Nirupa Manoharan, Partner, Nik Angelakis, Senior Associate , and Liat Kedem, Law Graduate

The Supreme Court of Victoria’s recent decision in Re Car Parking Solutions Pty Ltd (in Liquidation)[1] (Re CPS Group) illustrates the breadth of the Court’s power under section 90-15 of the Insolvency Practice Schedule (Corporations) (IPS)[2], and its willingness to exercise that power in appropriate circumstances to resolve issues faced by liquidators in the winding up of corporate trustees.

In this article, Partner, Nirupa Manoharan, Senior Associate, Nik Angelakis, and Law Graduate, Liat Kedem explore the historical and current controversies faced by insolvency practitioners in the liquidation of corporate trustees and how orders of the kind sought and made in Re CPS Group can assist to ameliorate those controversies. Mills Oakley acted for the successful liquidator in Re CPS Group.

Introduction

Difficulties associated with the winding up of corporate trustees are notorious. Part 5.6 of the Corporations Act 2001 (Cth) (Act) is not tailored to deal with corporate trustees, leaving courts to interpret and apply the Act with a view to resolving, wherever possible, the controversies that arise without a devoted regime.

Liquidators previously faced conflicting appellate authority as to whether trust assets were available for distribution to all creditors (including non-trust creditors) of a company.[3] Trust instruments ordinarily contain ‘ipso facto’ clauses that disqualify a corporate trustee from office in the event of its winding up, and which leave them as a ‘bare trustee’ with no power to deal with the trust assets. Conflicting authority arose as to whether a liquidator’s statutory power of sale enabled them to realise trust assets without an order of the court.[4]

With the state of the law as it was, liquidators developed numerous practices to enable them to deal with trust assets: they relied on the statutory power of sale contained within the Act and did not seek an order of the court; they sought orders out of an abundance of caution; and/or they relied on appointors or beneficiaries to pass resolutions to re-appoint the corporate trustee and clothe it with the trust instrument’s power to deal with the trust assets.

It is only in the last five or so years that judicial opinion has converged to provide clarity to liquidators on matters of principle.

In 2018, the Full Court of the Federal Court held that a liquidator of an insolvent former corporate trustee cannot sell trust property without an order of the court.[5] Courts are now regularly asked to make orders either appointing liquidators as receivers of trust assets, or orders under the Trustee Act 1958 (Vic) (Trustee Act), conferring on liquidators the necessary powers to deal with trust assets.

In 2019, in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (Amerind),[6] the High Court resolved the question of the appropriate approach to dealing with property held by a company that also acted as trustee. Relevantly, the Court held that trust property can only be applied to satisfy debt incurred to creditors of the trustee incurred in its capacity as trustee of the relevant trust, and that they cannot be mixed and applied to meet the claims of non-trust creditors.[7]

Gordon J also held that where a trustee acts as trustee for multiple trusts, a liquidator should be viewed as holding separate funds which are available to satisfy claims of different groups of creditors. Her Honour observed (at [163]):

“Of course, it must be accepted that that approach may lead to practical difficulties and expense. In such a case, equity may need to fill the vacuum left by the failure of the statute to deal expressly with multiple trust funds. An available mechanism is for … a liquidator to apply under s 90-15 [of the IPS] for directions from the court to seek to resolve any issues in relation to allocation between multiple trusts. What will be appropriate will vary from case to case. …”

Courts now regularly deploy powers in their inherent or implied jurisdiction, and under section 90-15 of the IPS, to accommodate the liquidation of corporate trustees.

Re CPS Group – The Issue Faced by the Liquidator

Re CPS Group follows the trend of courts making orders to aid liquidators in the winding up of corporate trustees and establishes the availability of s 90-15 as a source of power to resolve issues where a company acted as trustee of multiple trusts.

The Facts

The application related to the liquidation of the three ‘CPS Companies’, which we will call in shortform CPS, CPSA and CPSM.  CPS and CPSA acted as trustee of various trusts whilst CPSM only acted in its own capacity.

The trust deeds for the CPS Trusts and CPSA Trust contained ipso facto clauses which had the effect of disqualifying CPS and CPSA from office upon the liquidators’ appointment.

Shortly following their appointment, the liquidators accepted an offer to sell the business of the CPS Companies. Due to the prima facie doubt as to the CPS Companies ability to sell the trust assets and complete the sale, the unitholders of the CPS Trusts and CPSA Trusts passed resolutions re-appointing CPS and CPSA as trustees to the respective trusts.

