OLDE AND ANOR RE PROPESTATE PTY LTD (IN LIQUIDATION [2009] NSWSC 859 (27 August 2009)

Last Updated: 2 September 2009

NEW SOUTH WALES SUPREME COURT

CITATION:
OLDE AND ANOR RE PROPESTATE PTY LTD (IN LIQUIDATION [2009] NSWSC 859


JURISDICTION:


FILE NUMBER(S):
1366/09

HEARING DATE(S):
14 August 2009

JUDGMENT DATE:
27 August 2009

PARTIES:
Olde and Anor
Propestate Pty Ltd (in Liquidation)

JUDGMENT OF:
Bryson AJ

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable



COUNSEL:
Mr M Rosenblatt (Solicitor) - Plaintiffs
Mr AP Lo Surdo - Intervenor - Commissioner of
Fair Trading
Mr T Orlizki (Solicitor) - Intervenor - Creditor

SOLICITORS:
Somerset Ryckmans
Valerie Griswold Legal Services Office Fair Trading
Kent Attorneys


CATCHWORDS:
TRUSTS AND TRUSTEES - Liquidators and Trust Accounts of Company - Company held Real Estate Agents Licence and maintained Trust Accounts - Liquidators took control of Trust Accounts, identified persons entitled and paid over moneys to which there were identifiable entitlements - Liquidators applied for remuneration as Trustees out of remaining moneys for which there were no claimants - remuneration allowed
CORPORATIONS - Liquidation - Liquidators as Trustees of money in Company's Trust Account - remuneration allowed

LEGISLATION CITED:
Property, Stock and Business Agents Act 2002


CASES CITED:
Re G B Nathan & Co Pty Limited (In Liq.) (1991) 24 NSWLR 674
Re Berkeley Applicate (Investment Consultant Centre) Ltd (In Liq.) [1988] 3 All ER 71
Re Application of Sutherland [2004] NSWSC 796
Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd and Ors (2004) NSWSC 1224
Shannon and Anor v JMA Accounting Pty Ltd (2005) QSC 240
Re Lord (as Liq of Maureen Michael Management Pty Ltd (in Liq) [2005] NSWSC 1044; (2005) 55 ACSR 539

TEXTS CITED:


DECISION:
1 Orders 1 to 10 inclusive in the Originating Process.
2. Liberty to apply



JUDGMENT:

- 11 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
Corporations List
File No: 1366/09

BRYSON AJ

Thursday, 27 August 2009


THE APPLICATION OF OLDE AND ANOR

RE: PROPESTATE PTY LTD (IN LIQUIDATION

JUDGMENT

1 BRYSON AJ: The Plaintiffs Mr Olde and Mr Adams were appointed administrators of the Company by its directors on 14 February 2008, pursuant to section 436A(1) of the Corporations Act 2001 (Cth). At the same time they became administrators of two related companies, J and J Potten Holdings Pty Ltd and J and J Potten Pty Ltd. On the same day Mr Jason Potten, a principal figure in the affairs of the companies, became a bankrupt. Mr Potten was not a director of Propestate, although he conducted himself much as if he were. He was the director of the other two related companies. Propestate operated a real estate agency under the Raine and Horne franchise, with business offices at Castle Hill, Dural and West Pennant Hills. The business included a sales agency and also property management or rent rolls. The administrators were highly active, and took control of affairs and sold the business within a few days. Early investigations indicated that the Company’s debts were altogether overwhelming, principally debts which were or purportedly were secured. The administrators reported that they did not get appropriate assistance from directors. The Company’s obligations to keep written financial records have not been complied with and the records which the administrators recovered are largely incomplete. They reported

“...No meaningful financial statements (have) been recovered relating to the trading operations of the Businesses”

2 The administrators made a comprehensive report to creditors dated 12 March 2008 and the creditors appointed the administrators as liquidators by a resolution at the creditors meeting under section 439A on 20 March 2008. In their report tabled before the creditors the administrators estimated realisable values at negative $5,223,461. Estimated liabilities to unsecured creditors, trust account creditors and employees totalled $1,344,000; about ten times the estimated realisable value of assets, but these figures were completely overwhelmed by an estimated secured creditor shortfall of $3,714,461. Two factoring companies had or claimed securities relating to factoring sales commissions. It was the view of the administrators and they reported that commissions on non–existent sales had been fraudulently factored to the value of approximately $3.85 million.

