FEDERAL COURT OF AUSTRALIA Holland, in the matter of BCNCulinary Arts Pty Ltd (in liq) [2024] FCA 752 File number: QUD 282 of 2024 Judgment of: DERRINGTON J Date of judgment: 31 May 2024 Date of publication of reasons: 10 July 2024 Catchwords: CORPORATIONS – application for appointment of liquidators as receivers and managers of assets of various trusts – where five companies in liquidation each the former corporate trustee of a trust – where the majority of realisable assets of the companies are perishable – where the assets are subject to certain security interests – liquidators appointed as receivers and managers Legislation: Corporations Act 2001 (Cth) Federal Court of Australia Act 1976 (Cth) Personal Property Securities Act 2009 (Cth) Cases cited: Deputy Commissioner of Taxation v Shac Communications Pty Ltd [2024] FCA 488 Luxtown Pty Ltd (Administrators Appointed), in the matter of Luxtown Pty Ltd (Administrators Appointed) [2019] FCA 1861 Re Cremin, Brimson Pty Ltd (in liquidation) (2019) 136 ACSR 649 Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 22 Date of hearing: 31 May 2024 Counsel for the Plaintiffs: Mr M Downes Solicitor for the Plaintiffs: Mahoneys ORDERS QUD 282 of 2024 IN THE MATTER OF BCNCULINARY ARTS PTY LTD (IN LIQUIDATION) & ORS MARK ALFRED HOLLAND First Plaintiff WILLIAM JAMES HARRIS Second Plaintiff ANTHONY NORMAN CONNELLY Third Plaintiff order made by: DERRINGTON J DATE OF ORDER: 31 MAY 2024 THE COURT ORDERS THAT: 1. This application be returnable instanter. 2. Mark Alfred Holland, William James Harris and Anthony Norman Connelly (Receivers) be appointed as receivers and managers, without security, of the assets of: (a) Kellace Trust No.2 established pursuant to a deed dated 23 May 2019; (b) Kellace Trust No. 3 established pursuant to a deed dated 23 May 2019; (c) Kellace Trust No. 4 established pursuant to a deed dated 10 December 2019; (d) Kellace Trust No. 5 established pursuant to a deed dated 6 November 2019; and (e) QW Brasserie Trust established pursuant to a deed dated 25 January 2022. (Trusts and each a Trust). 3. The requirement for Receivers to file a guarantee under rr 14.21 and 14.22 of the Federal Court Rules 2011 (Cth) be dispensed with. 4. The Receivers are granted all the powers provided for by s 420 of the Corporations Act 2001 (Cth) (Corporations Act) as if "the corporation" were a reference to each Trust. 5. Pursuant to s 90-15 of Sch 2 to the Corporations Act, in respect of BCNCULINARY ARTS PTY LTD (in liquidation), the plaintiffs are justified in treating and shall treat: (a) all of the business and assets of that Company as assets of Kellace Trust No. 2; (b) all of the debts and liabilities which are provable in the external administration of the Company as having been incurred in the conduct of a business as trustee of Kellace Trust No. 2; and (c) all of the assets of Kellace Trust No. 2, including the proceeds of assets realised or due to be realised by the plaintiffs in the course of the external administration of that Company as being subject to an indemnity in favour of them that as to its power to exonerate the debts and liabilities. 6. Pursuant to s 90-15 of Sch 2 to the Corporations Act, in respect of BCNBRASSERIE PTY LTD (in liquidation), the plaintiffs are justified in treating and shall treat: (a) all of the business and assets of that Company as assets of Kellace Trust No. 3; (b) all of the debts and liabilities which are provable in the external administration of the Company as having been incurred in the conduct of a business as trustee of Kellace Trust No. 3; and (c) all of the assets of Kellace Trust No. 3, including the proceeds of assets realised or due to be realised by the plaintiffs in the course of the external administration of that Company as being subject to an indemnity in favour of them that as to its power to exonerate the debts and liabilities. 7. Pursuant to s 90-15 of Sch 2 to the Corporations Act, in respect of BCNEVENTS QLD PTY LTD (in liquidation), the plaintiffs are justified in treating and shall treat: (a) all of the business and assets of that Company as assets of Kellace Trust No. 4; (b) all of the debts and liabilities which are provable in the external administration of the Company as having been incurred in the conduct of a business as trustee of Kellace Trust No. 4; and (c) all of the assets of Kellace Trust No. 4, including the proceeds of assets realised or due to be realised by the plaintiffs in the course of the external administration of that Company as being subject to an indemnity in favour of them that as to its power to exonerate the debts and liabilities. 