Federal Court of Australia Kucianski (liquidator), in the matter of Johnson Roofing Pty Ltd (in liquidation) [2021] FCA 1370 File number(s): VID 566 of 2021 Judgment of: ANDERSON J Date of judgment: 5 November 2021 Catchwords: CORPORATIONS – insolvency - orders in relation to external administration – liquidator powers to deal with trust property – the liquidator seeks an order that he is justified and acting reasonably in proceeding on the basis that the company carried on business and holds all of its assets as trustee – the liquidator also seeks an order pursuant to s 63 of the Trustee Act 1958 (Vic) giving him powers to deal with trust property, an order relieving him from any liability for having already dealt with trust property as well as ancillary orders, including as to remuneration and expenses – application allowed Legislation: Corporations Act 2001 (Cth) Federal Court of Australia Act 1976 (Cth) Trustee Act 1958 (Vic) Cases cited: Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677 Cremin, in the matter of Brimson Pty Ltd (in liq) [2019] FCA1023; 136 ACSR 649 Deppeler, in the matter of Old Port Road Pty Ltd (in liq) [2021] FCA 980 In the matter of St George's Development Company Pty Ltd (in liq) [2018] VSC 595 Jess, in the matter of Westside Group Pty Ltd (in liq) [2020] FCA 1586 JML Property Services Pty Ltd (in liquidation) [2018] NSWSC 1069 Jones (Liquidator) v Matrix Partners Pty ltd, in the matter of Killarnee Civil & Concrete Contractors Pty ltd (in liq) [2018] FCAFC 40, 124 ACSR 586 Lawrence (liquidator), in the matter of LXNDR Group Pty Ltd (in liq) [2021] FCA 1243 Re Asten Holdings Pty Ltd (in liq) [2020] FCA 1107 Re Matthew Forbes Pty Ltd (in liq) [2018] VSC 331 Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 31 Date of hearing: 4 November 2021 Counsel for the Plaintiffs: Mr D F McAloon Solicitor for the Plaintiffs: Russell Kennedy Lawyers ORDERS VID 566 of 2021 IN THE MATTER JOHNSON ROOFING PTY LTD (IN LIQUIDATION) ACN 070 870 576 MATTHEW KUCIANSKI IN HIS CAPACITY AS LIQUIDATOR OF JOHNSON ROOFING PTY LTD (IN Plaintiff JOHNSON ROOFING PTY LTD (IN LIQUIDATION) ACN 070 870 576 Second Plaintiff order made by: ANDERSON J DATE OF ORDER: 4 NOVEMBER 2021 THE COURT ORDERS THAT: 1. Pursuant to section 90-15 of Schedule 2 - Insolvency Practice Schedule (Corporations) (Schedule 2) to the Corporations Act 2001 (Cth) (Corporations Act), the First Plaintiff (Liquidator) is justified and acting reasonably in proceeding on the basis that: (a) the Second Plaintiff, Johnson Roofing Pty Ltd (In Liquidation) (ACN 070 870 576) (Company), carried on business in its capacity as trustee of The Johnson Unit Trust (Trust); and (b) all assets and undertakings of the Company are properly characterised as property held by the Company in its capacity as trustee of the Trust (Trust Property). 2. Pursuant to section 63 of the Trustee Act 1958 (Vic) (Trustee Act), the Company shall have the power to act as trustee of the Trust. 3. Pursuant to section 90-15 of Schedule 2 of the Corporations Act, the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that he can deal with, hold, apply and/or distribute the Trust Property in accordance with Parts 5.5 and 5.6 of the Corporations Act. 4. Pursuant to section 1318 of the Corporations Act and/or section 67 of the Trustee Act, the Liquidator be relieved from any liability arising from having, between the date of his appointment and the date of this order, dealt with or realised Trust Property and/or made payments from the proceeds of such realisations. 5. Pursuant to section 90-15 of Schedule 2 of the Corporations Act, the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that: (a) the Liquidator is and was entitled to be paid from the Trust Property his remuneration, costs and expenses properly incurred in preserving, realising or getting in the Trust Property, or in carrying on any business or activities of the Trust, or in conducting any sale of the business or assets of the Trust, or in distributing the Trust Property (once realised), or in conducting the winding up of the Company (Remuneration and Expenses); and (b) the Remuneration and Expenses include the remuneration, costs and expenses of and incidental to this application and are to be paid in accordance with the priority specified in section 556(1) of the Corporations Act. 6. There is liberty to apply to any person who can demonstrate sufficient interest to modify these directions and orders on not less than 48 hours' notice. 7. The Liquidator is to serve a copy of this order upon each of the persons served with a copy of the Originating Process. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT ANDERSON J: 1 The first plaintiff, Mr Kucianski (the Liquidator), is the liquidator of the second plaintiff, Johnson Roofing Pty Ltd (in liquidation) (the Company). The Liquidator seeks orders under the Corporations Act 2001 (Cth) (Act) and the Trustee Act 1958 (Vic) for the purpose of facilitating his dealing with and distribution of assets of the Company, including to enable the winding up of the Company to be completed. 