Trustee Ordered to Compensate for Losses Caused by Failure to Act

FEDERAL COURT OF [COMPANY] v [NAME] [2007] FCA 1830

CORPORATIONS – winding up – trustee company – duties of [NAME] – finding a new tenant for trust property

[COMPANY] (in liq) and the Companies Act, Re [1977] 1 NSWLR 664 [NAME] v [COMPANY] (in liq) [1996] 22 ACSR 765 [COMPANY] (in liq), Re [1991] 24 NSWLR 674 IN THE [COMPANY] (IN LIQUIDATION) [COMPANY] (as trustee for the [COMPANY]) v [NAME] (as [NAME] [COMPANY] (IN LIQUIDATION)) VID 1038 of 2005

FINKELSTEIN J

23 NOVEMBER 2007

MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VID 1038of 2005

IN THE [COMPANY] (IN LIQUIDATION) BETWEEN: [COMPANY] (as trustee for the [COMPANY])

Plaintiff

AND: [NAME] (as [NAME] [COMPANY] (IN LIQUIDATION))

Defendant

JUDGE: FINKELSTEIN J

DATE OF ORDER: 23 NOVEMBER 2007

WHERE MADE: MELBOURNE

THE COURT ORDERS THAT:

1. The defendant pay to the plaintiff compensation in the sum of $29,047.33. 2. There be no order for costs. 3. The defendant's right of indemnity be limited to one half of his costs of this proceeding. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VID 1038 of 2005

Plaintiff

AND: [NAME] (as [NAME] [COMPANY] (IN LIQUIDATION))

