Supreme Court New South Wales Medium Neutral Citation: In the matter of JML Property Services Pty Ltd (in liquidation) [2018] NSWSC 1069 Hearing dates: 5 July 2018 Decision date: 11 July 2018 Jurisdiction: Equity - Corporations List Before: Black J Decision: Leave granted to the Applicant to make a distribution from the Trust's assets in the manner sought. Catchwords: CORPORATIONS – external administration – winding up – where expenses were incurred as liquidator of the company which functioned only as trustee of the trust and has no assets of its own – where remuneration of liquidator has been approved by resolutions of the creditors – where remuneration of liquidator is not excessive and is proportionate to the recoveries made – whether to grant leave to the liquidator to distribute trust assets towards payment of expenses and remuneration. Legislation Cited: - Corporations Act 2001 (Cth) ss 439A, 446A, 449E, 473, 491, 499, 556 Cases Cited: - Commonwealth v Byrnes & Hewitt (in their capacity as joint and several receivers and managers of Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2018] VSCA 41; (2018) 124 ACSR 246 - Jones (Liquidator) v Matrix Partners Pty Ltd, Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 - Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361 - Re Houben Marine Pty Ltd (in liq) [2018] NSWSC 745 - Re Independent Contractor Services (Aust) Pty Ltd ACN 119 186 971 (in liq) (No 2) [2016] NSWSC 106 - Re Mecfab Holdings Pty Ltd [2015] NSWSC 46 - Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 - Re MINMXT Holdings Pty Ltd (in liq) [2017] NSWSC 156 - Re North Food Catering Pty Ltd [2014] NSWSC 77 - Re Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 1484 - Re Suco Gold Pty Ltd (in liq) (1993) 33 SASR 99 - Sanderson, as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38 Category: Procedural and other rulings Parties: Frank Lo Pilato in his capacity as Liquidator of JML Property Services Pty Ltd (In Liquidation) (Applicant) Jeremy Michael Long (First Respondent) Meredith Co. (NSW) Pty Limited (Second Respondent) Representation: Counsel: D. Neggo (Plaintiff) Solicitors: Stacks Law Firm File Number(s): 2017/169266 Judgment The nature of the application and the affidavit evidence 1. By Interlocutory Process filed on 21 June 2018, the Applicant, Mr Lo Pilato, who is the liquidator of JML Property Services Pty Ltd (in liq) ("Company") and the receiver appointed by the Court to the JML Property Services Unit Trust ("Trust"), seeks leave to distribute the assets of the Trust, first, to payment of his costs and expenses; second, to payment of his remuneration; and, third, to payment of debts owed by the Company to the persons whom he has admitted as creditors in the liquidation of the Company, for their admitted debts on a pro-rata basis. That application for leave is necessary because, when Brereton J appointed Mr Lo Pilato as receiver of the Trust's assets and liabilities on 10 July 2017, he made an order that Mr Lo Pilato not distribute the Trust's assets to creditors or beneficiaries without the further direction of the Court. Brereton J also then gave leave to Mr Lo Pilato to apply for directions, including in relation to leave to distribute the Trust's assets and in connection with the remuneration. This application is brought pursuant to that leave. 2. Mr Lo Pilato relies on his affidavit dated 2 June 2017, which referred to his appointment as voluntary administrator of the Company, which was then the trustee of the Trust, and referred to the terms of the Trust. The Trust deed relevantly provided that the Company, as the then trustee of the Trust, was indemnified out of the Trust fund from and against any liabilities incurred by it in the execution of its authorities, powers and discretions and that a trustee of the Trust would ipso facto cease to be a trustee if it went into liquidation. It appears that provision will have been triggered in this case, although a new trustee was not appointed to the Trust. Mr Lo Pilato also noted that, at the second meeting of the Company's creditors in the voluntary administration, on 6 February 2017, the creditors resolved to place the Company in liquidation and he was appointed as liquidator. That affidavit also addressed the identity of unitholders in the Trust, which include Mr Long and Meredith Co (NSW) Pty Ltd ("MeredithCo"), who were joined as Defendants in the proceedings but have filed submitting appearances. Mr Lo Pilato also refers to arrangements which had been made by the Company, prior to his appointment as voluntary administrator, for a sale of a property that it owned on behalf of the Trust, on terms that he was satisfied were at fair value. The sale of that property was completed while he was voluntary administrator of the Company, in December 2016. 