2 On 4 November 2021, I made the orders sought by the Liquidators. These are my reasons for doing so. 3 The application is made in circumstances where the Company is presently the bare trustee of The Johnson Unit Trust ABN 54 931 744 051 (Trust), having ceased to be the trustee of the Trust consequent upon the Liquidator's appointment. 4 The situation reflects what was recently described by Beach J as a "standard context where orders have been made for the purpose of selling trust assets and distributing the proceeds among trust creditors by conferring on the liquidators of a corporate trustee of a bare trust the power to either deal with assets of the trust or to have the liquidators appointed as receivers". The plaintiffs seek relief in terms equivalent to that granted by this Court in such recent cases such as Lawrence (liquidator), in the matter of LXNDR Group Pty Ltd (in liq) [2021] FCA 1243 (LXNDR Group), Deppeler, in the matter of Old Port Road Pty Ltd (in liq) [2021] FCA 980 (Old Port Road), Re Asten Holdings Pty Ltd (in liq) [2020] FCA 1107 (Asten) and Jess, in the matter of Westside Group Pty Ltd (in liq) [2020] FCA 1586 (Jess). Background 5 The background to the proceeding is set out in the Liquidator's affidavit sworn on 5 October 2021 (Kucianski Affidavit). The Liquidator was appointed to the Company on 16 March 2020 at a general meeting of its members. Prior to it ceasing trading on 4 March 2020, the Company operated a roofing construction business from leased premises in Bayswater. The failure of the business has resulted in unpaid creditor claims exceeding $1 million. 6 According to a Unit Trust Deed (Trust Deed) pertaining to the Trust, the Company was appointed as trustee of the Trust in September 1995. The Liquidator's assessment is that the Company operated exclusively as trustee of the Trust. That assessment is based upon a review of corporate records (including tax returns, bank statements, credit applications and financial statements) and advice from the Company's accountant. The Liquidator's belief, which he has conveyed to the Company's creditors, is that the Company at all times held property on trust in its capacity as trustee of the Trust. 7 The Trust Deed serves to confirm that the trustee of the Trust is entitled to be indemnified out of the property of the Trust for "liabilities incurred in the administration of the Trust Fund". 8 The Trust Deed separately provides, at clause 11(c), that the "office of a Trustee shall be ipso facto determined and vacated if…a Trustee being a company shall enter liquidation, whether compulsory or voluntary (not being merely a voluntary liquidation for the purposes of amalgamation or reconstruction)". As noted above, the Liquidator was appointed to the Company on 16 March 2020. There is no suggestion that a replacement trustee has been appointed to the Trust. 9 As a consequence of the operation of clause 11(c) of the Trust Deed, the Company appears to have been a bare trustee of the Trust since 16 March 2020. Since that date, the Liquidator has collected and sold a number of assets (including plant and equipment and motor vehicles), details of which are provided at paragraph 27 of the Kucianski Affidavit. 10 As the authorities considered below serve to confirm, in the absence of a Court order, the ability of a bare trustee (or its liquidator) to deal with trust assets, including to satisfy claims of trust creditors, is limited. 11 The Liquidator's investigations suggest that the current unit holders in the Trust are C & J Dobson (as trustee for the CJD Trust) and Sorento Pty Ltd (as trustee for the Darren Johnson Family Trust). Steps have been taken to provide the Company directors, the unit holders and ASIC with notice of the application and the relief sought by the Liquidator. 12 The Liquidator has advised creditors of the Company that an application would be made to obtain orders enabling the Liquidator to deal with assets of the Trust. In June 2020, creditors were advised that, as the Company "has been disqualified and removed as trustee due to the liquidation it has been rendered a "bare trustee" of the trust assets it holds" and, further, that the Liquidator considered that he may be required to make an application to Court to be authorised to deal with trust assets. That such an application would be made was confirmed in a report to creditors in July 2021. No objection has been received from any creditor. Orders sought 13 This application raises legal issues about the powers of the Company and the Liquidator to deal with assets of the Trust. It is not a case where the Liquidator is seeking directions about commercial decisions that he ought make himself. 