Defendant

JUDGE: FINKELSTEIN J

DATE: 23 NOVEMBER 2007

PLACE: MELBOURNE

REASONS FOR

JUDGMENT 1 "If judged purely from the perspective of hindsight it would seem that something has gone seriously amiss in the conduct of this winding up": so remarked counsel for [NAME] in his closing submissions. The first question in issue is whether or not the responsibility for what went wrong lies with [NAME]. If it does, the second question is to what extent should [NAME] bear the loss that has been suffered. 2 The facts, for the most part, are uncontroversial. [COMPANY] (in liq) owed $69,132.13 to the [NAME] (NSW). The debt was for land tax and parking space levies. As the debt was not paid the Chief Commissioner applied to have [NAME] wound up in insolvency. On 27 August 2004 [NAME] was wound up and [NAME] was appointed [NAME] for the purposes of the winding up. 3 Within a month of the winding up order, [NAME] had received the following information: [NAME] was solvent; the company was the registered proprietor of two commercial properties in Sydney each worth approximately $3 million; and the properties were held on trust for the [COMPANY]. [NAME] was also told that [NAME] owed approximately $1.5 million to the Commonwealth Bank of Australia ([NAME]) and had few other debts. 4 The discretionary trust was established by a deed dated 12 December 1995. The deed conferred power upon a person designated as "appointor" to remove the trustee and appoint a [NAME]. On 28 February 2005 the appointor removed [NAME] as trustee of the discretionary trust and replaced it with [COMPANY], the plaintiff. [NAME], who was a director of both [NAME] and [NAME], wrote to [NAME] on 1 March 2005 informing him of the change in trustee. In that letter [NAME] advised that solicitors were in the process of preparing documentation so that the properties could be transferred from the old trustee to the [NAME]. 5 When the liquidation of [NAME] commenced there was a tenant in each property. Following his appointment [NAME] contacted the tenants and directed them to pay to [NAME] the rent due under the lease. In his letter of 1 March 2005, [NAME] also demanded that [NAME] account for the rent less any amount that might be due to creditors. 6 [NAME] replied to [NAME] saying that he would obtain legal advice before deciding what to do. He took the opportunity to remind [NAME] that he ([NAME]) had not yet received the books and records of [NAME] and that [NAME] had not prepared and submitted a report as to the affairs of the company. 7 No matter what advice [NAME] received he could not for practical reasons transfer the title to the properties to [NAME]. The properties were mortgaged to the [NAME] to secure not only the loan of $1.5 million to [NAME] but also other facilities totalling approximately $1 million which the [NAME] had granted to other companies controlled by [NAME]. The winding up order was an event of default under each of the facilities with the result that the debts to the [NAME] were due and payable. Moreover, from 1 March 2005 the [NAME] began charging penalty interest on its facilities. 8 The [NAME] had informed [NAME] that it was prepared to "restructure" the facilities if certain conditions were met. The conditions included the removal of [NAME], the provision of financial information about [NAME] and the other borrowing companies, the provision of copies of the leases for the properties and valuations being obtained presumably to show that the properties would be adequate security for the "restructured" facilities. 9 In those circumstances [NAME] could hardly give up the properties without seeing the [NAME] paid out. It was not suggested that it would have been appropriate to transfer the properties subject to the [NAME] mortgage. 10 In the event, it was not until around 18 August 2005 that the [NAME] decided to "restructure" the loans and not until 26 August 2005 that it advised [NAME] that it consented to the transfer of the properties to [NAME]. Only at that point could [NAME] consider a transfer of the properties. 11 Five days after the [NAME] indicated it would consent to the transfer, that is on 31 August 2005, [NAME] brought this application. It sought relief of three kinds: first, an order for the transfer of the properties to [NAME]; second, payment of the rent in [NAME]'s hands; and, third, damages for loss suffered by the discretionary trust since March 2005, being the time it was alleged [NAME] should have transferred the properties. 12 [NAME] adopted the position that until he could establish the liabilities that had been incurred by [NAME] in its capacity as trustee of the discretionary trust he was not obligated to transfer the properties because of the trustee's lien. There was also the question of [NAME]'s costs which were to come out of the assets under his control. 13 I accept that one difficulty confronting [NAME] was that [NAME] had not handed over the company's books and records and that made it difficult to assess the liabilities of [NAME]. The problem was that most of the company's books had been lost when [NAME] changed residences. Still, [NAME] had been in liquidation for almost a year and little was being done to finalise the liquidation. It is true that [NAME] had been told by [NAME] that an application would be made to stay the liquidation on the basis that the company was solvent. But that had been threatened as early as August or September 2004, and no application had been forthcoming. So at some point, and that point was well before August 2005, [NAME] should have got a move on. After all, sooner or later [NAME] had to ascertain the company's liabilities. The task was never going to be difficult. The liquidation was a simple affair. Only two persons ultimately claimed to be creditors. There were no other claims and there were no assets that had to be got in. The only thing that engaged [NAME] was collecting the rent and arguing with [NAME]. 14 The delay in progressing the liquidation is highlighted by the fact that it was not until 3 February 2006, some seventeen months after the litigation commenced, that [NAME] advertised for creditors. Only two creditors lodged proofs. Each was a trumped up claim. [NAME] explained to [NAME] why neither proof should be admitted. [NAME] accepted the explanation and rejected the proofs. No appeal was taken from [NAME]'s decision. 15 While this was going on, steps were being taken in the action. On 15 September 2005 an order was made permitting [NAME] to execute on behalf of [NAME] a transfer of the properties to [NAME]. The order was made in anticipation of the provision by [NAME] of a bank guarantee in favour of [NAME] to cover [NAME]'s costs and expenses to that date and to meet any liabilities of [NAME]. There followed a series of communications between [NAME] and [NAME]'s office about the form of the guarantee. By letter dated 12 October 2005, [NAME]'s solicitor estimated that [NAME] then held approximately $203,308 in the winding up. On the basis that the bank guarantee should cover, dollar for dollar, any funds that were to be transferred by [NAME] to [NAME], the solicitor suggested the guarantee should be in the order of $200,000. A further letter from the solicitor dated 21 October 2005 stated that the bank guarantee should include allowance for further anticipated legal fees and that in any event approximately $224,000 will have been paid to [NAME] by the time the guarantee is delivered and title to the properties is transferred. A series of emails then passed between the parties in November 2005, in which counsel for [NAME] informed [NAME] that a dollar for dollar bank guarantee would be provided and asked for confirmation of the exact amount being sought by [NAME]. 