New South Wales Supreme Court CITATION : Dayroll Pty Ltd (in Liq) v Dayroll NSW Pty Ltd [2009] NSWSC 895 HEARING DATE(S) : 28 August 2009 JUDGMENT DATE : 31 August 2009 JURISDICTION : Equity Division JUDGMENT OF : Brereton J DECISION : Liquidator entitled to indemnity for costs incurred to the extent of $15,000 being the amount of the new trustee's open offer CATCHWORDS : EQUITY – trusts and trustees – powers, duties, rights and liabilities of trustees – claim by liquidator of trust for indemnity out of trust assets of costs incurred in liquidation – whether costs reasonably incurred in administration of trust or in liquidator's capacity as liquidator of the trustee company – whether liquidator's costs in defending proceedings in substance for own benefit rather than for trust – where open offer made to liquidator exceeds amount to which Court finds liquidator is entitled – open offer taken to be admission against interest LEGISLATION CITED : (CTH) Corporations Act 2001, s 530C (NSW) Uniform Civil Procedure Rules 2005, r 42.25 CATEGORY : Principal judgment 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 Glazier Holdings Pty Ltd (in liq) v Australian Men's Health Pty Ltd (in liq) [2006] NSWSC 1240 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344 CASES CITED : National Trustees Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 re Beddoe [1893] 1 Ch 547; Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 109; (1983) 7 ACLR 873, 882 Re Sutherland, French Caledonian Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361 Dayroll Pty Ltd (in Liquidation) (applicant) PARTIES : Dayroll NSW Pty Ltd (first respondent) Max Christopher Donnelly in his capacity as Liquidator of Dayroll Pty Ltd (in Liq) (second respondent) FILE NUMBER(S) : SC 2710/08 COUNSEL : Mr P Walsh (applicant) Mr M Ashhurst SC w Mr D Allen (first respondent) SOLICITORS : Church & Grace (applicant) Proctor & Associates (first respondent) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GENERAL LIST Brereton J Monday, 31 August 2009 2710/08 Dayroll Pty Limited (in liquidation) v Dayroll NSW Pty Limited JUDGMENT 1 HIS HONOUR: On 30 April 2009, pursuant to an Interlocutory Process filed on 25 July 2008, the Court made orders substituting the applicant Dayroll NSW for the first respondent Dayroll as the trustee of the 9 Parramatta Road Unit Trust, and that the second respondent Max Donnelly – who had on 1 July 2008 been appointed liquidator of Dayroll, pay to Dayroll NSW (as new trustee) all funds held on trust for that trust, then said to be some $87,000. That order was stayed to permit the liquidator, who by then no longer disputed that the funds were assets of the trust, to file an interlocutory process claiming indemnity out of the trust assets in respect of liabilities incurred by the company in liquidation when it was trustee. Dayroll filed such a process on 15 May 2009, claiming a declaration that the liquidator was entitled to indemnity to the extent of $49,270.44 "for the professional costs and expenses incurred in the conduct of the liquidation of [the company] and in the administration by it of the affairs of [the trust] for the period from 27 July 2008 [shortly after Dayroll NSW filed its application for a declaration that it had been appointed new trustee of the trust] to 30 April 2009 [when the declaration that Dayroll had been appointed as the new trustee was made]", and an order varying the order for payment to $37,764.56 (being the difference between the amount of the claimed indemnity and the amount of trust funds said to be retained). On 26 May, the application was fixed for hearing on 1 July 2009, and directions were made, including for service of the liquidator's evidence by 19 June, and providing for Dayroll NSW to file – as it did on 28 May 2009 – an interlocutory process claiming an inquiry into whether payments made by Mr Donnelly from the trust assets were for the reasonable costs and expenses of the administration of the trust, and an order that Dayroll and Mr Donnelly account to Dayroll NSW as new trustee for the sum of $157,749.27, less a just and fair allowance for the reasonable cost and expenses of administration of the trust. The stay of the order for payment over to Dayroll NSW of the trust assets was continued until the hearing of the application. 2 The liquidator failed to file any evidence in accordance with those directions, or at all, and on the liquidator's application the hearing was vacated and further directions made, fixing the matter for hearing on 28 August. The liquidator again failed to file evidence in accordance with the court's directions, and only after the matter had been relisted at the request of Dayroll NSW was an affidavit of Ms Duggan eventually served on 21 August 2009. That affidavit set out claims totalling $22,754.25 for indemnity out of the trust assets; it did not explain what had become of the balance or why it should not be paid over to the new trustee. A further affidavit of Mr Crompton, claiming $75,442.80 for legal costs associated with the defence of the proceedings, was served on the eve of the hearing, in circumstances in which Dayroll NSW and its counsel could not reasonably be expected to meet it and a real case of potential prejudice should it be received was made out; given the history of the proceedings and the number of opportunities that the liquidator had been afforded to adduce evidence to date, I refused leave to rely on this belated affidavit. 3 The evidence establishes that on or about 17 February 2009 the liquidator received, from the managing agent of the property at 9 Parramatta Road – which all now accept is property of the trust – two cheques totalling $157,749.27, being rent in respect of the trust property. There is no evidence of any other trust asset. 