Insolvent Company Removed as Trustee of Trust

The court ordered the removal of an insolvent company as trustee of a trust and appointed new trustees in their personal capacities, considering the potential for conflicts of interest.

New South Wales Supreme Court

CITATION : Dreiberg & [NAME] v [NAME] and [NAME] as [NAME] of [COMPANY] [2007] NSWSC 1204

HEARING DATE(S) : 5/12/06, 31/01/07, 19/06/07, 19/07/07

JUDGMENT DATE : 30 October 2007

JURISDICTION : Equity Division Corporations List

JUDGMENT OF : [NAME]

DECISION : See paragraph 14 of judgment.

CATCHWORDS : [NAME] – Company trustee of trust – Whether liquidator of company can be appointed new trustee of trust – Possibility of there being a real prospect of a conflict of interest should not be assumed – Company removed as trustee and [NAME] appointed as trustees in their personal capacity. - PRACTICE AND PROCEDURE – Costs – Proceeding ceased without hearing – Reasonableness of conduct of parties – Distinction between surrender and supervening events rendering proceeding moot.

LEGISLATION CITED : Trustee Act 1925 (NSW)

[COMPANY] v [COMPANY] (in prov liq) (1990) 3 ACSR 183 [NAME], Law of Trusts in Australia, 7th ed (2006) Chatswood, LexisNexis Butterworths CASES CITED : Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 Re Minister for Immigration and Ethnic Affairs; ex parte [NAME] (1997) 186 CLR 622 [COMPANY] v Commissioner of Taxation (2000) 101 FCR 548

[NAME] PARTIES : v [NAME] and [NAME] as [NAME] of [COMPANY](S) : SC 2515/06

[NAME]: [NAME] COUNSEL : [redacted] Defendant: [redacted] 2nd, 4th-7th [NAME]: [NAME]: [NAME] SOLICITORS : [redacted] Defendant: [redacted] 2nd, 4th-7th [NAME]: [NAME]

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY [NAME], 30 October 2007

2515/06 [NAME] v [NAME] and [NAME] as [NAME] of [COMPANY]