8. Pursuant to s 90-15 of Sch 2 to the Corporations Act, in respect of BCN EXPRESS PTY LTD (in liquidation), the plaintiffs are justified in treating and shall treat: (a) all of the business and assets of that Company as assets of Kellace Trust No. 5; (b) all of the debts and liabilities which are provable in the external administration of the Company as having been incurred in the conduct of a business as trustee of Kellace Trust No. 5; and (c) all of the assets of Kellace Trust No. 5, including the proceeds of assets realised or due to be realised by the plaintiffs in the course of the external administration of that Company as being subject to an indemnity in favour of them that as to its power to exonerate the debts and liabilities. 9. Pursuant to s 90-15 of Sch 2 to the Corporations Act, in respect of QW BRASSERIE PTY LTD (in liquidation), the plaintiffs are justified in treating and shall treat: (a) all of the business and assets of that Company as assets of QW Brasserie Trust; (b) all of the debts and liabilities which are provable in the external administration of the Company as having been incurred in the conduct of a business as trustee of QW Brasserie Trust; and (c) all of the assets of QW Brasserie Trust, including the proceeds of assets realised or due to be realised by the plaintiffs in the course of the external administration of that Company as being subject to an indemnity in favour of them that as to its power to exonerate the debts and liabilities. 10. The proceeds from the realisation any assets of any Trust are to be kept in a separate controlled monies account operated by the plaintiffs and which may only be accessed by the plaintiffs for the purpose of: (a) the payment of the plaintiffs' reasonable costs and expenses incurred in the care, protection, preservation and/or realisation of the property referred to in Order 2 which includes the plaintiffs' costs of this proceeding, the identification of potential security interests and the identification and sale of property as may be subject to such potential security interests (Fees); (b) the distribution of the balance of the Proceeds to the entitled parties, which may only occur: (i) after payment of the Fees; (ii) after such time that the plaintiffs and the secured creditors have reached agreement as between them as to the distribution of the balance of the Proceeds; or (iii) absent such agreement being reached between the plaintiffs and the secured creditors, as directed by the Court. 11. By 7 June 2024, the Plaintiffs as liquidators are to take all reasonable steps to give notice of the orders to the creditors of each Company by means of a circular: (a) to be sent by email transmission to creditors and beneficiaries for whom the plaintiffs have a current email address; or (b) to be sent by ordinary post to creditors and beneficiaries for whom the plaintiffs have only a postal address. 12. The Receivers' reasonable costs, expenses and remuneration attributable to a Trust is to be paid: (a) at their usual professional rates; and (b) from the assets of that Trust. 13. The costs of this application be paid, jointly and severally, from the assets of the Trusts. 14. Liberty to apply to any person showing sufficient interest in these orders to vary or set aside these orders on reasonable notice. 15. Liberty to apply to the plaintiffs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DERRINGTON J: Introduction 1 The application presently before the Court has been brought on urgently by the plaintiffs, Mr Mark Holland, Mr William Harris, and Mr Anthony Connelly, in their capacity as the liquidators of five companies which operated hospitality businesses. The plaintiffs were appointed as liquidators of those companies on Tuesday, 28 May 2024 (being some three days prior to the hearing of this application). Each of the five companies was a trustee of a separate trust, and the material shows that on the liquidation of each company, each ceased to be a trustee of the trust, the relevant trust deeds containing terms which caused that to occur automatically. The director of each company is a Mr Shannon Kellam, who owns a number of restaurants and hospitality businesses in Queensland. 