The liquidator additionally recovered, via his successful recovery actions, a substantial sum of money in the liquidation of CPSA. The liquidator formed the view that a dividend could be paid in the liquidation of CPSA to unsecured creditors. Its unsecured creditors were CPS and CPSM as a result of inter-company loan accounts.

If those funds could be paid to CPS and CPSM, the liquidator would hold a fund of approximately $250,000 that could be paid to priority creditors of CPS and CPSM, including importantly employees (or FEGS subrogated to the position of the employees).

The Difficulties Faced by the Liquidator

There were, however, a swathe of issues that precluded the liquidator from paying those distributions including to name a few:

• Books: not uncommon to an insolvent entity, the CPS Companies maintained poor books and records which omitted transactions, were inconsistent in their treatment of transactions, and which failed to identify the capacity in which transactions were entered.
• Employees: the liquidator was unable to identify in what capacity CPS employed its employees, and further, could not identify whether CPS or CPSM was the true employer of several other employees.
• Debtors: there were significant debtor recoveries in CPS. However, it was not clear in what capacity CPS carried out the work to entitle it to payment from the relevant debtor. The receipts could not be readily allocated to specific trusts at the time of recovery.
• Proofs of Debt: in order to pay a distribution in the liquidation of CPSA to CPS and CPSM, the liquidator was required to adjudicate and admit proofs of debt that he prepared and lodged. This placed the liquidator in a position of potential conflict. Additionally, the proofs were quantified through a forensic review of the CPS Companies’ bank statements and reconstruction of the loan accounts.
• Power: The liquidator had doubt, following subsequent case law that arose in this space,[8] as to whether the resolutions passed by the unitholders of the CPS Trusts and CPSA Trust were effective. As a result, he formed the view that CPS and CPSA may have been rendered bare trustees from appointment, and that all dealings with the trust assets may have been ultra vires.

Consequently, the liquidator could not, in accordance with settled principle, treat each trust fund as a separate fund. To do so would require retrospectively allocating each recovery and expense to a specific trust or company. Due to the state of the CPS Companies’ records, the exercise would be highly uncommercial, if at all possible.

The Proposed Solution

In those circumstances, the liquidator proposed a regime of orders permitting him to pay the remaining funds in hand to FEGS:

• First, that the Court grant a direction that the liquidator was justified in adjudicating the inter-company proofs of debt and paying a dividend on the proofs. This would resolve the position of conflict and allow funds to flow from CPSA to CPS and CPSM.
• Secondly, that CPS and CPSA be granted retrospective power to deal with the trust assets from the commencement of the liquidations. This relieved the liquidator from concerns as to dealings with the trust assets beyond power and permitted CPS to pay a dividend to the Commonwealth.
• Thirdly, that the assets and employee-related liabilities of the CPS Trusts be pooled, and then further pooled with the assets and employee-related liabilities of CPSM. This obviated the need for the liquidator to retrospectively allocate expenses and receipts, and to identify where precisely the employee-related liabilities sat (if indeed that exercise could be undertaken, which was doubtful).

Importantly, the Liquidator considered that no creditor was prejudiced by the proposed pooling orders. There were insufficient funds in CPS and CPSM to pay a dividend to general unsecured creditors. The only creditor who would receive a dividend was the Commonwealth, and the Commonwealth was a creditor to either or both of CPS and CPSM for employee-related liabilities.  Attempting to ‘fix’ these entities’ books and records to address the issues would unlikely have been successful and resulted in a further depletion of assets for distribution via the incurrence of further costs and expenses.

In the lead up to the filing of the application, the liquidator corresponded with the Commonwealth and provided drafts of the application to be made. The Commonwealth confirmed that it did not seek to be heard in opposition to the application.

The Decision

The liquidator’s application was heard by the Honourable Justice Delany of the Supreme Court on 8 June 2023. His Honour made orders substantially in the form sought by the liquidator. The key findings of the Court included the following:

Trustee Capacity

The Court examined Re Amerind Pty Ltd (Receivers and Managers Appt’d) (in Liq)[9] for the factors taken into account in determining whether a company traded in its own right or as a trustee. The Court was satisfied that the liquidator was justified and acting reasonably on the basis that CPS and CPSA carried out business as trustees for the respective trusts. The liquidator had, inter alia, located trust deeds, identified bank accounts, and determined that CPS held no monies and engaged in no activities in its own right.[10]

Proofs of Debt

The liquidator had an ‘onerous and exacting’ task in seeking dispensation from his fiduciary obligation to avoid conflicts, but this had been satisfied.  The liquidator conducted a detailed review of the CPS Companies’ books and records to formulate the proofs, against the background of ‘irreconcilable inconsistencies’ in its books and records.[11]

