Recently Justice Brereton of the New South Wales Supreme Court handed down a decision in Stansfield DIY Wealth Pty Limited (in liquidation) [2014] NSWSC 1484 (Stansfield).
Stansfield is an important decision for liquidators for two reasons:
On 4 February 2013 Stansfield DIY Wealth Pty Limited (Company) was wound up in insolvency by order of the New South Wales Supreme Court.
The Company’s only function was to act as Trustee of the Elliott Stansfield Super Fund (Super Fund). The Company had no assets or liabilities save in its capacity as trustee of the Super Fund.
The liquidator of the Company made an application to the Court for directions that in effect the liquidator/Company be permitted to sell or otherwise deal with the property of the Super Fund of which it is the trustee, in the course of winding up the Company, for the purpose of satisfying creditors of the Super Fund for which the Company is liable.
Two issues arose out of the application made by the liquidator to the Court. Firstly, was the Company still the trustee of the Super Fund, and secondly, what power did the Company/liquidator have (in its capacity as trustee of the Super Fund) to sell the assets of the Super Fund?
In respect of the first issue, Justice Brereton noted that the trust deed of the Super Fund did not contain a clause to the effect that if the trustee is placed in liquidation, that the trustee would cease to be the trustee of the trust.
However, by reason of the fact that the Company was the trustee of a self-managed superannuation fund, Justice Brereton noted that by operation of Superannuation Industry (Supervision) Act 1993 (Cth), section 120(2)(e), upon the commencement of the winding up the Company became a disqualified person for the purposes of that legislation and thereafter commits an offence under section 126K if it is or acts as trustee of a superannuation entity.
Ultimately Justice Brereton found that while the Company remained as the trustee of the Super Fund, it committed an offence by doing so, and would more conspicuously do so if it exercised its power of sale. His Honour also noted that if, as would be prudent, the Company resigned as trustee, it would have no power of sale.
Justice Brereton considered two scenarios in respect of whether the liquidator of a corporate trustee had the power to sell trust property:
As Justice Brereton noted in Stansfield, the First Scenario presents a relatively straight forward answer. Where the trustee remains as trustee of the trust (ie there is no provision in the trust deed which automatically vacates the office of the trustee upon the trustee being placed into liquidation) and the trustee has the power to administer the trust, then the trustee/liquidator can sell the trust property.[1]
Where the trustee is removed as trustee of the trust, the trustee retains a right of indemnity out of the trust assets, which right of indemnity is secured by an equitable charge of the assets of the trust.[2] However, the right of indemnity does not confer a power of sale on the trustee.
As a result, liquidators (and Judges) have looked elsewhere to locate a power that may enable a liquidator of a trustee company to sell trust property. One such area that has been closely focused upon is section 477(2)(c) of the Corporations Act 2001 (Cth).
Section 477(2)(c) states:
(2) Subject to this section, a liquidator of a company may:
...
(c) sell or otherwise dispose of, in any manner, all or any part of the property of the company
The most recent authority (prior to the decision in Stansfield) to consider section 477(2)(c) and its application to trust property was the decision of McKerracher J in South West Kitchens.
In South West Kitchens Justice McKerracher considered whether a trustee had a power of sale where the office of the trustee became vacant on the appointment of a liquidator to the trustee. Justice McKerracher said that:
[30] The effect of the Trust Deed to preclude a company continuing to act as trustee after the appointment of the liquidator cannot be doubted. Equally, there appears to be no reason in policy or in principle, and none referred to in the authorities discussed, as to why a liquidator’s power of sale which is part of his or her statutory duties in a broader public interest should be limited by the terms of a private trust agreement.
[31] There appears to be no constraint on the power of sale under s 477(2)(c) CA. It does not impose any limitation on the power of sale insofar as the assets of a company are held on trust. Of course, the company has to have legal ownership of the assets in order for them to be sold but generally, and certainly in this case, the former Trustee, SW Kitchens, will have both legal ownership of the Trust Assets as a bare trustee and beneficial interest in the Trust Assets as the holder of the equitable lien. It is also to be noted in passing that s 501 CA provides that subject to the provisions of the CA, the property of a company must, on its winding up, be applied in satisfaction of its liabilities. Once again, there is no statutory exception expressed in relation to property held by the company on trust.
Justice Brereton reviewed the decision in South West Kitchens and arrived at the following conclusion:
[28] His Honour was, with respect, correct to point out that in none of the authorities which appear to have assumed the absence of a power of sale had the Court been referred to Apostolou or to s 477(2)(c), but rather proceeded on an assumption that the liquidator had no power to sell assets once the company ceased to be the trustee, or became a bare trustee. However, for the reasons I have given, that assumption was a correct one. The question is not whether a private trust can constrain the exercise of a liquidator's statutory powers; rather, it is whether those powers extend to property that is not beneficially the property of the company. As I have said, I do not see how it can: the power is limited to the company's legal and equitable interests in property. The liquidator cannot sell interests in property that the company does not have.
Accordingly, His Honour held that section 477(2)(c) of the Corporations Act 2001 (Cth) did not empower a liquidator to sell the beneficial interest in property that the company holds on trust, even if the company has an equitable charge over it, because the property is not itself "property of the company".
On the basis of the above, Justice Brereton formed the view that the best way to proceed, where there was no power of sale available to the trustee, was for the liquidator to seek to be appointed as a receiver of the trust assets, by way of enforcement of the (former) trustee's right of indemnity. The liquidator/Company could then realize the trust assets, and apply the proceeds to discharge the liabilities of the Company (all of which were incurred in the capacity of trustee), and recover the costs of the receivership (among others).
The decision in Stansfield is at odds with the decision in South West Kitchens and until a decision from an appellate court has been handed down, there is some uncertainty as to how to approach liquidations of corporate trustees. The most conservative approach is to revert to the position as it was prior to South West Kitchens, whereby a liquidator should apply to the Court for directions as to how to proceed in the liquidation and in particular dealing with the disposal of trust assets.
[1] Re Crest Realty Pty Ltd (No 2) (in liq) [1977] 1 NSWLR 644
[2] Chief Commissioner of Stamp Duties for New South Wales v Buckle [1998] HCA 4