3. Mr Pilato also relied on affidavits of Mr Meredith and Mr Long dated 16 June 2017 and 5 July 2017 respectively, which indicated that the Company did not operate any business in its own right, and its only business was to lease Trust assets, in its capacity as trustee of the Trust, to another entity. Mr Lo Pilato also relied on Mr Meredith's further affidavit dated 6 July 2017. Mr Lo Pilato also relied on his further affidavit dated 12 June 2018 which referred to his proposal for distribution of the Trust's assets in the manner set out in the Interlocutory Process and confirmed the position as to the Trust's activities as set out in his first affidavit. That affidavit also addressed the position as to debts owed by the Company, and referred to correspondence from Mr Meredith, I infer on behalf of MeredithCo, which consented to the orders sought in this application. Mr Long also subsequently consented to the orders sought in this application. 4. Mr Lo Pilato also relied on his affidavit dated 4 July 2018, which indicated that the sale of the Trust's property had not given rise to a capital gains tax liability, but had given rise to a liability of $64,000 for goods and services tax, which was included in the contract price. Mr Lo Pilato fairly observed that that liability was not properly characterised as a debt of the Company, as distinct from a debt for which he was personally liable as former administrator of the Company, and subject to his statutory right of indemnity against the Company's assets, where that debt had arisen after his appointment as voluntary administrator of the Company. That affidavit also noted that Mr Lo Pilato has rejected certain proofs of debt, the rejection of which have not been challenged and which the Court is not asked to address in this application, and referred to creditors' approval of the remuneration that he claimed, initially at the second meeting of creditors in respect of the administration, on 6 February 2017, and subsequently at a further meeting of creditors on 24 May 2018. 5. By a further affidavit dated 4 July 2018, Mr Clayton Davis, a solicitor acting for Mr Lo Pilato in the application, led evidence of his and Counsel's costs incurred in respect of the proceedings before Brereton J for the appointment of Mr Lo Pilato as receiver, and the estimated costs of this application. Mr Davis also referred to further correspondence with Mr Long and Mr Meredith, on behalf of MeredithCo, consenting to the orders sought in this application, and each of Mr Long and MeredithCo have filed submitting appearances in respect of the application. Submissions and determination 1. As I noted above, Mr Lo Pilato now seeks leave to apply the sale proceeds from the sale of the Trust's property, first, to payment of his costs and expenses as administrator and liquidator of the Company, comprising a liability for GST and for legal fees. As the evidence to which I referred above indicates, the sale of the Trust's property was completed by Mr Lo Pilato as administrator, giving rise to a personal obligation to account to the Australian Taxation Office for GST of $64,000 payable on the sale. The legal fees claimed are set out in Mr Davis' affidavit, to which I referred above. 2. Second, Mr Lo Pilato seeks to apply the sale proceeds of the property to payment of his remuneration as administrator and then liquidator of the Company. Mr Neggo, who appears for Mr Lo Pilato, points out that, as former voluntary administrator of the Company, Mr Lo Pilato is entitled to receive such remuneration as is determined (relevantly) by a resolution of the Company's creditors, under former s 449E(1) of the Corporations Act 2001 (Cth), and that the creditors resolved to approve his remuneration for the period 20 December 2016 to 15 January 2017 in the amount of $7,663 (plus GST and disbursements), and for the period 16 January 2017 to 6 February 2017 in the amount of $12,337 (plus GST and disbursements), totalling $20,000 (plus GST and disbursements). Mr Lo Pilato seeks leave to pay the lesser amount of $14,955 (excluding GST and disbursements), corresponding to a GST inclusive figure of $16,450.50, from Trust assets. 3. Mr Neggo also points out that, at the second meeting of the Company's creditors convened under s 439A of the Corporations Act, the Company was taken to have passed a special resolution under s 491 of the Corporations Act that it be wound up voluntarily, and Mr Lo Pilato was appointed as liquidator of the Company. Mr Lo Pilato's remuneration may then be fixed by resolution of creditors under s 499(3) of the Corporations Act, which continues to apply in the form which it took prior to the Insolvency Law Reform Act by reason of the transitional provision in s 1581 of the Corporations Act. On 6 February 2017, the Company's creditors resolved to approve Mr Lo Pilato's future remuneration as liquidator up to an amount of $20,000 (plus GST and disbursements) and, on 24 May 2018, the Company's creditors resolved to approve additional remuneration as liquidator for the period from 6 February 2017 to 28 March 2018 in the amount of $4,731.33 (plus GST and disbursements) and for the period from 29 March 2018 to the conclusion of the liquidation in the amount of $7,722 (plus GST and disbursements) totalling $32,453.33 (plus GST or disbursements) and $35,698.66 on a GST inclusive basis. Mr Lo Pilato therefore seeks leave to pay total remuneration of $52,149.16 (including GST) in respect of his appointment as voluntary administrator and liquidator from Trust assets. 