TGIF 8 October 2021 – Liquidating a former trustee: what to do when there is no power to sell the assets

This week’s TGIF looks at In the matter of Gary John Anderson in his capacity as liquidator of G & G Contractors Pty Ltd (In Liquidation) [2021] FCA 1185, the latest of a line of Federal Court decisions confirming the approach to be taken by liquidators of trustee companies that have ceased to be trustees as a result of going into liquidation.

Key Takeaways

• If being appointed as liquidator of a trustee company (or if providing credit to a corporate trustee), check the trust document to determine whether the company will automatically cease to be trustee as a result of any winding up and instead hold property under a bare trust.
  
  
• If this is the case, an application to court will likely be required to obtain orders for sale or appointment of the liquidator as receiver before selling assets to pay creditors (subject to exceptions).
  
  
• If it turns out assets have been sold in breach of trust, consider seeking retrospective conferral of a power of sale and relief from liability under section 1318 of the Corporations Act 2001 (Cth) and relevant state trustee legislation.

Background

G & G Contractors Pty Ltd (the Company) went into liquidation in August 2017. Mr Anderson was appointed as liquidator (Liquidator).

Prior to Mr Anderson’s appointment, the Company had engaged auctioneers to sell certain of the Company’s assets. The Liquidator allowed the sale to proceed to completion about 10 weeks later. Before that, the Liquidator became aware that the Company acted as trustee of the Gray Family Trust (the Trust) but a copy of the trust deed was not provided to the Liquidator until about a year later.

It turned out that, by operations of the terms of Gray Family Trust Deed, the Company had ceased to be the trustee of the Trust upon entering into liquidation.

Despite the fact that the Company had ceased as trustee, no other company or person had been appointed.

The trust deed provided for the Liquidator to have a power to appoint a new trustee only in the absence of the original appointor, who was an undischarged bankrupt. Notice of the application was given to the bankruptcy trustee, who neither consented to nor opposed the relief sought by the Liquidator.

Nature of the relief sought

The Liquidator brought an ex parte application for orders pursuant to:

• section 89 of the Trustees Act 1962 (WA) (Trustees Act) conferring a power of sale or appointing a receiver; and
  
  
• section 1318(2) of the Corporations Act 2001 (Cth) (Corporations Act) in relation to having sold Trust assets where the Company was not the trustee of the Trust.

Given that the sale had already been completed, the Liquidator sought the orders with effect from the time when the assets were sold.

The general principles

The Court observed that it is now settled that liquidators of insolvent (former) trustee companies cannot sell trust property without order of the Court or by appointment of a receiver over the trust assets. The reason for this is that, when understood properly, the trust assets are not the ‘property of the company’ but are instead trust property in which the corporate trustee has a proprietary interest by way of lien or charge to secure its right of exoneration. The courts are, however, generally willing to make orders permitting the liquidator of a (former) corporate trustee to sell trust assets.

The Court’s decision on liquidator’s applications

The Court turned to consider the application under the Trustees Act . Section 89(1) of the Trustees Act provides that the Court may confer upon the trustee (among other powers) a power of sale where, in the opinion of the court, such a sale is (among other things) ‘expedient in the management or administration of any property vested in the trustee’. 

The Court was satisfied that power was conferred on the Court under section 89(1) of the Trustees Act to make the orders sought by the Liquidator. The Court found that it was appropriate merely to confer a power of sale, rather than to establish a receivership. The Court was also satisfied that the orders could be made nunc pro tunc to confer the order retrospectively to the time when the property was sold.

Despite the Court’s conclusion on the application under the Trustees Act, the Court did not consider that it was an appropriate case to make an order under section 1318(2) of the Corporations Act. This provision applies where a liquidator has reason to apprehend that a claim will or may be made against them ‘in respect of any negligence, default, breach of trust or breach of duty’ in their capacity as liquidator.

On the facts before the Court, there was no evidence that there was a real possibility of a claim being made. The Liquidator indicated only that there was potential for some person to raise a claim in the future. Further, the Court stated that it was difficult to see how there could be a claim in the future, given that the order under the Trustees Act would confer authority on the Liquidator to sell the relevant Trust property, and this authority would apply at the time when the property was sold.

