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Helena Hu v PS Securities Pty Ltd as trustee of the Joseph Family Trust& anor [2011] NSWSC 98 (2 March 2011)
Last Updated: 14 April 2011
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Case Title:
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Helena Hu v PS Securities Pty Ltd as trustee of the
Joseph Family Trust & anor |
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Medium Neutral Citation:
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Hearing Date(s):
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Decision Date:
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Jurisdiction:
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Decision:
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Catchwords:
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PROCEDURE - application for freezing order under
rule 25.11 of the Uniform Civil Procedure Rules - effect of lodgement of proof
of
debt on ability to claim a right of subrogation to former trustee's right of
indemnity out of trust assets to meet judgment debt
- whether plaintiff has
standing to maintain such a claim - HELD -sufficiently arguable case as to
existence of right of subrogation
- reasonable apprehension of risk or
dissipation of assets - freezing order granted |
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Legislation Cited:
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Cases Cited:
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Texts Cited:
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Austin & Black's Annotations to the Corporations
ActFore & Austin's Principle's of Corporations Law (7th edn) |
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Category:
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Procedural and other rulings |
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Parties:
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Helena Hu (Plaintiff) PS Securities Pty Ltd as
Trustee of the Joseph Family Trust (First Defendant) Alphena Pty Ltd (in liq)
(Second Defendant) |
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Representation
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Counsel: M W Young with S O'Brien
(Plaintiff) B Skinner (First Defendant) |
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- Solicitors:
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Solicitors: Dixon Holmes du Pont Lawyers
(Plaintiff) Sally Nash & Co (First Defendant) |
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File number(s):
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Publication Restriction:
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Judgment
- Before
me on 22 February 2011 was an application brought by Ms Helena Hu by notice of
motion filed 14 January 2011 for a freezing
order under rule 25.11 of the
Uniform Civil Procedure Rules against PS Securities Pty Ltd (PS
Securities) as trustee of the Joseph Family Trust, in order to preserve
sufficient assets of the
trust (pending the determination of an application that
is to come before the Court on 25 March 2011 in relation to the bringing
of
proceedings by Ms Hu against PS Securities seeking to recover trust assets) to
meet a District Court judgment debt in her favour
obtained against the former
trustee of the said trust (Alphena Pty Limited). The application was brought on
the basis of an apprehension
by Ms Hu that steps may be taken by PS Securities
which will have the effect of depriving Ms Hu of the benefit of the judgment
debt.
- At
the conclusion of the hearing of Ms Hu's application on 22 February 2011 I made
orders on an interlocutory basis as sought by Ms
Hu (on the usual undertaking by
Ms Hu as to damages), but granting liberty to apply on 3 days' notice to
discharge or vary the freezing
order. I indicated that I would publish my
reasons as soon as possible thereafter. These are those reasons.
Background
- On
20 November 2009, Ms Hu obtained judgment in the District Court against a number
of parties, including Alphena (the then trustee
of the Joseph Family Trust). In
relation to Alphena, Ms Hu had sought the recovery of moneys said to have been
advanced by her to
the company (but which Alphena maintained had been borrowed
by someone else). Sidis J ordered judgment for Ms Hu against Alphena
in the sum
of $419,176.62 and ordered that Alphena pay Ms Hu's costs of the proceedings on
an indemnity basis. The imposition of
an indemnity costs order was due to the
manner in which Alphena had defended the litigation (her Honour finding that it
had put forward
a knowingly false defence and had resisted requests for
production of documents - Helena Hu v Kathy Ho and Alphena Pty Ltd
(4115/2008)).
- At
the time of the District Court judgment, Alphena held various assets as the
trustee of the Joseph Family Trust, including land
on which there is a shopping
centre (the Land). Paul Joseph is the principal of Alphena and he is the
appointor of the Joseph Family
Trust under a deed dated 31 January 1995, as
amended.
- On
9 December 2009, shortly after the District Court judgment was handed down
against Alphena, PS Securities was registered. Mr Joseph
is a director and the
secretary of that company. On 30 December 2009, Ms Shirley Therese Joseph (whose
residential address is the
same as that of Mr Joseph) was appointed as a co
-director of PS Securities. On that date, PS Securities was appointed by Mr
Joseph
as co -trustee of the Joseph Family Trust pursuant to a Deed of
Appointment of Co -Trustee of the Joseph Family Trust. The recitals
to that Deed
included the statement that the appointor (Mr Joseph):
... has become aware of a possible adverse court decision and
having reviewed the deed establishing the trust has noted the possible
application of clause 8(8) that results in the office of trustee ipso facto
determined and vacated if the trustee makes any arrangement
or composition
generally, or enters into liquidation, or has a receiver or manager appointed,
or makes or enters into any composition
or scheme of arrangement with its
creditors.
- I
interpose to note that, insofar as the Deed of Appointment of Co -trustee
identified a "possible" adverse court decision, the recital
is somewhat
misleading, given that there had already been judgment delivered against the
company prior to the date of the Deed and
there being no indication of any other
possible adverse judgment to which the recital could have referred. It is also
not apparent
from the Deed the basis on which it seems to have been feared that
Alphena would, as a result of the court decision, be faced with
an insolvency
situation (particularly when around that stage the view seems to have been
formed by Mr Joseph's adviser, Mr Joseph
Lombardo, that the trust assets were
worth significantly more than the book value suggested and when they were not
long afterwards
substantially revalued upwards once the new trustee took control
of the trust). It might perhaps be inferred that Mr Joseph either
did not intend
to cause Alphena to pay the judgment debt or did not believe it was in a
position to do so and hence his concern at
this potential termination of the
office of trustee.)
