Can a liquidator as bare trustee deal with trust assets without Court intervention?

27 January 2017

Trading trusts are a feature of modern business practices and have been for some time. They present complexities for liquidators, administrators and their advisers and cause ongoing difficulty and the need for legislative change.

A liquidator or administrator who is appointed over a trustee company has an additional layer of issues to consider when seeking to deal with assets. This is especially the case when the company is removed as trustee due to the appointment of external administrators (often because of clauses contained in the relevant trust deed), leaving the liquidators as bare trustees.

The case law and legislation are clear that a trustee (including a bare trustee) is entitled to a reimbursement for reasonable expenses incurred “in or about the execution of the trusts or powers”. An equitable lien operates to provide the liquidator with security to enforce their right of indemnity.

What is not as clear is the power a liquidator has to deal with the trust assets in order to realise them for the benefit of creditors and to be reimbursed for their reasonable costs and expenses.

Conflicting authorities regarding the power to deal with trust assets

There have been conflicting lines of authority regarding the power of the liquidator to realise the trust assets. The first line of authority provides that the liquidator has the power to sell trust assets, pursuant to section 477(2)(c) of the Corporations Act 2001 (Cth) (the Act), without the intervention of the Court.

In contrast, the second line of authority has held that the liquidator does not have the power under section 477(2)(c) of the Act, and must seek intervention from the Court either through the appointment of receivers (by way of appointing the liquidator as receiver and manager), or an order for judicial sale.

Leading conflicting authorities
No Court intervention required – power under section 477(2)(c) of the Act

The main competing authorities that provide a liquidator has the power to deal with trust assets pursuant to section 477(2)(c) of the Act are:

  • Apostolou v VA Corporation Aust Pty Ltd (2010) 77 ACSR 84 (Apostolou);
  • Barnet, in the matter of Fulkoto Pty Ltd (in Liquidation) [2013] FCA 595;
  • Kitay, in the matter of South West Kitchens (WA) Pty Ltd (in liq) [2014] FCA 670 (ReKitay); and

In the matter of Apostolou, Justice Finkelstein held that a liquidator has the power to sell trust property, either pursuant to the terms of the trust instrument or by the powers set out in section 477(2)(c) of the Act. Justice Finkelstein also held that it would be “highly inconvenient” should there be a requirement for a liquidator to seek redress from the Court to deal with assets.

Justice McKerracher recognised the competing authorities in this area, in the matter of Re Kitay. His Honour preferred the approach in Apostolou, on the basis that, amongst other things, other decisions regarding the issue had not specifically considered section 477 of the Act. His Honour made a declaration allowing the company to deal with the assets as the trustee company (in liquidation) had legal and beneficial ownership of the property, and without any restriction imposed by section 477(2)(c) of the Act, or any other legislative instrument.

Court intervention required

The leading authorities that provide that a liquidator requires Court intervention are:

  • Lemery Holdings Pty Ltd v Reliance Financial Service Pty Ltd [2008] NSWSC 1344 (Lemery); and
  • Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation [2011] FCAFC 79 (Bruton).

This line of authority was recently followed further In the matter of Independent Contractor Services (Aust) Pty Limited ACN 119 186 971 (in liquidation) (No 2) [2016] NSWSC 106, which again was presided by Justice Brereton.

Further, the recent decision of Kite (in their capacity as liquidators of Mooney’s Contractors Pty Ltd (in liquidation) v Mooney [2016] FCA 886, followed this line of authority and orders were made by Justice Yates to appoint the liquidators as receivers and managers, to allow them to deal with the trust property.

The basis for these decisions is that:

  • The asset that the Company holds is an equitable charge securing the equitable right of recoupment or indemnity;
  • The Company may hold the legal title in trust property, but it does not hold any beneficial interest in the trust property;
  • Section 477 of the Corporations Act does not provide any greater interest in trust property for a liquidator than the Company held;
  • The Company does not have the power to deal with trust assets once it becomes a bare trustee;
  • The liquidator may sell the assets of the Company – in this case, the liquidator could sell the equitable charge, but that does not empower the liquidator to sell the underlying asset; and
  • Court intervention is required before such a step can be undertaken.
Queensland alternative line of thought

In addition to the two lines of authority set out above, is the Queensland decision of Barnett, in the matter of Fulkoto Pty Ltd (in liq) [2013] FCA 595.

In this case His Honour determined that a bare trustee had the right to deal with trust assets pursuant to the operation of the Trusts Act 1973 (Qld) (the Trusts Act).

His Honour determined that the power of sale set out in the Trusts Act extends to bare trustees. This case does not appear to have been followed any time in the past three (3) years.

Conclusion

Whilst the most recent decisions favour the line of authority, that Court intervention is required, there is still no clear line of authority to follow. All decisions on this point are single judge decisions, meaning this ongoing conflict will likely remain the case until this issue is ultimately determined by an appellate Court.

Without a clear position being provided due to the conflicting lines of authority, it appears to be the safest option for a liquidator (or administrator) who is appointed to a company which is bare trustee to seek direction from a Court. This is especially the case if the trust assets are of substantial value or if there will be any opposition to the sale.

This article was written by Sarah Hamilton, Senior Associate and Warren Jiear, Partner in Brisbane.

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