FEDERAL COURT OF AUSTRALIA QBE Insurance (Australia) Limited v WA Metal Recycling Pty Ltd, in the matter of WA Metal Recycling Pty Ltd (in Liq) [2016] FCA 238 File number: NSD 1647 of 2015 Judge: FARRELL J Date of judgment: 10 March 2016 Catchwords: CORPORATIONS – application under s 57 of the Federal Court of Australia Act 1976 (Cth) – where liquidator of former corporate trustee seeks appointment as receiver and manager of the business and property of the trust – where trust is a discretionary family trust – where the appointor has not exercised power to appoint new trustee – where pending sale agreement to sell the business and assets of the trust – whether just or convenient to make order – consideration of s 477(2) of the Corporations Act 2001 (Cth) Legislation: Corporations Act 2001 (Cth) s 477(2) Federal Court of Australia Act 1976 (Cth) s 57 Cases cited: Apostolou (as trustee of the Vasilious Family Trust) v VA Corporation of Australia Pty Ltd (2010) 77 ACSR 84; [2010] FCA 64 Bastion v Gideon Investment Pty Limited (in liq) (2000) 35 ACSR 466; [2000] NSWSC 939 Hundy (Liquidator); In the matter of Enviro Friendly Products Pty Ltd (in liq) [2013] FCA 852 Re Stansfield DIY Wealth Pty Limited (in liq) (2014) 291 FLR 17; [2014] NSWSC 1484 Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600 SMP Consolidated Pty Limited (in liq) v Posmot Pty Ltd [2014] FCA 1382 Date of hearing: 25 & 26 February 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 20 Solicitor for the Applicant: J Scarcella of Ashurst Australia ORDERS NSD 1647 of 2015 IN THE MATTER OF WA METAL RECYCLING PTY LTD (IN LIQ) ACN 131 868 623 BETWEEN: QBE INSURANCE (AUSTRALIA) LIMITED (ACN 003 191 035) Plaintiff AND WA METAL RECYCLING PTY LTD (ACN 131 868 623) Defendant IN THE INTERLOCUTORY APPLICATION: DAVID ANTHONY HURST IN HIS CAPACITY AS LIQUIDATOR OF WA METAL RECYCLING PTY LTD (IN LIQ) ACN 131 868 623 Applicant JUDGE: FARRELL J DATE OF ORDER: 26 FEBRUARY 2016 THE COURT ORDERS THAT: 1. David Anthony Hurst, an official liquidator, be appointed without security as receiver and manager (the Receiver) of the business and property of the Scoby-Smith Family Trust (the Trust). 2. The Receiver have in respect of the Trust business and property the powers that a liquidator has in respect of the business and property of a company under the Corporations Act 2001 (Cth) including, without limitation: (a) The power to do all things necessary or convenient to effect the sale of the business and assets of the Trust; and (b) The power to pay dividends to the creditors of WA Metal Recycling Pty Ltd (in liquidation) ACN 131 868 623 incurred in its capacity as trustee of the Trust including the proceeds of the sale of the business and assets of the Trust. 3. Subject to order 6, following the sale of any business and assets of the Trust, and the distribution of the proceeds of such sale to the creditors of WA Metal Recycling Pty Ltd (in liquidation), the Receiver provide any surplus proceeds or remaining assets of the Trust to any incoming trustee of the Trust or to the beneficiaries and retire as Receiver. 4. The Receiver be paid remuneration on a time basis at a reasonable fee according to the hours for which he, or any employee of the firm HoskingHurst Pty Limited, are engaged in work necessary for and relevant to the purpose of the receivership, such remuneration to be calculated at the standard rates of HoskingHurst Pty Limited from time to time for work of that nature, together with all reasonable out of pocket expenses capped at $55,000 (exclusive of GST) and the Receiver be given liberty to apply to this Court for further orders in relation to his remuneration if that cap is reached. 5. The Receiver's cost of the Court application be costs and expenses in the liquidation of WA Metal Recycling Pty Ltd (in liquidation). 6. The Receiver not distribute the assets of the Trust to beneficiaries without further direction of the Court. 7. These orders may be taken out forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT 1 By an application filed on 25 February 2016, Mr David Anthony Hurst ("Mr Hurst"), in his capacity as liquidator of WA Metal Recycling Pty Ltd ("WA Metal") sought orders under s 57 of the Federal Court of Australia Act 1976 (Cth) ("FCA Act") appointing him as receiver and manager ("Receiver") without security of the business and property of the Scoby-Smith Family Trust ("Trust"). These are reasons for the orders which I made on 26 February 2016. Background 2 WA Metal was incorporated on 26 June 2008. On 17 February 2016, this Court ordered that WA Metal be wound up in insolvency and that Mr Hurst of HoskingHurst Pty Limited ("HoskingHurst") be appointed as liquidator. At that time, Mr Cameron Wade Scoby-Smith ("Mr Scoby-Smith") was the director of WA Metal; he had held that position since WA Metal was incorporated. 3 On 27 June 2008, WA Metal and Ms Cara Yvonne Scoby-Smith ("Ms Scoby-Smith") were appointed as trustees of the Trust pursuant to a trust deed dated 27 June 2008 ("Trust Deed"). It appears that WA Metal operated a metal recycling business as trustee of the Trust. 4 Clause 10 of the Trust Deed provides that "if the Trustee being a corporation has a … liquidator appointed … to it then in each such case the office of Trustee shall ipso facto become vacant." As a result, WA Metal no longer holds the office of trustee but it retains a right of indemnity in relation to liabilities incurred as trustee. 