.
42 The Neobev paradigms are also inconsistent with the continued dealings between Bacchus and Scott under which Bacchus exploited the technology by applying the process to the commercialisation of products for sale. Bacchus incurred expenditure in relation to the patent costs and commercialisation on its own account, and derived income from its exploitation on its own account. Scott was a consultant, for which he was paid fees and a royalty. He continued, until the appointment of the administrators, to derive an income from Bacchus in the nature of fees and royalty.
43 There is no doubt that Scott and Hajdinjak intended a full legal transfer of the invention and patent rights to Bacchus. With their apparent knowledge and approval, Bacchus incorporated the invention into its business in such a way as to make the business dependent upon access to the invention. There was no suggestion of a licence between Bacchus as trustee and Bacchus in its own right to commercialise the invention. Thus, in addition to clothing Bacchus with the appearance of having full legal rights to the patent, and so presenting Bacchus to the Commonwealth, the circumstances of the assignment and exploitation compel the inference that Scott and Hajdinjak agreed that Bacchus was authorised to conduct its business on the basis that the patent was a business asset.
44 Finally, Neobev contended that the nature of the trust property itself, as a patent involving a bundle of rights, carried with it a right of veto by a copatentee. That is another way of putting the argument that the rights as between Bacchus and Neobev should be construed as if Neobev was a registered patentee. Neobev argued that the court should find that the parties intended their relationship would be that of copatentees. I reject that contention. To so find would be to overlook the conduct of Scott and Hajdinjak, who deliberately invested Bacchus with the status of sole patentee. By allowing Bacchus to commercialise the invention as part of its business, they knowingly made the invention inseparable from the business of producing products for sale.
45 In my opinion, the trust includes a term under which Bacchus was authorised, as sole patentee, without qualification, to deal with the invention and patent as its own business asset. It was, after all, to the benefit of Scott that it did so. By incorporating the invention into its business, Bacchus was impliedly authorised to sell the patent with the business.
46 The written agreement on which Neobev relied to apply for specific performance of the royalty agreement is consistent with such a term. The agreement, executed by Scott and Hajdinjak on 16 March 2012, contemplated a sale of the process. It did not record anything in the nature of a right of veto by Scott.
47 Whether Neobev is eventually recorded in the register as a copatentee makes little difference to the resolution of the principal issue before this court. I am satisfied that the arrangements between the parties, under which Bacchus became the sole patentee on the register, were such that Bacchus was invested with the right to sell the patent as a business asset. The terms of the trust would deny to Neobev the right to veto a sale under s 16 of the Patents Act. Alternatively, Neobev must be taken to have consented to the exercise of the power of sale by Bacchus.
48 Having regard to my conclusion that Bacchus has a power to sell the patent with its processing business, in the absence of Neobev’s consent, and without resort to any right of indemnity as trustee, it is unnecessary to consider various other bases upon which the administrators might exercise a power of sale over the patent. Nevertheless, I will deal shortly with each alternative basis upon which the administrators relied.
49 For reasons given below, I am of the opinion that the administrators have a power of sale over the patent, whether or not Bacchus has any such power, and notwithstanding the absence of Neobev’s consent. While the administrators seek approval of claims which they hope will provide them or Bacchus with priority over any claim by Neobev to a share of the proceeds, I have not been asked to consider the claims by secured creditors to any such proceeds.
50 The administrators contended that, as trustee of the patent, Bacchus had a right of sale to recover expenses incurred on the patent application, maintenance, its commercialisation and in the Federal Court litigation. They also contended that they have an independent power under s 437A(1)(c) to sell the patent as part of the business of Bacchus. In addition, the administrators contended for the right to sell the patent to recover their expenditure in satisfaction of a Universal Distributing lien, or to satisfy their statutory rights of indemnity under ss 443D and 443F of the Corporations Act. The administrators accepted that, subject to the claims for indemnity or under the lien and rights of secured creditors, the net proceeds from a sale of the patent must be divided equally between Bacchus and Neobev.
51 The right of Bacchus to recoup trust expenses depended, of course, on the administrators establishing that Bacchus undertook the expenditure as trustee of the trust. In my opinion it did not. Such evidence as exists on the topic indicates that expenses in relation to the patent applications, maintenance and commercialisation were incurred by Bacchus in its own right and on its own account.
