Liquidation does not automatically remove a corporate trustee – Court directions may be required

In KSK Holdings (Australia) Pty Ltd (in liquidation) [2019] NSWSC 1463 a liquidator sought directions from the Supreme Court of New South Wales under section 90-15(1) of the Insolvency Practice Schedule (Corporations) at Schedule 2 of the Corporations Act 2001 (Cth).

The liquidator sought clarity as to whether KSK Holdings (Australia) Pty Ltd (in liquidation) (KSK Holdings) remained trustee of the Krstic Family Trust in circumstances where there was reportedly no trust deed and, consequently, whether the liquidator was entitled to sell the trust asset.

Background

KSK Holdings was part of a group of related entities that traded binary options online. Slavica Krstic was the sole director. Ms Krstic and her son, Kristijian, were each shareholders.

An ABN was obtained in July 2002 for the Trustee of the “Krstic Family Trust”. Significantly, the liquidator’s subsequent enquiries with KSK Holdings’ accountant reveal that “there is no such deed” establishing the Krstic Family Trust or appointing KSK Holdings as trustee.

In contrast, in December 2014, Ms Krstic and her son executed a discretionary trust deed establishing the “Krstic Trust” of which they were both beneficiaries. The deed contained an ipso facto clause terminating KSK Holdings’ appointment as trustee if it was placed in liquidation and providing for the trust property to be immediately handed over to the new trustee.

In January 2015 an ABN was obtained for the “Trustee of the Krstic Trust” and a bank account was established with an initial cash deposit of $500,000. The liquidator’s subsequent investigations would reveal that “a significant amount of high value transactions” took place.

In March 2015, KSK Holdings as “Trustee of the Krstic Family Trust” bought land at Box Road, Casula in New South Wales. Although the Contract named the buyer of the land to be KSK Holdings as Trustee of the Krstic Family Trust, the liquidator suggested (subject to further enquiries) that funds used to buy the land were in fact sourced from the bank account of the Krstic Trust.

KSK Holdings was deregistered in August 2017 and Ms Krstic continued to live at Box Road, Casula. By all accounts, her son lived overseas in Serbia and they were not in contact.

In the meantime, a related entity, Wiiklick Pty Ltd (Wiiklick), was placed into liquidation in June 2015. With reported debts owed to it by KSK Holdings exceeding $4 million, Wiiklick’s liquidator lodged a caveat over the Casula land on the grounds it was held on trust for Wiiklick and, in circumstances where Ms Krstic had allegedly breached her fiduciary duties as director of Wiiklick.

Wiiklick’s liquidator then sought to reinstate KSK Holdings and have it duly wound up so that full investigations could be made, including investigations regarding the acquisition of the Casula land.

Liquidator’s investigations

The liquidator’s findings in relation to KSK Holdings were:

• Its accountant advised “there is no such deed” in relation to the Krstic Family Trust.
• Ms Krstic’s solicitors advised the liquidator that she:
  • was not in contact with her son who had been overseas for some years; and
  • did not have answers to any of the liquidator’s queries.
• Ms Krstic:
  • had no knowledge of KSK Holdings’ business operations or the bank account transactions; and
  • advised her son was likely the person who operated the business without her knowledge since KSK Holdings’ inception.
• KSK Holdings:
  • had never lodged returns with the ATO;
  • did not have an AFS licence (despite online trading of binary options);
  • had not maintained adequate financial records; and
  • may have used funds from the bank account of the Krstic Trust to fund the purchase of the Casula land bought by KSK Holdings as trustee for the Krstic Family Trust – in which case the Krstic Trust may in fact, have a beneficial interest in the land.

Issues and outcome

The above circumstances raised doubts as to whether KSK Holdings held the Casula land on trust for the Krstic Trust or the Krstic Family Trust or, if it was trading in its own right. There was further doubt cast as to whether the liquidator could deal with the Casula land in the absence of a trust deed providing for what would occur to assets of the Krstic Family Trust when the apparent corporate trustee was in liquidation.

The Court held that it will generally not give directions where the matter relates to the making or implementation of a business/commercial decision that raises no legal issue or where there is no attack on the propriety or reasonableness of a liquidator’s decision.

Here, the liquidator properly sought direction from the Court where:

• limited records prevented him from determining if KSK Holdings had been removed as trustee of the Krstic Family Trust; and
• his dealing with the Casula land in the absence of direction and clarity from the Court would leave him exposed to the risk of potential complaints and accusations from creditors or the ultimate buyer of the Casula land that he acted unreasonably if subsequently, records came to light.

The Court found that in the absence of a trust deed, liquidation itself will not automatically lead to a company’s removal as trustee.

Orders were made that KSK Holdings remained the trustee of the Krstic Family Trust and that the liquidator could, and ought to, sell the Casula land in his capacity as liquidator of the corporate trustee of the Krstic Family Trust.

Key takeaway

This case is a reminder for insolvency practitioners that, in appropriate cases, clarity may be sought from the Court when faced with complex legal issues or a challenge to their decision. This provides protection from liability for breach of duty or unreasonable behaviour if full disclosure is made to the Court.

Importantly, when applying for directions under the Insolvency Practice Schedule, liquidators should first consider whether the matter only requires the liquidator to make a commercial decision, as the Court is unlikely to give directions in such situations.

Authored by:

Barbara-Ann Sim, Partner
Hannah Petersen, Solicitor