JUDGMENT 1 HIS HONOUR: The first [NAME] in these proceedings are the [NAME] of [COMPANY] (in liquidation) ("CBD"). The [NAME] challenged the decision of the first defendant to admit proofs of debt submitted by the second, third, fourth, fifth, sixth and seventh [NAME] at a second meeting of creditors of CBD pursuant to which it was resolved that CBD be wound up. Challenges were also made to the first defendant's refusal to admit other proofs and to admit in full proofs of debt of the [NAME]. Relief was sought to set aside the resolution of creditors that CBD be wound up. In its place, the [NAME] sought an order that a resolution put by the [NAME] that, CBD enter into a deed of company arrangement, should be passed, and the first [NAME] should be directed to enter into such a deed of company arrangement. Other alternative orders were sought in relation to the [NAME]' attempt to have the company enter into the deed of company arrangement they proposed. Alternatively, an order was sought for the termination of the winding-up of CBD. 2 By a further amended originating process dated 21 November 2006, the [NAME] also sought orders in relation to the registration of a transfer of shares in favour of the second plaintiff, an order that CBD be removed as trustee of a trust known as the [COMPANY] ("the [COMPANY]") and that [COMPANY] be appointed as trustee of the [COMPANY], or, alternatively, an order that the [COMPANY] ("[COMPANY]") be appointed trustee of the [COMPANY]. In a further alternative, the [NAME] sought an order that [NAME] be appointed trustee of the [COMPANY]. By a further amended originating process filed in court pursuant to leave given on 19 July 2007, the [NAME] sought an alternative order that Mr [NAME] be appointed as receiver, or receiver and manager, of the [COMPANY]. After argument (and apparently negotiation), the [NAME] ultimately sought an order that CBD be removed as trustee of the [COMPANY] and that the [NAME] be appointed as trustees of the [COMPANY] in their personal capacity. 3 This order was not opposed by any party. After the last hearing, I was provided with consents of the [NAME] to be so appointed. 4 It is undesirable for an insolvent company in liquidation to remain as trustee ([COMPANY] v [COMPANY] (in prov liq) (1990) 3 ACSR 183 at 185; [NAME], Law of Trusts in Australia, 7th ed (2006) Chatswood, LexisNexis Butterworths at [1551]). The [NAME], with the support of the [NAME], initially proposed that Mr [NAME] be appointed as receiver and manager, or that he be appointed as trustee in the place of CBD. This was opposed by the second, third, fourth, fifth, sixth and seventh [NAME] because of the cost implications of overlapping administrations. In Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158, [NAME] (as his Honour then was) said (at 162): " In general it seems to me that whether [NAME] of a company should accept appointment to another office, or having been appointed should retain both offices, must depend on whether there is any real prospect of a conflict of duties, or a conflict of duty and interest, arising from their holding both offices. ... if, having accepted such appointment the [NAME] should in the future find a position of conflict arising, they should not continue to retain both offices. " 5 There is a possibility that if the [NAME] are appointed as trustees of the [COMPANY], there will be a conflict between their duty as [NAME] of CBD and their duties as trustees of the [COMPANY] to the beneficiaries of the trust. CBD was established to carry out a residential sub-division on land adjacent to the land held by CBD in its capacity as trustee of the [COMPANY]. It appears that CBD carried out work in its capacity as trustee of the [COMPANY] such as fencing the [COMPANY]' land and obtaining relevant approvals from the council. It will be entitled to an indemnity from the trust assets in respect of liabilities incurred in that regard. There was some unspecific evidence that at the time the work was done, expenditure was not dissected into whether the work was done in relation to residential land owned by CBD in its own right, or whether the work was done in relation to the [COMPANY] land. There would have to be an allocation of expense which may give rise to a potential for conflict. There is also some confusion and a possible mistake as to the title to the relevant land. 6 It is not clear that the conflicts are real as distinct from potential. For example, there was no evidence that there could be a genuine dispute as to the allocation of particular expenses. There was merit in the contentions of the [NAME] that it would be undesirable to subject the parties, who have roughly, but not exactly, similar interests as shareholders in CBD as they have as beneficiaries in the [COMPANY], to two sets of costs of independent professionals. I understood the parties ultimately to be agreed that it would be desirable for the [NAME] to be appointed as trustees of the [COMPANY] so that they could bring their knowledge in their capacity as [NAME] of CBD to bear on any complications that might arise if there has been an intermingling of the affairs of the [COMPANY] with the affairs of CBD in its own right. Whilst the possibility of there being a real prospect of a conflict of duties cannot be discounted, it should not be assumed. It will be open to the [NAME], both in their capacity as [NAME] and in their capacity as trustees, to seek directions if such difficulties arise. 7 Ultimately, the parties were on common ground that the [NAME] should be appointed as trustees of the [COMPANY]. Notice was given to the beneficiary of the [COMPANY], who was not represented in the proceedings before me, of the application for removal of the trustee. There was no appearance for that beneficiary. 8 There is no question as to the power to appoint the [NAME] as new trustees in substitution for CBD (Trustee Act 1925 (NSW), s 70(1), (2) and (3)). I will make a consequential vesting order to vest the property held by CBD in its capacity as trustee of the [COMPANY] in the [NAME] to be held by them on the trusts of the [COMPANY] (s 71(1)). 9 The only other outstanding issue concerns the costs of the second, third, fourth, fifth, sixth and seventh [NAME] in proceedings 2515 of 2006. They were joined by an order made by Barrett J on 29 June 2006. His Honour directed that the amended originating process be further amended to join as [NAME] all persons whose proofs of debt were challenged in the proceedings. Those [NAME] took an active role in opposing the relief sought by the [NAME]. They submit that the effect of the settlement between the [NAME] and the [NAME] is that the [NAME] effectively failed in their claims. The substantial claims challenging the validity of the resolutions at the second meeting of creditors have been dismissed. 10 Although the [NAME] did not pursue their claims, and consented to the dismissal of the relevant paragraphs of the originating process, it was clear from the evidence adduced that there were at least substantial questions as to the accuracy of proofs of debt lodged on behalf of the second, third, fourth, fifth, sixth and seventh [NAME] at the second meeting of creditors. [ADDRESS] will not try the case to determine questions of costs. I am not in a position to decide, and I was not invited to decide, how the action would have fallen out had matters been litigated to a conclusion. I do not conclude that the [NAME] acted unreasonably in instituting the proceedings, just as I do not conclude that the [NAME] acted unreasonably in defending them. The proper exercise of the discretion as to costs in such circumstances is usually that there be no order as to costs of the proceedings (Re Minister for Immigration and Ethnic Affairs; ex parte [NAME] (1997) 186 CLR 622 at 624-625). 11 This position is qualified where one party has effectively capitulated to the demands of the other ([COMPANY] v Commissioner of Taxation (2000) 101 FCR 548 at 553 [6]). 12 I do not consider that I should treat the orders consented to by the [NAME] as a capitulation or surrender. Circumstances may have changed from the institution of the proceedings simply by the passage of time. The [NAME] could reasonably have taken the view that what they sought to achieve by the deed of arrangement which they propounded could in substance be achieved by the [NAME] using the information that emerged in evidence in the course of the proceedings. 13 In my view, this is not a case in which departure from the general rule that there should be no order as to the costs of the proceedings where both parties have acted reasonably in commencing and defending proceedings and their conduct continued to be reasonable until the litigation was settled. 14 For these reasons I make the following orders:

1. Order that [NAME] and [NAME] of Level 6, [ADDRESS], Surfers Paradise, Queensland, be appointed as trustees of the [COMPANY], established by a trust deed dated 6 May 2002, in substitution for [COMPANY] (in liquidation).

2. Order pursuant to s 71 of the Trustee Act 1925 (NSW) that the property held by [COMPANY] (in liquidation) on the trusts of the [COMPANY] be vested in [NAME] and [NAME] to be held by them on the said trusts.

3. Order that there be no order as to costs as between the [NAME] and the second, fourth, fifth, sixth and seventh [NAME] to the intent that each party pay its, his and her own costs of the proceedings.

4. The second further amended originating process be otherwise dismissed.

5. Exhibits may be returned after 28 days.

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