52 On the material before the court it is not possible to quantify the claims for indemnity that are made. I was not asked to do so. Instead, I have been asked to find that Bacchus had incurred substantial expenses in relation to each of the three categories of expense mentioned above — costs relating to patent applications and maintenance; commercialisation expenses; and litigation costs. I have also been asked to find, in the alternative, that the administrators incurred the substantial expenses in relation to the Federal Court litigation.
53 For the purpose of this part of the application, I am satisfied that:
(a) Bacchus incurred substantial expenses in making the patent applications and maintaining the patent;
(b) Bacchus incurred substantial expenses exploiting the invention and the commercialisation of its products; and
(c) Bacchus or the administrators incurred the substantial expenses of the Federal Court proceeding.
54 Neobev sought to challenge the assessment made by the administrators of the expenditure described in categories (a) and (b), on the basis of an estoppel by convention. The administrators contended that there was no evidentiary foundation to support such an estoppel, save for the absence of any attempt by Bacchus to recover Scott’s share of the expenditure. In ordinary circumstances, the absence of evidence to support the estoppel by convention might be critical. In the present case, it is not. That is because such evidence as there is concerning the obligations of Bacchus as sole patentee, pointed plainly to an intention by the parties to the assignment in 2005, that Bacchus would exploit the invention in the course of carrying on a business in its own right. It would incur expenses on its own account, recouping some of those expenses under the Commonwealth grant. There was no occasion for Bacchus to seek to recover any of those expenses from Scott, and no occasion now for the administrators to seek to recover those costs at the expense of Neobev.
55 The administrators also contended that the claim by Bacchus for indemnity out of the proceeds of sale included its costs of the litigation in the Federal Court. The costs incurred by Bacchus have been calculated at more than $500,000. It is not clear whether these costs include the balance of any amount owing to Neobev as a consequence of the costs orders made by the Federal Court. In any event, the costs are substantial.
56 The administrators contended that they and Bacchus had incurred the litigation costs in protecting the patent against the sole ownership claim by Neobev. That characterisation is inapt for a number of reasons. Firstly, Neobev’s claim was relevantly amended shortly before trial. Secondly, Bacchus crossclaimed for sole ownership rights to the patent. Putting aside the legal fiction of the trust, declared following the trial in the Federal Court, the dispute was between Bacchus and the Scott interests, each of whom initially claimed sole ownership. Bacchus did not participate in that trial as trustee, but in its own right to protect its own commercial interests. Accordingly, no question of reimbursement or recoupment as trustee out of trust property arises.
57 As far as the administrators are concerned, any claim they have for costs incurred in the Federal Court litigation ought to be confined to such rights as they have under ss 443D and 443F of the Corporations Act. A right of recoupment, based on the Universal Distributing lien, cannot arise to give the administrators a right priority over any claim by Neobev to its share of the net proceeds. The extent to which the administrators may be regarded as having priority over the secured creditors is yet to be determined.
58 Even if Bacchus has no independent power of sale, and no right of indemnity as trustee in respect of any one or more of the categories of expense mentioned above, the administrators may exercise their powers under s 437A(1)(c) to convert the patent into cash to satisfy the claim.
59 The administrators relied upon the decision of Finkelstein J in Apostolou v VA Corporation of Australia Pty Ltd.[8] In that case, a corporate trustee had been wound up on an application by the Commissioner of State Revenue for failure to comply with the statutory demand to pay land tax. Liquidators were appointed. The liquidators sought an order for judicial sale of the assets of the trust in order to pay creditors. While they were doing so, the mortgagee of the trust property took possession, advertised the property, auctioned and sold it. The new trustee complained that the property had been sold at an undervalue. He also claimed that the liquidators had acted unreasonably or illegally in winding up the company and were not entitled to their fees. The claim against the liquidators was that they had improperly prolonged the liquidation. One issue before the court was whether it was appropriate for liquidators to institute an application, and thereby incur costs, rather than simply sell the property. The determination of that question involved a consideration of a trustee’s right of indemnity. Finkelstein J said:[9]
60 The trustee in Apostolou had an express power of sale contained in the trust instrument. Finkelstein J continued:[10]
61 The administrators relied on Apostolou for the proposition that, even in the absence of a trustee’s power of sale, the liquidator of a corporate trustee may exercise a power of sale under s 477 of the Corporations Act in respect of property in which the company in liquidation had an equitable interest, provided the company also had legal title to dispose of the property. The administrators contended that their powers under s 437A were analogous to the powers of a liquidator under s 477 of the Corporations Act.
