Power to sell – Federal Court exercises discretion to allow company to realise trust assets

In Brooks, in the matter of Tease Hair & Spa Pty Ltd (in liquidation),[1] the Federal Court made orders in favour of the Liquidator, pursuant to section 90-15 of Schedule 2 to the Corporations Act 2001 (Cth) (Insolvency Practice Schedule (Corporations)) and section 47 of the Trustee Act 1989 (Tas) allowing the Liquidator to realise trust property for the benefit of creditors.

Background

Tease Hair & Spa (Company) operated a hair and beauty business in Hobart since the Company’s incorporation on 25 January 2010. In January 2021 the Company opened a fabric and craft retail store.

The Trust Deed establishing the Trust dated 22 January 2010, named the Company as trustee and contained an ‘ipso facto’ clause which determined and vacated the office of the incumbent trustee (the Company) if it ever passed a resolution for its winding up.

In December 2021, the Liquidator was appointed to the Company. No replacement trustee was ever appointed.

Upon the Liquidator reviewing the company’s financial and tax records, the Liquidator concluded that the Company had only traded in its capacity as trustee of the Trust and that there were a number of creditors whose debt appeared to have been incurred in the furtherance of the Trust.

As a preliminary issue, the Court held that while the Trust Deed was incorrectly dated and could only have been executed after the registration of the Company, it was clear from the Liquidator’s investigations that the Company always acted and treated itself as trustee of the Trust. As such, the Court was satisfied that the Company was properly appointed as trustee of the Trust.

As a result of the ‘ipso facto’ clause in the Trust Deed, the Company was a bare trustee of the Trust and had no powers with which to deal with the Trust assets. The Plaintiffs (being the Liquidator and the Company), sought the discretion of the Court to confer on the corporate trustee (the Company) the necessary powers to enable it to wind up the Trust and realise the Trust property for the benefit of creditors.

Decision

The Court held that the relief sought by the Plaintiffs was necessary as the Liquidator could not sell the Trust Property where it was not property of the Company, which would otherwise be authorised by the power of sale in section 477(2)(c) of the Corporations Act 2001 (Cth). Rather the property held by the Company was trust property in which the Company has a proprietary interest by way of lien or charge.[2]

It is widely accepted that the Court can make orders under the relevant State trustee legislation to confer on a corporate trustee (the Company) the powers to deal with trust assets.[3]

Relevantly, section 47 of the Trustee Act 1898 (Tas) provides:

1. 1. Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, expenditure, or other transaction is, in the opinion of the Court, expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any, or by law, the Court may by order, confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, upon such terms, and subject to such provisions and conditions, if any, as the Court may think fit, and may direct in what manner any money authorized to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.

…

1. 3. An application to the Court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.

Ultimately, the Court was satisfied, based on affidavit evidence submitted by the Liquidator that:

• the Company only ever traded in its capacity as trustee of the Trust; and
• to the extent that the debts owed by the Company to creditors were properly incurred in furtherance of the Trust, the Company has a right of indemnity against the Trust assets to pay its credits (which right is secured by equitable lien),

and that it was necessary for the expedient management and administration of the Trust’s assets that the Company, be conferred with powers to sell or dispose of all or any part of the Trust property.

In addition, the Court also granted orders providing retrospective relief for Trust assets which had already been dealt with by the Liquidator, including two vehicles and the leases for each of the premises of the respective businesses. In granting this order, the Court stated that there was no suggestion that the Liquidator acted dishonestly or unreasonably, and as such, the Court was satisfied that the retrospective relief was appropriate to assist with the expedient administration of property.

Pursuant to section 90-15 of the Insolvency Practice Schedule, the Court also granted orders that the Liquidator could take all steps to wind up the Trust.

Key takeaway

This decision highlights the circumstances in which it is necessary for the expedient management and administration of trust assets that a Liquidator be granted powers to deal with trust assets for the benefit of creditors.

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Authored by:

Scott Couper, Partner
Caitlin Milligan, Associate

[1] [2022] FCA 457.

[2] Cremin, Re Brimson Pty Ltd (in liq) [2019] FCA 1023.

[3] Anderson (liquidator) v Aravanis (trustee) [2021] FCA 1185 under the Trustees Act 1962 (WA) and Rathner (liquidator), re Garrows Close Pty Ltd (in liq) [2021] FCA 505 under the Trustee Act 1958 (Vic).