16 The matter came back to court on 13 December 2005. Following argument on the appropriate amount of the bank guarantee, I made orders approving the transfer of the properties upon [NAME] undertaking to provide to [NAME] an unconditional bank guarantee requiring the bank to pay [NAME] upon demand a sum of up to $225,000. There was a further undertaking to procure a guarantee for an additional $40,000 if ordered to do so, which was designed to cover legal costs [NAME] might incur in any prospective legal battles in the winding up. 17 The guarantee for $225,000 was provided on 12 January 2006. Still the properties could not be transferred to [NAME]. The reason was that the [NAME] had not finalised the restructure of the loans. It was not until May or June 2006 that the new facilities were in place and the transfers could be effected. They were transferred immediately. 18 Although there was delay in the transfer until the [NAME] had finalised the new loans, [NAME] was receiving the rents with the consent of [NAME]. It had been in receipt of rent since around November 2005. Even before then [NAME] had paid to [NAME] some of the rent he had received. The payments were made to enable [NAME] to meet its obligations. 19 On these facts [NAME] claims that [NAME]'s delay caused the discretionary trust to suffer two heads of loss. The first claimed loss is the difference between the normal interest that was payable on the loan to the [NAME] and the default interest that had been charged between 1 March 2005 and April 2006. That claim must fail. [NAME]'s delay in finalising the liquidation was both inordinate and inexcusable, it did not delay the restructure of the loans. Nor did [NAME] act unreasonably while negotiating the terms of the bank guarantee. 20 The second claim is for loss of rent. To explain this claim I need to backtrack a little. Immediately after his appointment [NAME] learnt that [NAME] owned two properties. Each was a floor in a building at 221 [NAME], North Sydney. Within a month [NAME] had completed an initial investigation into the affairs of [NAME] and was of the view that the company was solvent, having an estimated surplus of assets of approximately $4.3 million. This estimate was based on the combined value of the properties being approximately $6 million. That was a reasonably accurate estimate for commercial properties returning a rent of approximately $480,000 per annum. So far as the creditors were concerned only three were identified at the time: the [NAME] for $1.5 million, the [NAME] (whose debt had in fact been paid by [NAME]) and a claim by the body corporate for $120,000 which was ultimately rejected by [NAME]. [NAME] had also been informed, and had no reason to doubt, that the properties were held on trust for the discretionary trust. 21 On those facts, it would have been clear to [NAME] that sooner or later the properties would be transferred to the [NAME]. This put [NAME] in a special position of responsibility. Not only was he required to carry out the normal duties of a [NAME] he had to act "in a responsible way" as regards the trust property: [COMPANY] (in liq) and the Companies Act [1977] 1 NSWLR 664, 672. What that involves must, of course, depend upon the circumstances: Re [COMPANY] (in liq) [1991] 24 NSWLR 674, 688. In many circumstances, including the present, the duty requires [NAME] to take action to preserve and protect the trust property: [NAME] v [COMPANY] (in liq) [1996] 22 ACSR 765, 783. Where the trust property includes land the trustee is ordinarily under a duty to make the land productive, which requires the trustee to make reasonable efforts to lease the property if it is vacant: 3 Scott on Trusts (5th ed, 2007) § 17.13. 22 Here I am satisfied that [NAME] failed in his duty. I have already mentioned that when the liquidation commenced the properties were tenanted. As [NAME] knew, the lease for level 4 was due to expire on 15 June 2005. But he took no step to find a new tenant. [NAME] said he took no step to find a tenant because he believed that [NAME] would soon make an application to the court to regain control of the properties. I think the reality is that [NAME] simply did not turn his mind to what he should do with the properties. Even if he had it would have been apparent that although [NAME] had been threatening for months to take action to recover the properties he was in fact doing little more than writing letters. It was not appropriate for [NAME] to let matters stand, especially as the term of the tenancy was running out. 23 At one point I was inclined to the view that [NAME] might be saved because it was not until May 2005 that he was provided with positive proof that the properties were held on trust. In the end, however, I do not accept this is a sufficient basis to justify [NAME] doing nothing. He had been told from the beginning that the properties were held on trust. There was no reason to disbelieve what he had been told and that in due course it would be verified. [NAME] provided that verification. Some information was given on 8 March 2005 when [NAME] forwarded to [NAME] a statement of affairs and a pro forma balance sheet for the discretionary trust. Even if he had some reservation beforehand [NAME] had no reason to doubt from that point that the properties were held on trust. 24 In the end it was [NAME] who took action to find a tenant, albeit without having the authority to do so. On 5 May 2005 he approached an experienced real estate agent, [NAME], and asked her to find a tenant. An agency agreement was executed on 19 May 2005. [NAME] found two tenants each willing to take a lease of part of level 4. One lease commenced on 15 September 2005 and the other on 31 October 2005. The aggregate rent payable by the tenants is $14,523.67 per calendar month, inclusive of GST. This was less than the rent paid by the outgoing tenant but, as [NAME] explained, the rental market had dropped away. 25 There can be no doubt that if an estate agent had been retained to find a tenant well before 19 May 2005 a tenant would have been found to take over the property in mid-June. [NAME] said that the lettable area of level 4 was 492 square metres and for an area of that size the standard practice is to begin looking for a tenant between six to nine months before the tenant is needed. She explained that a tenant wanting to move into such a large space usually looks about nine months ahead. [NAME] confidently said that if she had been retained in January 2005 there was an "extremely good" chance of getting a tenant to take possession on 15 June 2005. What ultimately transpired bears this out. 26 [NAME]'s failure to make the trust property productive has resulted in a loss to the discretionary trust of two months rent. [NAME] will be ordered to make good that loss. 27 It was put that [NAME]'s failure to protect the trust property should deprive him of the costs and expenses to which he would otherwise be entitled. I do not agree. Once the loss of rent is made good, there is no reason to deprive [NAME] of the costs for the work he has done. 28 The costs of the action fall into a different category. I think they should lie where they fall. Each side has had a measure of success and it would be unfair to make any party pay the costs of the other. To give effect to this ruling requires an order that [NAME] be indemnified out of the trust assets for only one half of his costs. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Associate: Dated: 23 November 2007 Counsel for the Plaintiff: [redacted]

Solicitor for the Plaintiff: [redacted]

Counsel for the Defendant: [redacted]

Solicitor for the Defendant: [redacted]

Date of Judgment: 23 November 2007