Section 468(1) of the Corporations Act 2001 (Cth) (Act) provides: “any disposition of property of the company, other than an exempt disposition, made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void“.
Simpson & Anor v Tropical Hire Pty Ltd (in liq) [2017] QCA 274 provides an analysis of section 468(1) of the Act concerning the disposition of trust assets in the case of an insolvent corporate trustee. It is authority for the proposition that a company can be acting as trustee of a trust even in circumstances where there is nothing in the relevant documentation to suggest that that is the case.
Facts of the case
Tropical Hire Pty Ltd (Company) had been run by Mr and Ms Simpson for approximately 3 years when the business (the Company’s only significant asset) was sold in 2009. The proceeds of sale of the business were distributed by the Company to Mr and Ms Simpson. After the distribution of the sale proceeds, it was discovered that there was a substantial debt owing to the Australian Taxation Office (ATO) that the Company was unable to pay due to the distribution. Accordingly, the Company was wound up in February 2014.
Prior to this, in early 2013, Mr Simpson had asked his accountant, Mr O’Connor, for investment advice. Mr and Ms Simpson had a substantial amount of savings in a mortgage offset account which they wanted to invest. Mr O’Connor advised Mr and Ms Simpson to run the investment through a trust to avoid tax implications. It was decided that the Company would act as trustee of the new trust as it was no longer trading.
The Simpsons subsequently decided to invest $250,000.00 with Investors Central Pty Ltd for a 3 year term. The application form for the investment plainly recorded that the investment was one to be made by the Company. The money was then transferred from Mr and Ms Simpson’s mortgage offset account to Investors Central Pty Ltd.
In January 2015, Mr Simpson sought clarification from Investors Central Pty Ltd as to whether the investment could be cancelled prior to the 3 year term and was informed that that could be done. On 27 February 2015, Mr Simpson emailed Investors Central Pty Ltd and requested that the investment funds be transferred to a bank account in the name of Ms Simpson. The transfer was made by Investors Central Pty Ltd that day.
The liquidators of the Company filed an originating application with the District Court of Queensland seeking declarations that the money invested by Mr and Ms Simpson was property of the Company and, accordingly, that the payment made to Mr and Ms Simpson by Investors Central Pty Ltd was void for the purposes of section 468(1) of the Act. At first instance, Wall QC DCJ ordered that there be a trial of the issue.
Trial decision
Baulch SC DCJ held that the evidence of Mr Simpson and Mr O’Connor (namely, that the property was trust property as opposed to property of the Company) was entirely unsupported by the investment application form. Additionally, there was no tax file number or ABN for the trust and the bank account used for the trust was the Company’s bank account.
His Honour inferred that Mr and Ms Simpson had tried to hide the investment from the liquidators and had not suggested that the money was trust property in the early stages of the liquidation. Further, his Honour was critical that Ms Simpson did not give evidence at the trial.
Accordingly, his Honour made the following orders:
- A declaration that the investment of the company was property of the company for the purposes of section 468 of the Act;
- A declaration that the payment of $250,000.00 by Investors Central Pty Ltd to Ms Simpson was void by virtue of section 468 of the Act; and
- Mr and Ms Simpson were to pay to the company $250,000.00 together with interest and costs.
Appeal judgment
Finding that money was trust money
On appeal, McMurdo JA (Sofronoff P and Boddice J agreeing) held that, contrary to the trial judge’s findings, there was significant documentary evidence supporting the evidence given by Mr Simpson and Mr O’Connor, such as:
- The existence of the trust deed and the fact that it had been created at the same time that the investment was to be made; and
- The evidence showing that the source of the funds was Mr and Ms Simpson’s bank account rather than the Company’s.
Further, copies of the Company’s bank statements that were put into evidence showed that the company did not have any money in its bank accounts such that the investment could have been made by it.
Accordingly, his Honour held that the funds were trust funds and not property of the Company.
Indemnity of trustee company
The liquidators for the Company then argued that even if the money was trust property, it was nevertheless property of the Company on the basis that the Company may have incurred liabilities in acting as trustee of the trust and it was entitled to retain the funds to discharge these potential liabilities, in priority to the beneficiaries.
This argument was rejected by McMurdo JA on the basis that there was no evidence that the Company had incurred any debts as trustee and that there was therefore no evidence that the Company had a beneficial interest in any of the trust property.
The liquidators then argued that it may emerge later that the Company had incurred debts which would remain outstanding. That was held not to be a justification for the trust funds to be paid to the Company. McMurdo JA further held that if the liquidator intended to argue that the money should be paid to the Company pursuant to its indemnity, the liquidators should have provided some evidence to support that argument. The liquidator should have been aware of the make-up of the Company’s creditors by that time but no evidence was provided.
Orders
Accordingly, the appeal was allowed and the orders made by Baulch SC DCJ were set aside.
McMurdo JA made the following orders:
- A declaration that any entitlement of the company to be paid money by Investors Central Pty Ltd was an entitlement held by the company solely in its capacity as trustee; and
- The Company was to pay Mr and Ms Simpson’s costs of the District Court proceedings and the appeal.
Implications of the case
It will not always be obvious on the face of documents whether a company is acting solely (or otherwise) in its capacity as trustee of a trust. Accordingly, further investigations will need to be made rather than merely reviewing certain documents on their face.
Additionally, if liquidators wish to argue before a Court that the insolvent company may have a beneficial interest in the trust property pursuant to its right of indemnity, there must be evidence provided to support the proposition that the company incurred debts in its capacity as trustee such that it can enforce its right of indemnity over the trust assets.
This article was written by Isabella Fyfe, Solicitor, in our Sydney office.
Publication Editor: Grant Whatley