When a Company in Liquidation is or was the Trustee of a Trading Trust

KEYWORDS: when office of trustee vacated upon liquidation and liquidator appointed receiver; trustee’s right of indemnity as an equitable lien that survives cessation of appointment; liquidator’s costs and remuneration; remuneration of receiver; importance of complexity of the work to applying the right rate; where some other entity attempts to act as trustee.

The decision of Associate Justice Hetyey in Re Martar Pty Ltd (in liq) and Quinmar Pty Ltd (in liq) [2024] VSC 239 (2 May 2024) provides a useful distillation of principles that apply when a liquidator is appointed to a company whose sole business was to act as trustee of a trading trust.

TAKE AWAYS

• Where upon liquidation, under the trust deed, a company becomes automatically disqualified from acting as trustee of a trading trust, that company becomes a bare trustee. Depending upon circumstances, the duties and obligations of bare trustees may be broader than might be expected (see my earlier Keynote ‘Bare Trustees Wear Some Clothes: The rights and obligations of a bare trustee’ 1 November 2023, Queensland Nickel Sales Pty Ltd v Park in his capacity as liquidator of Queensland Nickel Ltd (in liq) [2023] FCAFC 150). However, generally bare trustees do not have a power of sale so the usual course is for the liquidator to apply to the Court to be appointed receiver over the trading trust in order to be able to realise trust assets.
• Companies acting as trustees have a right of indemnity out of the assets of the trust in relation to their roles as trustee. This right extends to debts incurred in the course of operating the trading trust. The right of indemnity is secured by a lien over trust assets. This indemnity continues even if the company is no longer trustee by reason of its liquidation or resulting status as bare trustee ([20] of judgment (“J”)).
• Where the sole activity of a company is acting as trustee of the trust, the remuneration and costs of the liquidator are recoverable from the assets of the trust by way of the indemnity ([57]) or as a lien pursuant to the principles in Re Universal distributing Company Ltd (in liq) [1933] 48 CLR 171 ([59] J).
• When the Court appoints a receiver over a trust, the usual orders include an order that the receiver’s reasonable remuneration and disbursements should be paid out of the assets of the trust as a first charge after having been approved by the Court. That is, technically, the costs of the receivership come before liquidation costs.
• In considering a liquidator’s remuneration under section 60-12 of the IPS, the onus is on the liquidator to show that the amount claimed is fair and reasonable. It is not a rubber stamp exercise and the Court must make an independent assessment having regard to the work performed and particular features of the external administration. However, a line by line review is not required ([65] J).
• Time cost charging may be applied where the work done is reasonable and the charge out rate is commensurate with the degree of expertise, competency and level of seniority required. in this case, for a period the liquidator was unable to delegate work so did the less complex work himself at a lower rate. This approach was accepted by the Court ([84] – [85] J). I would also observe that this principle may be applied where there is ample opportunity for delegation but that for one reason or another, individual personnel do work that could have been done by a colleague at a lower rate.
• Where remuneration has been previously approved by the creditors under s 60-10(1)(a), the Court does not have power under s 60-10(2)(c) to approve remuneration again ([74] J). This issue arose because initially, through an abundance of caution due to complaints made regarding the earlier remuneration, the liquidator also sought this relief however ultimately, he accepted that the Court did not have power and did not press the point.
• As a Court appointed receiver is not an ‘external administrator’ in terms of the IPS, the process in section 60-10(1)(c) doesn’t apply ([66] J) however the Court may have regard to the items in section 60-12 as ‘board evaluative factors ‘([68] J).
• Where the company’s sole activity was to be trustee of the trust, there is probably no need for the liquidator to separately identify work as receiver and as liquidator citing Re AAA Financial Intelligence Ltd (in liq) [2014] NSWSC 1004 per Brereton J 9[79] J). I would also add that this may not apply if there could be a shortfall and third party disbursements have been incurred.
• However, if the company also had other activities, then the liquidator/receiver may have to separate work done respecting the winding up the business of the trust from other work citing Finkelstein J in Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144 ([78] J).
• The case also invites the question: what happens if another entity commences acting as trustee upon the liquidation of the corporate trustee without the authority of the liquidator but before any receiver is appointed? In that event, the new trustee will take control of the trust assets subject to the last trustee’s equitable lien. Therefore, any attempt to avoid the operation of that well recognised lien could give rise to a Barnes v Addy (1874) LR 9 Ch App 244 type claim against both the new trustee and any person who or entity who assists them with knowledge of the existence of the lien potentially including lawyers and accountants.