2 The liquidators' initial investigations have revealed that a significant portion — or potentially the majority — of the assets of the companies, or at least some of the companies, are perishable and need to be realised. Those assets are held on trust, and there are some difficulties with that, not in the least because the companies in liquidation are no longer trustees of the trusts and cannot exercise powers under the relevant trust deed, but also because the assets subject to the trusts are likely subject to certain security interests. As a result, by their application dated 30 May 2024, the liquidators seek orders for their appointment as receivers and managers of the assets of each of the trusts, so that they may proceed to sell those assets expeditiously. Relevant facts 3 As mentioned, each company in liquidation was a corporate trustee of a trust, and formed part of a corporate group which traded in the food and hospitality business. Central to the operation of the group was the business, "The Kneadery", which operated under the company BCNEVENTS QLD PTY LTD (in liquidation). That was the central kitchen for the group of companies, based in the Breakfast Creek Lifestyle Precinct in Breakfast Creek, Queensland. 4 Importantly, the material shows that each company traded only as a trustee and not in its own right. Each held assets as trustee and not in its own right and in consequence, each incurred liabilities as trustee and not in its own right. The use of the expression, "not in its own right", is a shorthand explanation for the fact that each company, whilst incurring legal liabilities or having legal rights in relation to the operation of the business, accrued the liabilities or gained the rights in its capacity as a trustee. That has consequences in relation to the entitlements of the creditors of those companies. 5 In any event, on Tuesday, each of the companies were placed into liquidation pursuant to a members' resolution under s 491 of the Corporations Act 2001 (Cth). The following day, Mr Holland inspected the premises from where the businesses were operated, identified the assets, and conducted a stocktake. He identified that the stock included a large quantity of cooked, semi-cooked and frozen food, all of which were perishable. 6 It is apparent from Mr Holland's affidavit that those perishable assets may represent a significant portion, indeed, perhaps a majority, of the realisations available from the companies. During the course of Mr Holland's inspection and stocktake, he ascertained that the perishable items had "use-by" dates starting from on or around 31 May 2024, that there would be difficulties in identifying which of the perishable assets belong to which company, and that all of the perishable assets were owned by at least one of the companies. 7 This circumstance gives rise to significant difficulties for the liquidators. If they refrain from selling the perishable goods whilst they attend to determining the ownership of the assets and any security rights over them, the goods will deteriorate and be rendered worthless. Very appropriately, they have instead expressed an intention to sell those perishable assets, thereby liquidating them into cash, and to thereafter make the relevant investigations to ascertain the rights and liabilities in respect of the assets that will then identify the entitlements to the proceeds of any sale. The PPSA interests 8 By his affidavit, Mr Holland identified that there are 35 security interests registered against one or more of each of the companies as trustees, and many are registered over all present and after-acquired property of the companies and some are purchase money security interests, as recognised under the Personal Property Securities Act 2009 (Cth). 9 There is, undoubtedly, a real risk that one or more of the secured creditors will have security interests over the perishable assets. The liquidators' solicitors and counsel have, very properly, highlighted these facts to the Court because any order the Court makes will ultimately affect those interests. The difficulty is that there is insufficient time to notify all of the potential claimants on the property in the liquidators' hands or to work out the nature of any interests — the assets of the companies are perishable and will soon deteriorate. 10 In effect, the liquidators seek to undertake the task of salvors. That is, to protect the interests of all parties in the assets by turning them into cash or money and then to subsequently ascertain the rights and interests of the secured parties. 11 In his very helpful submissions, Mr Downes, counsel for the liquidators, referred the Court to the decision of Markovic J in Luxtown Pty Ltd (Administrators Appointed), in the matter of Luxtown Pty Ltd (Administrators Appointed) [2019] FCA 1861 (Luxtown). Those proceedings came before the Court in circumstances similar to the present case, although perhaps not entirely so. 12 There, the company in administration was the vendor of electrical goods, which operated from five different leased locations across Sydney. A stocktake was taken of the goods, which revealed that there were approximately 10,000 items of stock, consisting of a variety of different kinds of electrical goods from different brands. In that case, a search of the Personal Property Security Register (PPSR) revealed some 213 security interests. Unlike the present case, the administrators had engaged with the holders of the securities, but were ultimately unable to easily "match" the security interests with specific items of stock in the possession of the administrators. 