TGIF 22 November 2019: No trust deed? Not always a problem - The Supreme Court of NSW gives directions to a liquidator to sell trust property

This week’s TGIF considers a recent application by a liquidator to the NSW Supreme Court for directions regarding the sale of trust property where the trust deed could not be found.

Background

This case concerned an application by the liquidator of KSK Holdings (Australia) Pty Ltd (the Company) for directions under section 90-15(1) of the Insolvency Practice Schedule contained in Schedule 2 to the Corporations Act 2001 (Cth). The matter was heard before Justice Rees.

The Company had been part of a group of entities that had traded binary options online. It had been deregistered in August 2017. However, in January 2019, a purported creditor, Wiiklick Pty Ltd (Wiiklick), successfully applied for the Company to be reinstated. A liquidator was then appointed to the Company so that it could be wound up.

Only one potential asset of substance had been identified, being a piece of real property at Casula. However, it was unclear whether the Company owned the property and, if so, whether it owned the property in its own right or as trustee for one of two possible trusts.  The uncertainty created by these matters exposed the liquidator to the risk of creditor or third party claims if it was later shown that the liquidator was not entitled to sell the property.

Ownership of the Casula property

The preliminary factual issue identified by the liquidator was whether the property was purchased by the Company in its own right, or as trustee for either the Krstic Family Trust (established in July 2002) or the Krstic Trust (established in December 2014).

The contract for sale recorded the purchaser of the property as being the Company as trustee for the Krstic Family Trust and this was consistent with the records of Revenue NSW.  However, there was a suggestion that the funds used to purchase the property were sourced from a bank account operated by the Company as trustee for the Krstic Trust, not the Krstic Family Trust.

To complicate matters further, Wiiklick had lodged a caveat over the property claiming that the Company had used Wiiklick’s funds to purchase the property in breach of fiduciary duties allegedly owed by the Company’s director.

It was the liquidator’s position that, as best could be determined, the property was purchased by the Company as trustee for the Krstic Family Trust. At the time the application was heard, the liquidator remained uncertain as to the source of funds used to purchase the property.

Absence of a trust deed 

The most significant issue identified by the liquidator was that he was not able to locate a trust deed for the Krstic Family Trust.  The Company’s former accountant had advised that “there is no such deed”.

The liquidator was concerned that a trust deed might be found at a later point in time containing an ipso facto clause – that is, a clause removing the Company as trustee, and requiring the Company to transfer the trust assets to a new trustee, in the event of the Company entering into liquidation.  A trust deed had been located for the Krstic Trust and that trust deed contained a clause of this kind.  

If the trust deed for the Krstic Family Trust contained an ipso facto clause, the liquidator might not have been permitted to sell the property in the Company’s liquidation.

The Application

The liquidator applied to the NSW Supreme Court for directions pursuant to section 90-15(1) of the Insolvency Practice Schedule as to:

1. whether the Company remained the trustee of the Krstic Family Trust; and
2. whether the liquidator would be justified in selling the property and paying the net proceeds of sale into his solicitor’s trust account.

The Decision

The Court made directions in the terms sought by the liquidator.

Factual issues

The Court agreed with the liquidator’s position that, as best as could be determined based on the available evidence, the property was held by the Company as trustee for the Krstic Family Trust.

The Court concluded that, on the available evidence, there was no trust deed for the Krstic Family Trust.  It followed that the liquidation did not affect the Company’s continuing role as trustee of that trust by reason of an ipso facto clause.

The power to give directions to the liquidators 

The Court then turned its consideration to whether this was an appropriate case to give directions to the liquidator pursuant to section 90-15 of the Insolvency Practice Schedule.  Under this section, a Court is empowered to make such orders as it thinks fit in relation to the external administration of a company, including determining any question arising in the external administration of the company.  

Based on previous authorities, the Court noted that:

• the Court may give directions where it will be “of advantage in the liquidation”; and
• the Court will not generally give a direction where the matter relates to the making or implementation of a business or commercial decision or when no legal issue is raised or where there is no attack on the propriety or reasonableness of the liquidator’s decision but it may do so where there is the prospect of such an attack.

The Court concluded that this was an appropriate case to make directions so as to protect the liquidator from potential creditor claims (or a claim by any purchaser of the property) that might arise if a trust deed surfaced containing an ipso facto clause.

The Court noted that the liquidator and Wiiklick had agreed that the proceeds of sale would be retained in a trust account pending the determination of Wiiklick’s claimed interest in the property.

Comment

This case is a reminder that the liquidators can apply to the Court for directions under the Corporations Act 2001 (Cth) where complex legal issues arise in the external administration of a company.

This is a stark example of the judicial protection that liquidators can seek.   There was considerable uncertainty as to whether the Company was the trustee of the Krstic Family Trust – there was no trust deed to confirm the establishment of the trust or the identity of the trustee and the Company was incorporated some 12 years after the first record of the trust having been established.  While this uncertainty exposed the liquidator to significant risk in respect of the sale of the Casula property, the liquidator was able to mitigate this risk by seeking appropriate directions from the Court.

Liquidators should avail themselves of this protection in suitable cases, noting that the Court will generally not entertain giving directions in respect of matters calling for a liquidator’s commercial judgment only.