4 Ms Duggan, who is a registered liquidator and who has had day-to-day control and conduct of the liquidation subject to the supervision of Mr Donnelly, sets out in her affidavit a claim for indemnity totalling $22,754.25, under the following heads: (1) attempting to recover books and records of the company – $5,045.50; (2) attempting to identify the assets and liabilities of Dayroll – $6,355.00; (3) identifying, protecting and getting in trust assets – $3,837.25; and (4) defending the current proceedings – $7,516.50. Although it was submitted for Dayroll NSW that Ms Duggan's affidavit was mere assertion and did not show a connection between the work performed and the time expended, the annexed narratives – which were admitted, although in at least one case over objection, set out, usually sufficiently comprehensively, the work done, the time claimed and the charges made. However, Ms Duggan's affidavit appears to assume that all costs incurred in the liquidation of Dayroll can be treated as recoverable under the trustee's indemnity, regardless of whether or not they were incurred in the administration of the trust, or whether they were incurred in the liquidation of the company in discharge of the responsibilities of the liquidator. 5 It is uncontroversial that a trustee has a right of indemnity out of the trust assets for expenses or liabilities properly and reasonably incurred in the administration of the trust [Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 367; Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226, 245], that upon bankruptcy or liquidation of a trustee, its right of indemnity vests in its trustee in bankruptcy or liquidator [Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 109; (1983) 7 ACLR 873, 882], and that this indemnity extends to the proper costs and expenses of the liquidator of a corporate trustee, incurred in the administration of the trust [Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 100; Re Sutherland, French Caledonian Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361, [213]; Glazier Holdings Pty Ltd (in liq) v Australian Men's Health Pty Ltd (in liq) [2006] NSWSC 1240, [42]]. However, this does not capture all the costs and expenses incurred by the liquidator of a corporate trustee, some of which will be attributable to liquidator's role as liquidator of the trustee company, and not to administration of the trust; it includes those costs and expenses reasonably incurred in identifying, recovering, realising, and protecting trust assets (or attempting to do so), and distributing them to those beneficially entitled [13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377, 385; Re Sutherland, 426 [210]]. 6 The claim in respect of attempting to recover books and records of the company, amounting to $5,045.50, relates to the issue of statutory notices, review of the Administrator's report, preparing an application under Corporations Act, s 530C, and correspondence with ASIC pertaining to complaints about failure of the director to provide a Report as to Affairs and to deliver books and records. This was work done in the capacity of liquidator of the company, referable to the powers and duties of liquidators under the Corporations Act, and not as trustee of the trust; the associated costs are costs of the liquidation, and not costs of administration of the trust. 7 As to the claim in respect of attempting to identify the assets and liabilities of Dayroll, in the amount of $6,355.00, I rejected a summary in Ms Duggan's affidavit of the quantum of the claim, but the amounts appear to be supported by the more detailed narrative annexed to her affidavit, which I admitted). This work involved (1) attempting to obtain further Reports as to Affairs; (2) obtaining records from a forensic image of a hard drive; (3) conducting public examinations to ascertain the asset and liability position of the company; and whether there were subrogation claims in respect of other properties. Obtaining RATAs and conducting public examinations are functions of the liquidator qua liquidator of the company, and even as advanced by Ms Duggan were conducted to ascertain what were the assets of the company (not the trust); indeed, it appears that the liquidator's purpose was to establish, if he could, that there was no trust. Through much of the period in question, the liquidator was resisting the suggestion that the assets were trust assets. It is not readily possible to extract the costs attributable to communications with the managing agent of 9 Parramatta Road and the Uniting Church, which do appear at least arguably related to administration of the trust, but they could not have exceeded two-thirds of the balance after excluding the work attributable to public examinations ($1,306.00), which would allow (broadly, and perhaps generously) some $3,350.00. 8 As to the claim for identifying, protecting and getting in trust assets, amounting to $3,837.25, Dayroll NSW accepted that this claim was reasonable. (Contrary to Dayroll NSW's submission, the work detailed in the annexed narrative shows that this head does not duplicate items claimed under the previous head in respect of identifying assets and liabilities). 9 As to the claim in respect of defending the current proceedings, in the amount of $7,516.50, again, although I rejected summary evidence in the affidavit, the amounts appear to be supported by the more detailed narrative that was admitted. However, there is a significant issue as to whether the liquidator is entitled to indemnity in respect of these costs. 10 Dayroll and its liquidator Mr Donnelly were parties because Dayroll was the extant trustee, and Mr Donnelly as liquidator was in control of Dayroll and in possession of the trust assets. The proceedings were against them in their capacity as trustee and liquidator of corporate trustee. Prima facie, the company in liquidation, as former trustee, is entitled to be indemnified out of the trust assets for costs reasonably and properly incurred in proceedings brought or defended by it in its capacity as trustee [re Beddoe [1893] 1 Ch 547; National Trustees Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268; UCPR, r 42.25]. 