13 It was properly pointed out to the Court that the goods in that case were not perishable. In any event, there was great difficulty in matching the secured parties with specific items, except in the case of one secured creditor, Samsung. The solution sought by the administrators was to sell the stock in a single line to minimise the holding costs. The learned judge adopted that approach and made practical orders which permitted that to occur. Her Honour did so because it was recognised (at [28]) that: (a) the PPSR identified that a substantial quantity of the company's assets were encumbered; (b) the administrators and the secured creditors were unable to identify the stock in which particular secured creditors held an interest; (c) the business of the company in administration had been advertised for sale in one line rather than a piecemeal fashion because that would produce the greater benefit from the sale of the stock. If the property was sold, after the payment of various costs of the sale, the money would be held pending agreement between the secured parties and the administrators as to the manner in which the monies would be paid out; (d) the proposed arrangements for the preservation of proceeds of sale provided adequate protection for the secured parties' interests; and (e) had the administrators sought to sell the stock in the absence of any order, they could have been exposed to claims for damages for having disposed of the property contrary to s 442C of the Corporations Act 2001 (Cth). 14 As Mr Downes pointed out in his written submissions, those considerations apply in the present case. That is to say, the perishable stock held by the companies is encumbered, in one way or another, in respect of a variety of security interests. The liquidators have been unable to match the stock to particular interests, and because of the stock being perishable, they have been unable to undertake a stocktake with the assistance of secured creditors. To add to the confusion, it appears that, as a result of some of the perishable goods being cooked or part cooked and frozen, the original ingredients have been commingled into new items, and that makes the identification issue rather more difficult. The application for the appointment of the liquidators as receivers 15 The resolution sought or proposed by the liquidators is to urgently sell the perishable assets, liquidate them into cash, and then put arrangements in place to preserve the proceeds of sale so that all parties with an interest in the proceeds can be adequately protected in the future. 16 As in the case of Luxtown, in this case, if the liquidators took those steps in the absence of a Court order, they could be exposed to a claim for damages for having improperly disposed of the property. 17 The application for the appointment of the liquidators as receivers of the trust assets is made pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth). Section 57(1) relevantly provides that: The Court may, at any stage of a proceeding on such terms and conditions as the Court thinks fit, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just or convenient so to do. 18 That provision was recently reviewed in Deputy Commissioner of Taxation v Shac Communications Pty Ltd [2024] FCA 488, where receivers were appointed to the assets of a trading trust which was in the course of being wound up. As was stated in that case, the principles relevant to the appointment of liquidators of trust companies as receivers are relatively well settled and they were set out by Moshinsky J in Re Cremin, Brimson Pty Ltd (in liquidation) (2019) 136 ACSR 649, 655 – 656 [48] – [51] as follows: Applicable principles [48] A company that is the trustee of a trading trust has a right of indemnity to resort to the trust assets to vindicate its right to be exonerated from a liability that it has incurred in the course of carrying out trust business. In circumstances where such a company goes into liquidation, its right of indemnity and accompanying equitable lien over the trust assets endures, notwithstanding that the company has been removed as trustee of the trust and only holds the trust assets as a bare trustee: see Jones (in his capacity as liquidator of Killarnee Civil & Concrete Contractors Pty Ltd (in liq)) v Matrix Partners Pty Ltd (2018) 260 FCR 310; 354 ALR 436; 124 ACSR 568; [2018] FCAFC 40 (Jones v Matrix) at [85], [142], [198]. [49] There has, until recently, been a difference of opinion as to whether, in such circumstances, the liquidator's power to sell the "property of the company" in s 477(2)(c) of the Corporations Act permits him or her to sell trust assets: see Re Aced Kang Investments Pty Ltd (in liq) [2017] FCA 476 at [12]. 