3 This application relates to one part of this complex and disastrous liquidation. As a licensee under the Property, Stock and Business Agents Act 2002, the Company was obliged to comply with Part 7, Trust Account, and pay money received by or on behalf of any person in connection with the business into the trust account (whether general or separate) at a bank (or other authorised deposit taking institution): See particularly section 86. The administrators found ten trust accounts operated by the company and the related companies, at St George Bank and the ANZ Bank; most were overdrawn or contained insignificant sums but four had significant credit balances. The administrators opened an account at Macquarie Bank into which they paid moneys coming under their control, including moneys in the trust accounts. As appropriate records had not been kept it was not easy to identify entitlements to funds in what were described as trust accounts; however, the administrators, later as liquidators, were able to identify, and acknowledged and paid out a number of entitlements to these funds. To take the simplest example, one of the trust accounts contained only a deposit relating to one identifiable transaction: when the transaction was completed these funds were accounted for. A number of other entitlements were identified and paid out: so that $148,220.82 was collected as recognisably proceeds of trust accounts, and paid into Macquarie Bank in February 2008, and after payment of claims (and also collection of interest and payment of bank fees) there was a closing balance on 31 October 2008 of $45,127.04. The liquidators hold the fund which now represents that credit as trustees: this is clear because they found and took control of money in accounts which were designated as trust accounts, kept by a licensee with a statutory obligation to keep trust accounts: so the liquidators themselves are trustees of these funds. However, they, after making efforts and expending considerable time and work, have not been able to identify the beneficial owners of the remaining amount.

4 There are a number of classes of people who in concept might be beneficial owners: landlords entitled to rent paid to the agents, purchasers entitled to deposits they had paid on projected sales which had not been exchanged, vendors for deposits paid on sales which had been exchanged: with stakeholder obligations. Then too, in concept the Company might be entitled to a charge on a deposit for commission when earned, and a factoring company might be entitled to a charge on that. There may be other classes. In the time which has passed it can for practical purposes be assumed that anyone who is in a position to claim to be the equitable owner of these funds and to show how his rights can be traced to a particular part of them would have to come forward and stated his claim to liquidators. It is still conceivable that someone exists who is able to show entitlement to some of the funds: but this is very unlikely.

5 The applicants asked the court to order that remuneration be paid to them from these funds. They asked the court to determine the amount of the remuneration; I am not engaged in determining the amount, which should be established by a reference to the Registrar for assessment. The applicants proposed detailed procedural arrangements relating to that process of assessment. However what is involved in principle and what I am addressing is the question whether the court should exercise its powers as a court of equity with general supervision over trust property and trustees to order and allow remuneration, and whether the remuneration should fall on the funds remaining in the hands of the trustees, that is the part of the proceeds of the Company’s trust accounts for which equitable owners have not been identified.

6 An underlying assumption, which I do not question, that is these funds are not assets in the liquidation out of which the court can allow liquidators remuneration. Two persons intervened in the application, by leave. These persons have not contended or undertaken to prove that they have any identifiable right to any part of the fund. I cannot see from the facts before me how they could prove such a thing, but if they wanted to do so, they would have to take much more concrete action than simply opposing payment of the remuneration out of the funds; they would have to make some positive approach to the Court for ascertainment and enforcement of an entitlement to part of the fund, and if they succeeded that would give reality to the question of what the Court should do in the competition between an interest they can establish and the claim of a trustee to remuneration. That however, is not what is before me. If this remuneration is not allowed, the liquidators’ claim for remuneration will fall against the assets of the company in the liquidation, which will be altogether inadequate to meet the liquidators’ time-based work charges, fees and expenses. Indeed, there will be a significant shortfall even if the whole of the remaining fund related to the trust accounts is available as remuneration.

7 These interveners responded to a published notice relating to this application and directed to:

“creditors who may have a stake in trust accounts previously maintained by Propestate...”