Pooling Employee Claims

The Court referred to observations dealing with the jurisdiction of the Court to make pooling orders, which included:

• Gordon J in Amerind, that s 90-15 is an available mechanism to fill the vacuum left by the failure to the Act to deal with multiple trust funds;[12]
• Gordon J in Sonray Capital Markets Pty Ltd v Seabom International (as trustee Seabom Family Trust), where her Honour made a direction that liquidators were justified in pooling segregated client accounts into a single account, where the dealings were such that the accounts could not practically or economically be the subject of a cash tracing exercise; and[13]
• Brereton J in Re BBY Ltd (receivers and managers appointed) (in liq) (No 2), as to the ‘pragmatic nature of the jurisdiction’ available to the court to direct distribution of a fund amongst claimants proportionately to their claims, in circumstances where evidence does not permit ascertaining strict legal entitlement.[14]

His Honour was satisfied with the proposal for pooling in this case. The orders sought were ‘appropriate and in the bests interests of the Commonwealth’ who was the only creditor expected to receive a distribution.[15]

Dealing with Trust Assets

The liquidator relied on either the court’s power to retrospectively confer on CPS and CPSA powers to deal with the trust assets under s 63 of the Trustee Act or, alternatively, an order relieving liability for ultra vires dealings under s 67 of the Trustee Act together with a prospective order conferring power under s 63.

The Court observed that the power is of ‘broad compass’, and courts will generally be willing to make orders permitting a liquidator of a corporate trustee to sell trust assets. His Honour further observed that it is open for the Court to make orders with retrospective effect.[16]

In this case, the Court considered there was a ‘real question’ as to whether the liquidators had power to deal with the trust assets over the course of the liquidations.[17] As noted above, the unitholders passed resolutions which purported to re-appoint CPS and CPSA as corporate trustees, but the liquidator later formed doubts as to whether they were effective. The Court was satisfied that, at the relevant time, the liquidators ‘relied on the CPS and CPSA Resolutions in good faith and proceeded to deal with the assets of the trusts for the benefit of creditors as a whole’.[18]

The Court further held that, in circumstances where it would make orders under s 63 of the Trustee Act with retrospective effect, it was not necessary for the court to make a ‘relieving order’ under s 67 of the Trustee Act.[19]

Conclusion and Takeaways

The controversies faced by liquidators in the winding up of corporate trustees stem from, as Gordon J put it in Amerind, the ‘vacuum left by the failure of the statute to deal expressly with multiple trust funds’.

In 2021, the Treasury commenced consultation on “Clarifying the treatment of trusts under insolvency law”. It outlined that:

“Australia’s current corporate insolvency regime does not expressly cover how companies which structure themselves through a trust, or businesses which have a corporate trustee (‘corporate trusts’) are to be dealt with during insolvency.”

On 28 September 2022, the Parliamentary Joint Committee on Corporations and Financial Services commenced an inquiry into corporate insolvency in Australia. The terms of reference included trusts with corporate trustees as a potential area for reform. Numerous submissions were made on the issue. The Parliamentary Joint Committee released its report on 12 July 2023: watch this space for our thoughts and takeaways from the Report.

[1]           [2023] VSC 362.

[2]           Corporations Act 2001 (Cth), Schedule 2.

[3]             Re Enhill Pty Ltd [1983] 1 VR 561, 564; Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 104.

[4]             See Corporations Act 2001 (Cth), s 477(2)(c); Apostolou v VA Corporation Aust Pty Ltd (2010) 77 ACSR 84; Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677.

[5]             Jones v Matrix Partners Pty Ltd (2018) 260 FCR 310

[6]           (2019) 268 CLR 524.

[7]           Carter Hold Harvey Wood products Australia Pty Ltd v Commonwealth (2019) 268 CLR 524.

[8] Carello, in the matter of Gembrook Investments Pty Ltd (in liq) [2019] FCA 1143.

[9]           (2017) 320 FLR 118.

[10]          Re CPS Group, [59] – [62].

[11]          Re CPS Group, [91] – [92]

[12]          2019) 268 CLR 524, [162]-[163].

[13]          (2012) 288 ALR 240, [91] – [92].

[14]          (2018) 363 ALR 492, [83].

[15]          Re CPS Group, [82] – [89].

[16]          Re CPS Group, [76] – [78].

[17]          Re CPS Group, [63].

[18]          Re CPS Group, [80].

[19]          Re CPS Group, [81].