62 Neobev contended that the extension of the power to an asset held by a trustee, where the trust instrument did not confer a power of sale, was obiter, and did not find support in subsequent judgments in which the decision is cited. For example, in Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd,[11] Besanko J said:
In the present circumstances the liquidators are faced with three possible courses of action. First, they can proceed on the basis that the defendant remains the trustee of the trust and they can continue to rely on the powers in the trust deed or the powers they have under the Corporations Act or both. The difficulty with this course of action is that there is uncertainty about the defendant’s position as trustee under the trust deed. Although it may be that the liquidators have sufficient powers under the Corporations Act (Apostolou (as trustee of the Vasiliou Family Trust) v VA Corp Aust Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84) it has to be said that the position is not entirely clear. Furthermore, there is sufficient doubt attending this course of action to suggest that potential purchasers may be dissuaded from dealing in the assets (see Bastion v Gideon Investments Pty Ltd (in liq) [2000] NSWSC 939; (2000) 35 ACSR 466 (“Bastion”) at 479 [65] per Austin J).
63 In Apostolou, Finkelstein J cited UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd[12] as one instance in which the statutory power of sale was authorised when the company had no such right. In Ultra Tune, Hansen J had authorised liquidators, under s 511 of the Corporations Law, to enter into a deed to assign a cause of action. Before the Court of Appeal, the appellant contended that s 477(2)(c) of the Corporations Law should not be read as permitting a liquidator to sell a company’s cause of action to anyone who did not already have an interest in the outcome of it, because such a sale would lead to maintenance or, if there be some sharing of the proceeds of the litigation, champerty. The Court of Appeal concluded:
I do not accept that s 477 is to be read, as counsel for the appellant contended, as doing no more than identifying the circumstances in which a liquidator can exercise powers which otherwise would rest in the company. Such a construction wholly ignores that the liquidator is to wind up the affairs of the company and distribute its property: cf s 477(2)(m). The liquidator is not appointed simply as a particular agent or controller of the company who is to set about carrying on the business and affairs of the company as if winding up had not intervened. The liquidator is there to wind up the company’s affairs.I therefore agree with the learned primary judge, substantially for the reasons that he gives, that the proposed sale of the company’s rights of action to Titan was within the power of the liquidator.
Whether, in all the circumstances, the particular transaction proposed should have been authorised was a matter that lay within the discretion of the primary judge. It is enough if I say that I detect no basis for interfering with the exercise of that discretion. His Honour’s reasons were, as I say, set out in elaborate detail and I see no virtue in repeating them here. He considered all of the matters which it is now said he should have taken into account and I see no basis for interfering with the exercise of his discretion.
64 The administrators contended that their power under s 437A(1)(c) was relevantly indistinguishable from a liquidator’s power under s 477(2)(c). There is support for that contention. Section 437A(1) of the Corporations Act provides:
While a company is under administration, the administrator:(a) has control of the company’s business, property and affairs; and
(b) may carry on that business and manage that property and those affairs; and
(c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and
(d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.
65 In Re Smith,[13] Barrett J found that the power of an administrator under s 437A(1)(c) was a separate statutory power which did not depend upon the existence of a corresponding power in the company, as if the administrator was acting as the company’s agent. His Honour said:
If one looks at the provisions of Pt 5.3A of the Corporations Law, it is clear, in my opinion, that they focus exclusively on the interests of creditors of the corporation in question. Nowhere in Pt 5.3A is provision made for members to have a voice in the administration of the corporation. Expressed another way, members are excluded from contemplation during the process of an administration. Section 437A, so far as is relevant, reads:
437A(1) [Powers of administrator] While a company is under administration, the administrator: ...
(c) may ... dispose of all or part of that business, and may dispose of any of that property ...