The first intervener is the Commissioner for Fair Trading of the Department of Commerce, who is responsible amongst many other things for the administration of the Property Services Compensation Fund under Part 10 of the Property, Stock and Business Agents Act. The Commissioner received many claims against the Compensation Fund by persons to whom Propestate had failed to account for money which if there had been compliance with the legislation by the licensee would have been found in a trust account when the administration commenced, but was not. Many of these claims were for a balance of several thousand dollars, which probably related to collection of rent, but there were several for considerably larger amounts which probably relate to deposits. A schedule shows 78 claims, most of which were paid in full, some of which were paid in part, the total of the payments being $444,739.38.

8 Under section 177 the Crown is subrogated to all the rights and remedies of a claimant against a company or against any other person. This of course, places the Crown in a position (at the lowest) of an unsecured creditor in the liquidation in respect of claims which have been paid, but it also entitles the Crown to any equitable proprietary interest which could be shown to exist in the funds derived from the trust accounts now held. The Commissioner is not attempting or proposing to embark on proving subrogation to any equitable propriety entitlement. I infer that this should be attributed to an understanding that if the Commissioner devoted time and money he is unlikely to find out any more about ownership of the fund than the applicants have been able to do in the course of their activities since February 2008. If this is the view that is taken, it is hardly surprising. There are other powers conferred by the Act on the Commissioner which could in concept have been exercised: the Commissioner is empowered by Part 9 of the Act to appoint a manager for a licensee’s business where there may have been a failure to account, and may apply to the court for the appointment of a receiver under Part 9, Division 3. It was open to the Commissioner to take these courses but left control of the trust accounts, and resolution of the problems relating to them, were left in the hands of the applicants: as well the Commissioner might do. The other intervener Cashflow Advantage Pty Ltd, formerly Paidonexchange.com.au Pty Ltd was the smaller creditor of the two factoring companies and claims entitlement over commissions earned on the sale of seven properties which the Company assigned to Cashflow Advantage. Where money is held in the trust account as a deposit and a commission accrues due, Cashflow Advantage could claim that the money in the trust account representing the commission was held in trust for it, under an assignment which formed part of its factoring arrangements. However Cashflow Advantage does not undertake to identify an interest of its own in any part of the funds out of which the applicants seek remuneration.

9 Leave to intervene in proceedings is discretionary: there was no entitlement or right to be heard as a matter of procedural justice. The intervenors do not undertake to prove any entitlement.

10 The first contention on behalf of the Commissioner was to the effect that the work relating to the trust accounts when properly analysed was undertaken in general administration of the voluntary administration and liquidation, and should be remunerated under the general administration. I do not accept this because evidence on behalf of the applicants shows that, subject to examination in detail, there is much work which related only to the trust accounts and to identification and protection of interests in the trust accounts and I see no reason why the trust accounts should not bear the burden of any work identifiably related to them.

11 It was then contended that for discretionary reasons the liquidators should not be granted the relief they seek. In relation to the plaintiff’s claim, and the discretionary considerations put against it, I was referred to a number of authorities in which the allowance of remuneration to trustees has been considered. Several of these decisions relate to remuneration of an administrator or liquidator where the applicant has actually administered trust funds. These are Re G B Nathan & Co Pty Limited (In Liq.) (1991) 24 NSWLR 674 (McLelland J) where his Honour said to the effect that it will normally be appropriate to make an allowance to the liquidator out of trust assets, and referred to Re Berkeley Applicate (Investment Consultant Centre) Ltd (In Liq.) [1988] 3 All ER 71 (Deputy Judge Nugee QC).

12 In deciding as he did, Deputy Judge Nugee followed modern English authority about remuneration out of trust property, which had departed from a much older position of great reluctance to make allowances to trustees. A detailed review of the approach of courts, in England and New South Wales, was made in Re Application of Sutherland [2004] NSWSC 796 (Campbell J). Relatively greater readiness of the court in New South Wales to allow remuneration is of very long standing, the oldest authority referred to being a decision of the year of 1870.

