Remuneration and expenses of liquidators of corporate trustees – two recent decisions
Liquidators ought to take particular note of the recent decisions of Re Dalewon Pty Ltd [2010] QSC 311 and Commissioner of Taxation v. Bruton Holdings Pty Ltd (in liq) [2010] FCA 978 which provide further guidance as to the circumstances in which a liquidator of a corporate trustee will be permitted to look to trust assets for his or her remuneration and expenses.
The decision in Re Dalewon highlights how trusts which share a common corporate trustee must be treated separately. On an application for the payment of a liquidator’s costs and remuneration from trust assets, the liquidator must be able to produce clear evidence which establishes that work performed relates to a particular trust.
Bruton Holdings illustrates the importance of giving careful consideration to the functions and duties of a “former” corporate trustee in respect of trust assets and liabilities following its removal as trustee. The decision suggests that the role of a former trustee (as bare trustee) may be limited to preserving and administering the assets which are the subject of the trustee’s right of indemnity.
Re: Dalewon Pty Ltd [2010] QSC 311
The facts in Re Dalewon can be summarised as follows:
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Dalewon Pty Ltd (Dalewon) was the trustee of two trusts (The Topmoor Superannuation Trust and the Topmoor Investing Trust) and was replaced as the trustee of both shortly before it was wound up;
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Dalewon was wound up by reason of its failure to comply with a statutory demand made by Brisconnections Management Company Ltd (Brisconnections);
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the former director and secretary of Dalewon issued proceedings seeking to terminate the winding up (Termination Proceedings) on the basis that no debt was owed to Brisconnections;
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the liquidators of Dalewon incurred fees and expenses in relation to each trust;
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the liquidators sought to apply the assets of both trusts to meet their fees and expenses, which (including legal expenses of the Termination Proceedings) were about $200,000.00 in total; and
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the liquidators also sought a declaration that they were entitled to realise the assets of either trust to pay the liquidators’ fees and expenses.
The Court found that it was “inconsistent with principle and authority” that the liquidators should have recourse to the assets of one trust to pay for what was done in the administration of the other trust. The trusts must be considered as “distinct structures”. There must be a nexus between the work for which payment is sought and the administration of certain property.
The Court also confirmed the distinction to be made between the liquidators’ work in administering the trust and the work which is solely concerned with the winding up. The Court found that the Trust assets may only be applied to work which falls into the former category.
The Court observed that notwithstanding the practical difficulty of distinguishing between the costs of administering the trust assets and the costs of the winding up generally, it was necessary for a liquidator to establish the connection between the fees and expenses claimed and the administration of the trust assets from which those fees are to be drawn.
In relation to the amounts claimed by the liquidator the Court found that:
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the Brisconnections transaction (giving rise to the alleged debt) was undertaken by Dalewon as trustee of the Superannuation Trust;
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the liquidators’ work in respect of those proceedings was therefore work in the administration of the Superannuation Trust;
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there was no “substantial task” required to secure the assets of the Investing Trust and it seemed that the liquidators’ efforts were designed to secure those assets for any creditor of the company (and in particular Brisconnections); and
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in the circumstances, the evidence did not address the connection between the liquidators’ fees and expenses and the proper administration of the Investing Trust.
The Court was not prepared to permit the liquidators to draw from the assets of the Superannuation Trust to meet the costs and expenses of the Termination Proceedings. The reasons for this were:
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the fees, disbursements and legal expenses were yet to be approved in the amounts claimed; and
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the potential impact of a costs order in the Termination Proceedings (which were not concluded) was to be considered. If they were successful, Brisconnections would be ordered to pay the costs of those proceedings including the liquidators’ costs. As the costs exceeded the value of the assets in the Trust, it would be unfortunate if all of the assets of the Trust had already been sold to meet the liquidators’ costs.
Commissioner of Taxation v. Bruton Holdings Pty Ltd (in liq) [2010] FCA 978
In Bruton Holdings the following facts were relevant:
- Bruton Holdings Pty Ltd (Bruton) was the trustee of the Bruton Educational Trust;
- Bruton was voluntarily wound up by Bruton’s creditors on 30 April 2007;
- the trust deed provided for the automatic removal of Bruton upon it entering into administration, receivership or liquidation;
- between 26 October 2005 and 28 February 2007, Bruton paid the sum of $470,000.00 into its solicitors’ trust account in relation to an application for endorsement as a tax exempt entity;
- on 26 March 2007, the Commissioner issued a Notice of Assessment directed to “the Trustee for Bruton Educational Trust” in the amount of $7,477,238.46;
- on 8 May 2007, the Commissioner issued a notice to the solicitors said to be issued under s. 260-5 of the Taxation Administration Act 1953 requiring them to pay the sum of $447,420.20 to the Commissioner;
- on 30 May 2007, Bruton commenced proceedings against the Commissioner seeking a declaration that a notice was invalid (Proceedings);
- the Proceedings were ultimately determined in Bruton’s favour by the High Court; and
- the Commissioner applied to the Court for a declaration that Bruton was not entitled to be indemnified out of trust assets in relation to its costs of the Proceedings.
The Court confirmed (at [47]) that a corporate trustee’s right of indemnity extends to providing for its liability to pay remuneration to its liquidator, but only to the extent that work has been done in connection with the administration of the trust.
Bruton submitted that the costs of the litigation were properly incurred as they could be characterised as work performed in preserving, realising or getting in property.
As the Court observed (see paragraph [52]) it commenced the litigation as a “former” trustee, not a “serving” trustee.
The Court found that Bruton was merely a “bare” trustee of the assets comprising the Trust fund, and as a bare trustee it was not part of Bruton’s functions to issue the proceedings and therefore, the costs were not properly incurred in the administration of the Trust fund.
An appeal of the Court’s decision in Bruton Holdings was filed on 10 September 2010. The decision on appeal will likely provide welcome guidance to insolvency practitioners as to the circumstances in which it will be permissible to look to trust assets to meet the liquidator’s costs and remuneration.
If the decision stands, it and Re Dalewon represent useful lessons to liquidators of corporate trustees to ensure they have authority to incur costs and expenses before doing so. Also, where the trustee company acts in a number of capacities, it is essential that fees are separately allocated by, for example, maintaining separate files.