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 v Matrix at [44] per Allsop CJ (Farrell J agreeing at [196]); Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 103 ACSR 401; 291 FLR 17; [2014] NSWSC 1484 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 v 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). [50] 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 v 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: see Jones v Matrix at [142] per Siopis J; Amirbeaggi (in her capacity as liquidator of Simpkiss Pty Ltd (in liq)) v Simpkiss Pty Ltd (in liq) [2018] FCA 2121 (Amirbeaggi); Taylor (in his capacity as CJ & KL Bond Super Pty Ltd (in liq)) v CJ & KL Bond Pty Ltd (in liq) (as trustee for the CJ & KL Bond Superannuation Fund) [2018] FCA 1430 (Taylor v CJ & KL Bond Super Pty Ltd); Staatz (as liquidator of Wollumbin Horizons Pty Ltd (in liq) v Berry (No 3) [2019] FCA 924. Orders appointing a liquidator as a receiver for this purpose may be made nunc pro tunc to authorise sales of trust assets that have already occurred: Jones v Matrix at [91], [152], [198]. [51] The proceeds from an exercise of a corporate trustee's right of exoneration may only be applied in satisfaction of the trust liabilities to which that right relates: see Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 368 ALR 390; [2019] HCA 20 (Carter Holt) at [40] per Kiefel CJ, Keane and Edelman JJ; at [92] per Bell, Gageler and Nettle JJ; at [106] per Gordon J. Thus, the liquidator of a (former) corporate trustee may only apply the proceeds of a sale of trust assets to satisfy debts owed to trust creditors (as opposed to general creditors). This includes the costs of the liquidation (including the liquidator's remuneration) because such costs constitute debts incurred by the company in discharging the duties imposed by the trust: Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 110; 7 ACLR 873 at 883 per King CJ; Jones v Matrix at [105]–[106]. In circumstances where a company has only ever acted as a trustee of one trust and that has been the totality of its affairs, no issue arises as to the application of trust assets to general creditors because all of the company's creditors are trust creditors. In this situation, the proceeds from the exercise of the right of exoneration are to be distributed to the trust creditors in accordance with the order of priority prescribed by the Corporations Act: Jones v Matrix at [100]–[108] per Allsop CJ; see also Carter Holt at [93]–[96] per Bell, Gageler and Nettle JJ; at [111], [156]–[158] per Gordon J. 19 In this case it is undoubtedly appropriate to make the orders sought. They are necessary to realise the trust assets and to enable that to be done urgently because of their perishable nature. It is necessary to appoint the liquidators as receivers because the ability to exercise any powers under the existing trust deeds was removed as a consequence of the companies' removal from office as trustees of the trusts such that the companies in liquidation now hold the assets only as bare trustees. 20 The companies in liquidation have rights of indemnity against the trust assets, and the liquidators are the natural and logical choice to be appointed as the receivers. They consent to their appointment in that capacity. Indeed, they are the only parties who consent, and the Court can have confidence that they will carry out their duties appropriately as officers of the Court. 21 It is noted that the liquidators seek to be appointed as receivers without the need to provide security. That requires a departure from the general rule which requires security to be provided. However, it is often the case that no security is required in circumstances such as the present. As mentioned, the liquidators are from a respectable firm and will act as officers of the Court in the conduct of their duties. The Court can therefore have confidence that no security is required in this case. 22 In those circumstances, it is appropriate to make the orders in the form sought by the liquidators in their application. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington. Associate: Dated: 10 July 2024