In my opinion, it is clear that the administrators of a company appointed under Pt 5.3a of the Corporations Law have the power to dispose of the business and property of the company without convening a general meeting of the members of the company.
See also Re Eisa Ltd (2000) 35 ACSR 394 ; [2000] NSWSC 940.
66 I respectfully agree with the characterisation of the power in Re Smith, as one that does not depend upon a corresponding power in the company. Thus, the administrators may fall back on the power under s 437A to dispose of the patent with the business and other property of Bacchus, even though Bacchus may not have a power of sale. To limit the administrators’ power to those of the company may seriously undermine the utility of the power. In the present case, such a limitation would prevent the administrators from obtaining the best possible price for the business and other assets of a company. In my view, the power of sale under s 437A(1)(c) of the Corporations Act is sufficient to override the objection of a beneficial coowner of an asset that has been deployed by the company in administration, as legal owner, with the full knowledge and consent of the other beneficial coowner. All the administrators propose to do is to convert the patent into cash in the course of selling the business of Bacchus.
67 Accordingly, I am of the opinion that insofar as it may be required, the administrators have the power under s 437A(1)(c) of the Act to sell the invention and patent as part of a package with the other business assets of the company, notwithstanding the absence of any consent from Scott.
Power under the Trustee Act 1958 (Vic)
68 Finally, the administrators contended that if the power of sale was otherwise lacking, the court should authorise the sale of the trust property under s 63 of the Trustee Act 1958 (Vic). The section provides:
Power of Court to authorize dealings with trust property
(1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorized to be expended, and the costs of any transaction are to be paid or borne as between capital and income.(2) The Court may from time to time rescind or vary any order made under this section, or may make any new or further order.
(3) An application to the Court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.
69 That section has been recently considered by the Court of Appeal in Royal Melbourne Hospital v Equity Trustees Ltd.[14] The administrators contended that the decision established the following propositions:
(a) there are three jurisdictional conditions to be satisfied for application of the section: the dealing had to be ‘in the management or administration of any property vested in trustees’, ‘expedient’ and not possible because of an ‘absence of any power’;
(b) the section should be liberally construed — where the conditions in it were satisfied the discretion to give authorisation was unfettered;
(c) in deciding what was expedient in the management or administration of the trust property, it was necessary to take into account the interests of the trust as a whole, which meant the interests of all the beneficiaries;
(d) the words ‘management or administration’ were of wide import and picked up everything that a trustee may need to do in practical or legal terms in respect of trust property; and
(e) a power could be expedient although it negatively affected the interests of some beneficiaries — it might legitimately affect beneficiaries differently.
70 The administrators contended that as Bacchus was both the legal owner of the patent and a beneficial coowner, the monetisation of the trust property was beneficial to it and necessary. They claimed it was only prejudicial to Neobev in the sense that a sale would convert its interest into cash. Thus, the administrators argued, it was expedient in the management and administration of the insolvent trustee whose administrators proposed to sell its assets, the use of which depended, in part, on access to the patent. Neobev’s interests in the proceeds of sale would, of course, be subject to a trustee’s priority for indemnity and any priority the administrators might have under a Universal Distributing lien, as well as the claims by secured creditors.
71 Neobev contended that the court should not grant any relief under s 63 of the Trustee Act for the following reasons. Firstly, the cobeneficial owner does not wish to sell the property. Secondly, the purpose of the proposed sale is foreign to the trust, because the purpose of the sale is to satisfy an indemnity or lien or to satisfy all creditors. It argued that the administrators were not seeking to act in the interests of the trust as a whole, but rather in a manner that was expedient for them and for Bacchus. Thirdly, Neobev argued that the sale of the property would bring the trust to an end. Fourthly, the effect of a sale would be to obliterate Neobev’s rights in the trust property without compensation, because the proceeds would be applied in satisfaction of rights of indemnity, liens and creditors. Fifthly, Bacchus had failed to perform its duty as trustee by failing to maintain a derivative patent. Finally, the administrators were in a position of hopeless conflict when making an application for the exercise of discretion under s 63 of the Trustee Act. The administrators were purporting to exercise powers to dispose of trust property for the purpose of satisfying their own claims.