The Court orders

In light of the above, the Court made orders conferring upon the Company, as bare trustee of the Trust, the power to sell or realise the property of the Trust and to wind up the affairs of the Trust, which was power to be exercised by the Liquidator in his capacity as liquidator of the Company. Further, the Court ordered that the proceeds from the sale of the property of the Trust were to be dealt with in accordance with the provision of the Corporations Act on the basis that creditors of the Company were entitled to exercise a power of exoneration in respect of such proceeds, including remuneration of the liquidator. 

Comment

Many Australian businesses are structured as trusts, particularly family trusts as in this case. Many trust deeds provide for automatic removal of the trustee company upon the appointment of liquidators or other ipso facto insolvency triggers.

The result is that, in this scenario, liquidators have to determine whether selling the assets requires going to court – often in circumstances where the time and funding to run a sales process are in short supply.

In this case, the liquidator was appointed while the Company was already in the midst of an auction process. The issue was only discovered a year later and relief has been granted about four years after the sale.

Relief granting a power of sale

There are now well-trod paths for liquidators in this scenario to obtain relief in respect of any sale of assets held on bare trust. 

It is not unusual for a liquidator’s application to seek alternative orders. There are several relevant sources of jurisdiction found among the Corporations Act, each state’s version of the trustee statute, and the Court’s inherent powers.

The path followed in this case was to seek:

• an order conferring a power of sale under the State trustee statute;[1] and
  
  
• alternatively, orders appointing the liquidator as receiver of the trust assets.[2] 

There is no ‘bright line’ for deciding between these alternative forms of relief. The more common approach is to appoint the liquidator as receiver.[3] But it will generally be appropriate to confer a power of sale instead where, as here, the company had acted only as trustee of the trust (with all assets held and all liabilities incurred as trustee) and become a bare trustee upon appointment of the liquidator, with no new trustee having been appointed.[4]

The Court’s reasons for conferring a power of sale in this case was that there was no reason to establish a receivership ‘to deal with competing claims’.[5] The relevant background was that the sale had already occurred, the liabilities vastly exceeded the assets and no one had sought to claim against the assets or appoint a new trustee.[6]

The Court’s orders conferring the power of sale were made pursuant to section 89(1) of the Trustees Act. Similar orders have been made under equivalent legislation in other states.[7] Each state and territory has its own legislation governing the conduct of trustees. The equivalent provision in Queensland is substantially in the same terms, while the provisions in Victoria and New South Wales are in different terms, but with substantially the same effect.[8]

Relief from liability for breach

Where a liquidator has already sold property and is concerned about having done so in breach of trust, it is not uncommon to seek orders under section 1318(2) of the Corporations Act. There are similar provisions for relief from liability in state trustee statutes.

In this case, the concern was that there had been a breach of the bare trust under which the Company held the property, which did not authorise the liquidator to sell all the property. The Court declined to grant section 1318 relief, on the basis that making an order conferring a power of sale nunc pro tunc was sufficient, but left open the liquidator’s right to make a future application if needed.[9]

While each case will depend on its own facts, the Court’s decision in this case suggests that there must be a real, rather than a fanciful or remote, possibility that breach of trust claim might be made before the Court will grant relief under section 1318(2). Further, the Court’s decision suggests that where the risk is mitigated by other relief granted by the Court, relief under section 1318(2) is less likely to be granted.

Conclusion

Where a trustee automatically ceases to be trustee on liquidation, it also ceases to have powers of sale as trustee under the trust deed. Instead, it holds the assets as bare trustee and can only convey them on demand to or as directed by the beneficiaries. It will have a right of exoneration supported by an equitable lien, but this in itself will not necessarily be enough to sell the trust assets themselves without applying to court.

The usual forms of relief are referred to above, however, there are other potential paths for a liquidator. Depending on the facts, liquidators may be able to enforce a right of exoneration (or a right of recoupment and reimbursement) in a way that does not involve a sale requiring court approval.

Further, even where a court application is not strictly required, liquidators can also apply for judicial advice to seek confirmation as to their powers or strategy where a trust is involved.[10]