5 The Trust is a discretionary trust. The named income beneficiaries are Mr Scoby-Smith and Ms Scoby-Smith. The Trust Deed provides that the children of Mr Scoby-Smith and Ms Scoby-Smith are also beneficiaries. The Scoby-Smith's have three children, one of whom is 21 years old and the other two are 12 years old. As with many discretionary trusts, the classes of potential beneficiaries are wider than the two named beneficiaries, but based on financial statements for the years ended 30 June 2013 and 30 June 2015 it appears that between 2012 and 2015, the only beneficiaries of the Trust to receive distributions or loans were Mr Scoby-Smith, Ms Scoby-Smith and their three children. 6 Mr Hurst says that he believes that Ms Scoby-Smith has retired as trustee of the Trust and has renounced her rights as beneficiary. This is based on a cover page of a "Deed of Removal of Joint Trustee, Renunciation of Beneficiary and Variation of Trust" held by Mr Hurst but he does not have a copy of the entire Deed. He concludes that there may be no current trustee of the Trust. 7 At the time of the hearing of the application on 25 February 2016, Mr Hurst held written consents to his appointment as Receiver from Mr Scoby-Smith on his own behalf and on behalf of his minor children. He also held a written consent from the adult child. He did not hold a written consent from Ms Scoby-Smith and Mr Hurst's evidence was that he had been unable to contact her. A written consent from Ms Scoby-Smith was obtained overnight following the hearing and this resolved any issue which might have arisen from the uncertain nature of her status with respect to the Trust. 8 On 8 December 2015, WA Metal (expressly in its capacity as trustee of the Trust) entered into a document entitled "Binding Heads of Agreement" with Auricom Pty Limited ("Auricom"), Aurigen Group Limited ("Aurigen"), and Mr Scoby-Smith ("Sale Agreement"). Pursuant to the Sale Agreement, WA Metal agreed to sell the scrap metal recycling business which it conducted under the business name "WA Metal Recycling" and associated assets for the following consideration: (1) A non-refundable cash deposit of $100,000 (GST inclusive). Mr Hurst deposed that he had not been provided with records of WA Metal to enable him to verify the receipt of these funds by WA Metal, however the financial controller for the purchaser advised that the funds had been paid in accordance with the instructions received from Mr Scoby-Smith; (2) the issue of 684,931 fully paid ordinary shares in Aurigen to WA Metal at a deemed issue price of 25 cents per share. Mr Hurst is awaiting information from Aurigen in respect of whether the shares have been issued; (3) a cash payment of $500,000 (including GST) to be paid by electronic funds transfer on the date of the settlement of the sale; and (4) the issue of certain "Milestone Shares" being shares in Aurigen at a deemed issue price of 25 cents per share, equivalent to the annualised EBITDA for the business based on the period beginning 1 January 2016 up to 30 June 2016 (on a dollar for dollar value). 9 It was also a term of the Binding Heads of Agreement that prior to the receipt of the deposit, Mr Scoby-Smith and Auricom were to negotiate in good faith the terms upon which Mr Scoby- Smith would be employed by Auricom to assist with the site and running of the business. 10 Settlement is scheduled to occur around 31 March 2016, however Auricom is already in possession of the business which is located in Perth. Mr Hurst deposed that, although he has had his staff inspect the Trust's assets, he is unable, in his capacity as liquidator, to protect and preserve those assets effectively and they may become unaccounted for, especially as it appears that there is no trustee of the Trust. 11 Mr Hurst's preliminary investigations indicate that WA Metal operated as if its sole undertaking was its role as trustee of the Trust, however he is unable to say whether WA Metal is entitled to any assets in its own right other than its right of indemnity in respect of the Trust assets. Upon his appointment, Mr Hurst engaged Tiger Asset Group Pty Limited to inspect the Trust assets and to provide him with a valuation, but as at 25 February 2016 he had not received that valuation. Based on his preliminary investigations, Mr Hurst had formed the view that the sale contemplated by the Sale Agreement is an appropriate sale, the completion of which is in the best interests of the creditors and beneficiaries of the Trust. Once he is appointed as Receiver, he intends to further investigate the proposed sale to ensure that his preliminary views are correct and the sale is in fact the best available. In the meantime, he wishes to preserve the benefit of the Sale Agreement. Mr Hurst proposes to complete the sale and distribute the proceeds of the sale to the creditors of WA Metal, he will then account to any incoming trustee, or otherwise to the beneficiaries, for any surplus proceeds or remaining assets of the Trust. 