72 Except for the last two objections, Neobev’s contentions that relief under s 63 of the Trustee Act should not be granted, depended on accepting Neobev’s paradigms concerning the nature and terms of the trust. I have rejected those paradigms.
73 It was common ground that before a court would exercise the discretion under s 63, much more information would be required concerning the value to be attributed to the patent on any proposed sale, the status of claims by secure creditors, and if applicable, more information and precision in respect of the claims for indemnity and the United Distributing lien. The magnitude of such claims may have a bearing upon the willingness of the court to order a sale, just as the validity of claims by the secured creditors over the patent. It is in such a context that the licence proposal advanced by Neobev may become relevant.
74 Accordingly, a consideration of the power of sale under s 63 of the Trustee Act is premature and may never arise. It is also unnecessary to consider the application of s 63 of the Trustee Act, because, if Bacchus or the administrators have a right of indemnity as claimed by them, there is ample power under s 437A of the Corporations Act to convert the patent into cash. Thus, I should not be taken to dismiss any application that might be made under that section by the administrators. They may, at an appropriate time, seek to revive that part of their application should the need arise.
75 Neobev sought the removal of Bacchus as trustee and the appointment of a new trustee. There is power under s 48(1) of the Trustee Act for the appointment of a new trustee. Should Bacchus and the administrators be unable to sell the patent as a business asset, there would be merit in the appointment of a new and independent trustee, if only to eliminate the conflict of interest that the administrators have in their dealing with the patent.
76 Neobev was not satisfied with an independent trustee. It sought to replace Bacchus as trustee. It contended that it was convenient in the present circumstances, because the appointment of an independent trustee would impose an unnecessary additional substantial cost burden on the trust, for no obvious benefit.
77 The continuing antipathy between the administrators and Neobev, concerning the status and future of the trust, makes it wholly inappropriate for Neobev to be appointed as trustee in place of Bacchus. No useful purpose would be served by such a change.
78 Finally, Neobev sought a vesting order under s 51 of the Trustee Act, under which the court should distribute the property in equal shares to the beneficiaries. Neobev contended that such an order would inevitably lead to the rectification of the register to add it as a copatentee.
79 The administrators contended that such an order would tend to frustrate the conversion of the property and the money and the beneficial sale of the business assets on behalf of creditors. I agree. It would also be inconsistent with the conclusion, that Bacchus has a power of sale; but even if it does not, s 437A enables the administrators to sell the patent. The applications are dismissed.
80 The findings on the administrators’ applications may be summarised as follows:
(1) Bacchus has a power to sell the patent with other business assets.
(2) If Bacchus does not have a power of sale over the patent, s 437A of the Corporations Act authorises the administrators to sell the patent.
(3) Bacchus has no right of indemnity as trustee, to recover from the proceeds of sale, any costs and expenses incurred by it in the patent application, maintenance or commercialisation activity.
(4) Bacchus has no right to recover its litigation expenses out of the proceeds from the sale of the patent in priority to any claim that Neobev may have to a share of the proceeds.
(5) The administrators have not established an entitlement to a United Distributing lien over any proceeds from the sale of the patent, having priority over a claim by Neobev.
81 A declaration to the effect that the administrators have power to sell the patent is not to be taken as authorisation that they may do so. The very real interest that Neobev has in the sale process and the allocation of price to assets, including the patent, requires continuing supervision of the court.
[1] Australian Standard Patent No 2006201593.
[2] Neobev Pty Ltd v Bacchus Distilleries Pty Ltd (Administrators Appointed) [2014] FCA 4.
[3] [2014] FCA 4 at [115].
[4] Re Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171, 174.
[5] [2014] FCA 4, citations omitted.
[6] Reasons dated 4 February 2014, [7], emphasis added.
[7] Ibid, emphasis added.
[8] [2010] FCA 64; (2010) 77 ACSR 84.
[9] Ibid [38]–[40], citations omitted, emphasis added.
[10] Ibid [46]–[48], citations omitted, emphasis added.
[11] [2011] FCA 600, [17].
[13] [2006] NSWSC 780; (2006) 58 ACSR 410, [10]–[14].
[14] [2007] VSCA 162; (2007) 18 VR 469.
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