4. Mr Neggo submits that, generally, a trustee is entitled to be indemnified out of the assets of a trust for all liabilities incurred in its capacity as trustee and cl 6.2(a) of the Trust deed also conferred an express indemnity in this case. As Mr Neggo also points out, the right of indemnity may take the form of recoupment of debts paid by the trustee, or exoneration in relation to debts not yet paid, and the trustee has a charge or lien over the trust assets for the purpose of enforcing that indemnity. Mr Neggo also submits that a liquidator of a company, the only function of which is to act as trustee, is entitled to be paid his or her remuneration and expenses, whether for administering the trust assets or for "general liquidation work", out of the trust assets, and it appears that the position is the same for administrators: Re Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 1484 per Brereton J at [7]; Re Mecfab Holdings Pty Ltd [2015] NSWSC 46 per Brereton J at [9]. 5. I accept that 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: Re Suco Gold Pty Ltd (in liq) (1993) 33 SASR 99 at 104ff; Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361 at [201]; Re North Food Catering Pty Ltd [2014] NSWSC 77 at [17]; Re Independent Contractor Services (Aust) Pty Ltd ACN 119 186 971 (in liq) (No 2) [2016] NSWSC 106 at [27]; Re MINMXT Holdings Pty Ltd (in liq) [2017] NSWSC 156 at [14]. The relevant principles were summarised in Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 at [55] and by Brereton J in Re North Food Catering Pty Ltd above at [9], as follows: "(1) The court has an inherent equitable jurisdiction to allow a trustee remuneration, costs and expenses out of trust assets, and this extends to a person such as a liquidator who is, for practical purposes, controlling a trustee … (2) The court may decline to exercise that jurisdiction where the company does not solely act as trustee and has sufficient beneficial assets to meet the liquidators remuneration costs and expenses and where the work done by the liquidator in relation to trust assets may properly be treated as done for the purposes of winding up the company affairs. Thus, generally where a company has assets which are not held on trust, the liquidator's costs should usually fall on its non-trust assets … (3) Where the company has both trust assets and assets held beneficially by the company, the costs can be apportioned such that the remuneration attributable to the statutory liquidation work would fall on the assets beneficially owned by the company, whereas that which related to administering the trust property might fall on the trust assets …" [citations omitted] 1. Those principles were recently cited with approval by Gleeson JA in Re Houben Marine Pty Ltd (in liq) [2018] NSWSC 745 at [14]. His Honour also there noted (at [16]) that a trustee's right of indemnity survives its loss of office, and continues if the trustee continues to hold property as bare trustee after the loss of its office. The recent decisions of the Court of Appeal of the Supreme Court of Victoria in Commonwealth v Byrnes & Hewitt (in their capacity as joint and several receivers and managers of Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2018] VSCA 41; (2018) 124 ACSR 246 ("Amerind") and the Full Court of the Federal Court (sitting at first instance on a referral from a single judge) in Jones (Liquidator) v Matrix Partners Pty Ltd, Re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 ("Killarnee") also do not question the proposition that a liquidator of a trustee company may be paid his or her remuneration and expenses, including general costs of the liquidation, out of trust assets in priority to the claims of trust creditors, at least where that company is the trustee of a trading trust and does not conduct business on its own account or on behalf of any other trust and has no assets of its own: Killarnee at [105], [107] (Allsop CJ), [201], [217], [222] (Farrell J); Re Houben Marine Pty Ltd (in liq) above at [38]. 