13 The conclusions reached by Campbell J are held generally; see Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd and Ors (2004) NSWSC 1224 (Barrett J), Shannon and Anor v JMA Accounting Pty Ltd (2005) QSC 240 (Wilson J). Reality requires ready acceptance of the need to allow remuneration to professional persons who act as trustees. Leaving to one side simple cases of sheer benefaction, trusts in any commercial context are better handled by professional people such as chartered accountants, solicitors or trustee companies than left to people who undertake the work without being paid for it. Specifically where liquidators incur trust liabilities by managing trust funds held by companies in liquidation, the interest of whoever may be entitled to the trust funds, and the interests of good administration of trust assets require that the court not have a disposition against remunerating them. If liquidators are left to work for nothing, or think they may be, trust funds are unlikely to be managed properly. No-one would be happy to hear that the administrators had learnt that the bank accounts were trust accounts and just left them alone and done nothing about them. I would not be.

14 In Re Lord (as Liq of Maureen Michael Management Pty Ltd (in Liq) [2005] NSWSC 1044; (2005) 55 ACSR 539, Young CJ in Eq considered the remuneration of a liquidator who comes to administer trust assets. His Honour recognised the discretionary nature of the court’s power and discussed some matters relevant to the exercise of discretion. In my opinion the judgment illustrates that the court acts with care, considers appropriate discretionary matters and does not follow unconsidered routine: but there is no hostility or general reluctance to paying liquidators for work they do.

15 Counsel contended that it was an adverse consideration that the application was not made early in the administration of the trust. This is a consideration adverse to the application, but not one of much weight, in my judgment. The administration was not one which was to continue for some years, and a better course was to attend to the practicalities about people’s entitlements.

16 Counsel also contended that when I have regard to section 86(1)(a), allowance of remuneration competes with the policy of that provision. Section 86(1)(a) provides

86 Trust money to be paid into trust account

(1) Money received for or on behalf of any person by a licensee in connection with the licensee’s business as a licensee:

(a) is to be held by the licensee or if the licensee is

employed by a corporation) by the corporation,
exclusively for that person,

The direction that the money is to be held exclusively for that person is a legislative direction to the licensee who is to hold it. It is not a statutory exemption of the money from the general powers of the court in exercising its jurisdiction over trusts and trustees: Counsel did not content that it is. The whole question of the costs of management by a trustee who succeeds to a licensee is not dealt with by section 86(1)(a).

17 Counsel also contended to the effect that the proportionality of the burden on the money in the trust account with the remuneration claimed is an adverse consideration. The remuneration claimed exceeds the amount of money now in the fund derived from the trust account. However, it does not exceed the whole fund, the greater part of which has been distributed to those of the beneficial owners who are identifiable. It is not surprising that the burden of expense was heavy, having regard to the disordered state of affairs which the administrators found at the outset. There were also observations adverse to the quality of the applicants’ work and inquiries for which I do not see any just basis in the evidence.

18 Any question of proportionality which calls for consideration relates to this topic. The only part of the trust account moneys left is the part of which the owners can not be identified: all of it, or as much as the Registrar assesses, will be used for remuneration, while none of the burden of remuneration will fall upon those who were entitled to funds, were identified and received their funds. I see the significance of proportionality, but in the present case it is outweighed by pragmatism; the burden is to fall on part of the fund for which no owner has been identified and no one offers to prove entitlement: no one can be identified who is disadvantaged by the absence of this proportionality.

19 The probable outcome of only allowing a proportion of the remuneration against this part of the fund would be that a residue fund would remain unclaimed for many years to be dealt with eventually as unclaimed moneys. I see no advantage in this course.

20 Submissions by the solicitor for Cashflow Advantage presented a further review of considerations said to be adverse to a discretionary decision in favour of the application. These contentions followed a generally similar course to those put on behalf of the Commissioner, except that they were presented with markedly more pejorative tone and expression.

21 Overall my conclusion is that the allowance of remuneration to the applicants is appropriate, and further it is appropriate that their remuneration should be charged against the remaining balance so far as it extends. I do not find anything in what the applicants have done which is significantly adverse to an allowance of remuneration: if anything my conclusion is that their attention to the trust fund and their energy should be commended.

22 I propose to make the orders claimed.

Orders:

1. Orders 1 to 10 inclusive in the Originating Process.

2. Liberty to apply

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LAST UPDATED:
1 September 2009