12 Other orders sought by Mr Hurst include: (1) that as Receiver of the Trust business and property, he have the powers that a liquidator has in respect of the business and property of a company, including the power to effect the sale of the business and assets of the Trust and the power to pay dividends to the creditors of WA Metal, and (2) that the Receiver be paid remuneration on a time basis at a reasonable fee according to the hours which he or any employee of the firm HoskingHurst is engaged in work necessary for and relevant to the purpose of the Receivership, such remuneration to be calculated at the standard rates of HoskingHurst from time to time for work of that nature, together with reasonable out of pocket expenses. Consideration 13 Section 57(1) of the FCA Act empowers the Court to appoint a receiver on such terms and conditions as the Court thinks fit in any case in which it appears to the Court to be just or convenient to do so. This power is not confined to a closed class of circumstances. Ultimately, the general ground upon which the Court appoints a receiver is the protection or preservation of property for the benefit of persons who have an interest in it: see Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600 at [15] per Besanko J ("Sapphire"). 14 In this case, Mr Hurst is concerned to protect the property of the Trust which is in the hands of Auricom pending completion of the Sale Agreement. Subject to further investigations, Mr Hurst considers it to be in the best interests of the beneficiaries of the Trust to be in a position to complete the Sale Agreement by 31 March 2016; if conditions precedent are not satisfied by that time, the Sale Agreement may be terminated. There is no provision in the Sale Agreement which would provide the purchaser with a right to terminate because WA Metal has been placed in liquidation. However, there is a condition precedent in clause 3(a) that the results of Auricom's due diligence of the assets and the business be satisfactory to Auricom (in its sole and absolute discretion). Mr Hurst reasonably apprehends that any lack of clarity concerning WA Metal's capacity to confer title on the purchaser may mean that that condition precedent is not satisfied. 15 Mr Hurst's representative noted the conflict of authority as to utility of the powers conferred under s 477(2) of the Corporations Act 2001 (Cth) to enable a liquidator of a corporate trustee to confer good title to trust assets on a purchaser. In Apostolou (as trustee of the Vasiliou Family Trust) v VA Corporation of Australia Pty Ltd (2010) 77 ACSR 84; [2010] FCA 64 at [48], Finkelstein J suggested that it was possible where the trustee has legal title and a proprietary claim by reason of its right of indemnity. In Re Stansfield DIY Wealth Pty Limited (in liq) (2014) 291 FLR 17; [2014] NSWSC 1484 ("Stansfield") at [30] and [33], Brereton J held that where a corporate trustee had ceased to hold office because of the appointment of a liquidator, although the corporate trustee maintained an equitable charge over the trust property, it was not itself "property of the company" under s 477(2)(c). 16 In Bastion v Gideon Investment Pty Limited (in liq) (2000) 35 ACSR 466; [2000] NSWSC 939 at [66] Austin J found that it was appropriate to appoint a liquidator of a corporate trustee as receiver and manager where there was sufficient doubt as to the liquidator's capacity to confer good title on a purchaser such that purchasers may be dissuaded from dealing in the assets. This approach has been followed in this Court in Sapphire, Hundy (Liquidator); In the matter of Enviro Friendly Products Pty Ltd (in liq) [2013] FCA 852 per Foster J and in SMP Consolidated Pty Limited (in liq) v Posmot Pty Ltd [2014] FCA 1382 per Yates J. 17 Under cl 8(f) of the Trust Deed, Mr Scoby-Smith as appointer has power to appoint a new trustee. While no new trustee has been suggested, both Mr Scoby-Smith and Ms Scoby-Smith (if she remains a trustee) have consented to Mr Hurst's appointment as Receiver. 18 In the circumstances I consider it just and convenient to appoint Mr Hurst as Receiver of the Trust business and property. I accept that there is no conflict of duty which should prevent Mr Hurst acting in the capacity of both liquidator of WA Metal and Receiver of the business and property of the Trust in the circumstances of this application. 19 The orders proposed by Mr Hurst sought authority to be paid remuneration at HoskingHurst's usual rate. The proposed orders made no provision either for accounts to be produced or a cap on remuneration. In response to concerns raised by the Court, Mr Hurst proposed that his capacity to recover remuneration and disbursements should be capped at $55,000 (plus GST), with liberty to apply to the Court for further orders if this capped is reached. 20 The orders proposed by Mr Hurst also suggested that the distribution of the proceeds of sale of any business or assets of the Trust be available to the creditors of WA Metal, with any surplus being paid to an incoming trustee. While in this case it was highly likely that the creditors of the Trust and of WA Metal would be the same, amendments were made to the proposed orders to make it clear that proceeds from the sale of the Trust assets should only be made available to WA Metal's creditors for debts incurred in its capacity as Trustee of the Trust. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell. Associate: Dated: 9 March 2016