2. In allowing remuneration to the liquidator of a trustee company, in its inherent equitable jurisdiction to allow remuneration out of trust assets in connection with the administration of a trust fund, the Court will have regard to the factors that are applicable in a court-appointed liquidator's claim for approval of remuneration, including those specified in former s 473(10) of the Corporations Act: Alphena Pty Ltd (in liq) v PS Securities Pty Ltd (ACN 141 021 445) (as trustee of the Joseph Family Trust) [2013] NSWSC 447; (2013) 94 ACSR 160 at [53], [63]–[64]; Re Houben Marine Pty Ltd (in liq) above at [20]. The Court has regard to whether the remuneration for which approval is sought is reasonable, and proportionality in terms of work done as compared with the size of the property which is the subject of the insolvency administration or the benefit to be obtained from the work, is an important consideration: Templeton v Australian Securities and Investments Commission [2015] FCAFC 137 at [32]; (2015) 108 ACSR 545; Sanderson, as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38. 3. This case reflects the simplest position where the Company acted solely as trustee of the Trust and Mr Lo Pilato's work in respect of the Company extended to the realisation only of assets held in that capacity and not in a personal capacity and his claim to costs and expenses and remuneration could only be met from those assets. The evidence, to which I referred above, establishes that the quantum of that remuneration has been approved by resolutions of the creditors, and the evidence indicates that remuneration is not excessive and is proportionate to the recoveries made in the administration and the liquidation. I am satisfied that Mr Lo Pilato's costs and expenses and his remuneration are properly payable from the assets held by the Company on behalf of the Trust, where they were incurred as administrator and liquidator of the Company which functioned only as trustee of the Trust. 4. Third, Mr Lo Pilato seeks to apply the sale proceeds of the property to payment, on a pro rata basis, of debts owed by the Company to Mr Meredith and JML Tree Services Pty Ltd (in liq). That payment reflects the adjudication of proofs of debt in the winding up. This aspect of the application does not require determination of the questions whether the proceeds of realisation of trust assets are subject to the statutory order of priority under s 556 of the Corporations Act, or whether they can be applied to meet debts of non-trust creditors, which were recently considered in Amerind and Killarnee and noted by Gleeson JA in Re Houben Marine Pty Ltd (in liq) above at [32]ff. I recognise that Amerind (at [281]) and Killarnee (per Allsop CJ at [101]–[102], per Farrell J at [200]–[201], [223]) support the view that the statutory scheme of priorities in the Corporations Act applies to the distribution of assets where a company in liquidation is trustee of a trading trust and those assets are subject to a right of exoneration and supporting lien, at least in respect of a company that only acts as trustee for one trust and does not conduct affairs in its own right. It is not necessary to determine whether to follow that approach or the approach previously taken by Brereton J in Re Independent Contractor Services (Aust) Pty Ltd ACN 119 186 971 (in liq) (No 2) above and by several first instance decisions in the Federal Court of Australia, since no question of claims of priority creditors arises here and only trust creditors have claims against the relevant assets. The same result would follow from the application of the statutory order of priority under s 556 of the Corporations Act and a pari passu distribution among trust creditors. 5. Mr Neggo also points out and I note, for completeness, that the consequence of a distribution of assets in the manner proposed by Mr Lo Pilato is that neither of the unitholders in the Trust will receive any of the net proceeds of the sale of the property, although MeredithCo, a unitholder, will receive a payment in its capacity as a creditor of the Company. Those unitholders do not oppose the orders sought. 6. The matters to which I have referred above support the grant of leave to Mr Lo Pilato to make a distribution from the Trust's assets in the manner proposed. Accordingly, I make the following order as sought in the Interlocutory Process: 1. Grant leave to the Applicant to distribute the assets of the JML Property Services Unit Trust as follows: (a) firstly, to payment of the Applicant's costs and expenses; (b) secondly, to payment of the Applicant's remuneration; and (c) thirdly, to payment of the debts owed by JML Property Services Pty Ltd (In Liquidation) to Mr Meredith and JML Tree Services Pty Ltd (In Liquidation) that the Applicant has admitted in the liquidation of JML Property Services Pty Ltd (In Liquidation), on a pro rata basis. ********** 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 July 2018