14 Given the popularity of trading trusts, the present scenario is a common one. In an analogous situation in Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677 (Caterpillar Financial), Gordon J summarised the rights and powers of a bare trustee (that had been removed as trustee by virtue of an equivalent disqualification clause in a trust deed) and its liquidator. Amongst the principles stated by her Honour is that while a bare trustee may still hold trust assets, its "duties, powers and rights are limited to protecting the Trust assets". As was observed recently in Old Port Road, applications of this kind are necessary when, by virtue of an "ipso facto" clause in the relevant deed of trust, a trustee company is automatically removed from office on the occurrence of a particular event, such as the appointment of a liquidator. 15 Further, as was observed in Cremin, in the matter of Brimson Pty Ltd (in liq) [2019] FCA1023; 136 ACSR 649 (Cremin): It is now settled that the liquidator of an insolvent (former) corporate trustee cannot sell the trust's property without order of the Court, or by appointment of a receiver over the trust assets: see Jones & Matrix at [44] per Allsop CJ (Farrell J agreeing at [196]); Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17 at [10]; Apostolou v VA Corporation of Aust Pty Ltd [2011] FCAFC 103 at [45]. The rationale for this position is that, on a proper understanding, the trust assets are not the "property of the company", but are instead trust property in which the corporate trustee has a proprietary interest by way of lien or charge to secure its right of exoneration: see Jones & Matrix at [89]. Thus, to the extent that the subject of a sale is the whole of a trust asset, rather than merely the company's lien or charge in respect of that asset, it is not authorised by the power of sale in s 477(2)(c). The courts are generally willing, upon an appropriate application, to make orders permitting the liquidator of a (former) corporate trustee to sell trust assets. In situations where the property of the trust will be exhausted following its sale and subsequent distribution to creditors, it may be appropriate merely to give the liquidator a power of sale: see Jones & Matrix at [91]. The more common course is, however, for the liquidator of the insolvent (former) corporate trustee to apply to be appointed a receiver for the purpose of selling the trust assets and distributing the proceeds among trust creditors… 16 While the Liquidator is content to be appointed as receiver over the trust property under s 57(1) of the Federal Court of Australia Act 1976 (Cth) (as occurred in Cremin), that is not his preferred outcome. Rather, the making of the orders sought in the Originating Process will secure an equivalent outcome without the Liquidator being appointed in a new capacity. In Old Port Road, it was noted that there is no "bright line" that "provides assistance to the Court to determine whether, in cases such as this, the preferable course is to make orders permitting the former corporate trustee to sell assets or to appoint a receiver". Orders 1-2 in the Originating Process: confirming the ability of the Liquidator to deal with Trust assets 17 The Liquidator seeks orders, in equivalent form to those made in cases such as LXNDR Group, Asten, Old Port Road and Jess, confirming that he is justified and acting reasonably in proceeding on the basis that: (a) the Company carried on business in its capacity as trustee of the Trust; and (b) all of the Company's assets are properly characterised as property held by the Company in its capacity as trustee of the Trust. 18 The relief sought can be granted pursuant to Section 90-20 of the Insolvency Practice Schedule (Corporations) of the Act (Practice Schedule), which enables a liquidator to apply to the Court for orders under section 90-15 in relation to the external administration of a company. The Court's power to make orders under s 90-15 is broad. Having regard to the enquiries made by the Liquidator and where there is no evidence that the Company traded or held assets other than in its capacity as trustee of the Trust, it is appropriate to give a direction in the form sought at paragraph 1 of the Originating Process. 19 Further, it is appropriate, for the avoidance of doubt, to authorise the Company to act as trustee of the Trust. Section 63(1) of the Trustee Act 1958 provides as follows: 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. 20 In Caterpillar Financial, Gordon J set out the above provision and observed: As a result, the Federal Court has the power to authorise the Company as a bare trustee to deal with trust assets and apply trust assets to meet claims under s 556 of the Act in the course of the winding up of the Company. 