11 Initially, Dayroll was justified in defending the claim for a declaration that Dayroll NSW had been appointed trustee in its place, as necessary steps to procure the appointment of a replacement trustee had not been completed. However, the liquidator's primary position was to put in issue the contention that all or any of the property held by Dayroll was held by it as trustee, with its alternative position being that, if it were established that Dayroll was a trustee, then it had a right of indemnity and was entitled to retain the trust assets for the purpose of satisfying liabilities of the trust. 12 If the proceedings had been defended only on the basis that Dayroll NSW had not made out its case that it had been appointed replacement trustee, Dayroll would undoubtedly be entitled to be indemnified for its costs. And although it was unsuccessful in the contention [resolved in the related litigation in Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344] that it was entitled to retain possession of the trust property against the new trustee as security for its right of indemnity, such an argument on the state of the authorities was not an unreasonable one, and Dayroll would not have been deprived of its indemnity on account of mounting that unsuccessful defence. However, the liquidator's primary position – to put in issue that all or any of the property held by Dayroll was held by it as trustee – involved a denial of the trust, and a trustee is not be entitled to indemnity out of the trust assets for the costs of defending proceedings in which it denies that it holds assets on trust; it could not have been acting as trustee, or in the interests of the trust, in so doing. 13 Moreover, although the indemnity to which the former trustee was entitled extended, in theory, to all liabilities incurred in the administration of the trust, as it transpired the only liability propounded was the liquidator's costs and expenses. As a matter of practicality, the proceedings were defended, not in the interests of the trust, but in the interests of the liquidator, in an endeavour to secure his remuneration. In my view, the liquidator and company in liquidation have, in the defence of these proceedings, been acting in substance for their own benefit, not for the benefit of the trust, and should not be entitled to their costs of their unsuccessful defence out of the trust fund. 14 The amounts I would allow, on the evidence, therefore total $7,187.25. However, Dayroll NSW, in its written submissions, made an open offer to allow $15,000, on the basis that the liquidator must have done some work in administering the trust. As that open offer exceeds the amount I have found otherwise established by the evidence, as an open offer I should treat it as an admission against interest, and allow the liquidator the amount so offered. 15 The liquidator has had the benefit of the sum of $157,749.27 received from the managing agent of 9 Parramatta Road since 18 February 2009. I have concluded that he is entitled to be indemnified out of those funds to the extent of $15,000. Although the Court has been informed that some of the fund has been expended on legal costs, no evidence of that expenditure has been adduced; in any event, assuming that the costs involved are those referred to in Mr Crompton's belated affidavit – being costs of defending these proceedings – they are, for the reasons already advanced, not costs in respect of which the liquidator is entitled to indemnity out of the trust fund. 16 The balance (namely $142,749.27) ought therefore to be – and ought already to have been – paid over to the new trustee, with interest, which I allow at 10% per annum for 6 months, amounting to $7,137.46. 17 My orders are: (1) Certify that the reasonable costs and expenses of Dayroll Pty Ltd (in liquidation) for the administration of the 9 Parramatta Road Unit Trust for the period from 27 July 2008 to 30 April 2009 are $15,000; (2) Declare that Max Christopher Donnelly is entitled to be indemnified out of the assets of the 9 Parramatta Road Unit Trust to the extent of $15,000 for the costs of administration of the trust for the period from 27 July 2008 to 30 April 2009; (3) Give judgment that Max Christopher Donnelly and Dayroll Pty Ltd (in liquidation) pay Dayroll NSW Pty Limited the sum of $149,886.73; (4) Reserve liberty to Dayroll NSW to apply for ancillary relief. Costs 18 On the one hand, the liquidator and company in liquidation have had a measure of success on their interlocutory process, in that they have been awarded an amount out of the trust fund. Prima facie, they would ordinarily receive an order for costs out of the trust fund, as would the new trustee. However, the practical effect of that would be to order the new trustee to pay the liquidator's costs, because it would erode the amount payable to the new trustee, and I do not think that that is the appropriate outcome. It is also relevant that a substantial amount of such success as the company in liquidation has had is by reason of the open offer made by Dayroll NSW in its written submissions, and that had that offer been accepted, albeit made only days before the hearing, significant costs could have been avoided. On the other hand, as Mr Chee (for Dayroll NSW) has indicated, the new trustee has had success on its interlocutory process; but virtually no argument or evidence was addressed to that process as it was practically if not explicitly conceded that whatever was not payable to the liquidator by way of indemnity would have to be paid over to the new trustee. Thus while in principle Dayroll NSW would be entitled to its costs of its interlocutory process, that would be quite a small proportion of the overall costs. 19 Balancing those considerations, the most just course is that there be no order as to costs, to the intent that each party bear its own costs of the interlocutory process filed by Dayroll Pty Ltd (in Liquidation) on 15 May 2009 and the interlocutory process filed by Dayroll NSW Pty Ltd on 28 May 2009. 20 I make no order as to costs, to the intent that each party bear its, his or her own costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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