21 As noted above, no replacement trustee has been appointed to the Trust. The order sought will enable the affairs of the Trust to be "finalized prospectively and efficiently without the need to return to Court". Orders 3 in the Originating Process: confirming operation of winding up provisions of the Act 22 In the interests of certainty, a direction should be made (pursuant to section 90-15 of the Practice Schedule) that the Liquidator is justified and otherwise acting reasonably in proceeding on the basis that his possession, realisation and distribution of property of the Trust is governed by Parts 5.5 and 5.6 of the Act. 23 Such a direction accords with the conclusion of the Full Court in Jones (Liquidator) v Matrix Partners Pty ltd, in the matter of Killarnee Civil & Concrete Contractors Pty ltd (in liq) [2018] FCAFC 40, 124 ACSR 586 (Jones & Matrix), where Allsop CJ made the following observations regarding the situation that arises in this case (namely, "where the company has only acted…as corporate trustee for one trust") at [102] and [108]: In such circumstances, the property of the company that includes the right of exoneration and the funds obtained from its exercise is to be distributed in accordance with the statutory command: ss 501 and 556. In such circumstances, the words of the statute are to be applied to direct the distribution of the property of the company. Where the corporation has only ever acted as trustee of one trust and that has been the totality of its affairs, there is no reason either in principle or by reference to context or text why the words of the statute setting out the order of priorities should not be followed. 24 It is unsurprising that, in the period following the decision in Jones v Matrix, Courts have granted relief in the form sought by the Liquidator (including, for instance, in Re Matthew Forbes Pty Ltd (in liq) [2018] VSC 331 (Matthew Forbes) (at [20]), In the matter of St George's Development Company Pty Ltd (in liq) [2018] VSC 595 (St George's) (at [31]), Asten (at [27]) and LXNDR Group (at [24]). Order 4 in the Originating Process: relieving Liquidator from potential liability for past conduct 25 As noted above, in the period following his appointment, the Liquidator dealt with property of the Trust in the course of discharging his role as liquidator. That conduct relevantly entailed the realisation of pre-appointment debtors, plant and equipment and motor vehicles. 26 In light of these dealings with trust property (at a point in time when, it is now apparent, the Company had ceased to hold office as trustee), the Liquidator seeks an order pursuant to section 1318 of the Act and/or section 67 of the Trustee Act 1958 (Vic) that the Liquidator be relieved from any potential liability arising from his dealings with trust property. As was noted in Matthew Forbes, the purpose of s 1318 is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are business persons who act in the environment involving risk in commercial decision-making. Referring to s 67 of the Trustee Act 1958, Gordon J stated in Caterpillar Financial that the section "empowers the Court to excuse a breach of trust by a trustee who has acted honestly and reasonably". 27 Where the Liquidator's conduct has been both honest and reasonable (where its object has been to advance the interests of the Company's creditors and wind down the affairs of the Company and the Trust in an orderly fashion), it is appropriate to make an equivalent order to that made in cases such as Cremin, Asten and LXNDR Group. Order 5 in the Originating Process: payment of the Liquidator's remuneration and expenses from trust property 28 The reports to creditors annexed to the Kucianski Affidavit contain details of the tasks undertaken and being performed by the Liquidator. Further, the Liquidator has identified the further work required to conclude the Company's winding up. 29 An order is sought to confirm the Liquidator's entitlement to be indemnified out of the trust assets in respect of the costs and expenses incurred. As noted above, the sole activities of the Company were as trustee of the Trust. Save for its right of exoneration and the supporting lien, the Company has no assets of its own. In these circumstances, it is appropriate that the Liquidator's remuneration and expenses be paid out of trust assets. As was stated in In the matter of JML Property Services Pty Ltd (in liquidation) [2018] NSWSC 1069: …the case law establishes that a liquidator of a trustee company is entitled to be paid his or her remuneration, whether for administering the trust assets or for general liquidation work, out of trust assets where that company has no assets other than its rights against the trust assets. 30 It is also appropriate that the costs of this application be met from the property held on trust. Disposition 31 I will make the orders provided for in the Originating Process filed on 5 October 2021. I certify that the preceding thirty one (31) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anderson. Associate: Dated: 5 November 2021