- On
5 January 2010, a resolution was passed by the sole member of Alphena to wind up
that company and liquidators were appointed to
the company. Simultaneously,
Alphena ceased to act as a trustee of the Joseph Family Trust. (According to
Counsel for PS Securities,
Mr Skinner, the reason for the winding up of the
company at that stage was the issue of a statutory demand by Ms Hu in respect of
the judgment debt. There was seemingly no application to set aside that
statutory demand, nor was I told of any appeal from the decision
of Sidis J.)
- The
effect of this series of events was to leave the control of the trust assets
(including the Land) solely in the hands of PS Securities,
a new company of
which Mr Joseph and Ms Joseph were then the sole directors.
- On
13 January 2010, Ms Hu lodged a proof of debt with the liquidators of Alphena in
the amount of $558,912.85 in respect of the District
Court judgment. No little
significance is placed on this fact by Mr Skinner (on the basis of this
operating to merge the debt owing
to Ms Hu into a claim against whatever fund is
held by the liquidator on the winding up of the company for the general body of
creditors).
Hence, as I understand Mr Skinner's submission, this is relied upon
as precluding Ms Hu from seeking to recover the moneys owing
to her by any other
legal action against the company.
- On
2 March 2010, PS Securities was registered as the new proprietor of the Land and
on that day a mortgage was registered in favour
of NAB over the Land in the
amount of $1,850,000. (It does not seem to be disputed that the Land constitutes
the major asset of the
Joseph Family Trust.)
- It
is submitted by Counsel for Ms Hu (Mr Young) that the transfer of the Land to PS
Securities has resulted in Alphena being unable
to satisfy the judgment debt in
favour of Ms Hu obtained in the District Court proceedings (at least without
reference to any right
of indemnification out of the trust assets formerly held
by it) and this must be the case given that the liquidators of Alphena have
reported to creditors that the company has no assets.
- What
next occurred was a course of correspondence with the liquidators of Alphena
from August 2010 (when Ms Hu became aware that the
Land had been transferred to
PS Securities) through to late November 2010, in which the solicitors acting for
Ms Hu urged the liquidators
to take action against PS Securities in order to
recover the sum referable to the District Court judgment debt (in reliance upon
the trustee's right of indemnification in respect of that debt). That
correspondence included an offer on behalf of Ms Hu to indemnify
the liquidators
for the purposes of funding the issue of a demand on PS Securities and
subsequent litigation in relation to a claim
against it. That correspondence
(not, it must be said, favoured with a prompt response from the liquidators) led
to a qualified acceptance
of the funding offer but seemed to contemplate the
holding of liquidators' examinations before any decision to commence proceedings
(something Mr Young submits may be unnecessary given that Mr Joseph has already
given evidence in the District Court proceedings).
Ultimately, Ms Hu's lawyers
advised that she intended to commence a derivative suit.
- These
proceedings were instituted on 23 December last year with the filing of a
Statement of Claim. Ms Hu, as an unsecured creditor
of Alphena, asserts an
entitlement to be subrogated to Alphena's right of indemnity out of the trust
assets for the debt incurred
by Alphena in defending the District Court
proceedings on behalf of the Trust or to exercise on behalf of Alphena that
right of indemnification
in order to permit it to satisfy the District Court
judgment debt.
- On
7 February this year, Mr Lombardo (a former partner of KPMG) was appointed a
director of PS Securities. In his affidavit sworn
10 February 2011 on behalf of
PS Securities, Mr Lombardo deposed to an extensive period of experience "in
assisting clients advance
their businesses" and that he seeks to bring
"different parties together to create more profitable and economically
independent and
sustainable businesses". He deposed in general terms to
discussions with Mr Joseph as to business opportunities for the Joseph Family
Trust to expand its investment portfolio.
- This
affidavit, read on the application before me, is the only affidavit sworn
following the making of orders by Pembroke J as duty
judge on 19 January 2011
regarding the provision by PS Securities of an affidavit setting out the assets
of PS Securities with various
particulars of those assets. (Mr Young complains
that Mr Lombardo's affidavit fails to comply with those orders - in particular
that
it does not contain the information one would expect an experienced
accountant to provide as to the assets of the company and is
vague in the
limited information it does provide.)
- Mr
Lombardo deposed to the main assets of the trust including "an indirect interest
in a shopping centre that was acquired in 2003".
It is not clear to me how it is
that Mr Lombardo considered a property held by a company as trustee for the
trust would constitute
an asset in which the trust had an "indirect interest",
unless by that he is somehow referring to the interest of the beneficiaries
of
the trust (which ordinarily does not entitle them to a particular share of the
trust assets in specie but gives a right to compel
performance of the trustee's
obligations). In any event, Mr Lombardo was unable (despite his earlier due
diligence) to provide an
estimate of the value of the "indirect interest in the
shopping centre of the Joseph Family Trust" or the value of the property,
though
it seems to have been sufficient to permit a significant borrowing on the
security of the Land.
- Mr
Lombardo, in his affidavit, referred to the due diligence carried out by him in
October 2009 (ie before the arrangements pursuant
to which PS Securities became
a co -trustee) on Mr Joseph's financial resources and deposed that he had formed
the view that the
assets of Alphena (acting as trustee for the Joseph Family
Trust) were worth about $5m net equity (the June 2009 accounts produced
at the
commencement of the hearing of this application in answer to a notice to produce
instead reflected a negative net equity of
some $49,000).
- Mr
Lombardo also deposed to various discussions in October 2010 with one of the
liquidators of Alphena in which it would seem that
he was exhorting the
liquidator not to "abandon his duties in favour of a creditor" (I can only
assume this was in reference to the
demands that had been made by Ms Hu's
solicitors in respect of the institution of or investigation into the proceeding
against PS
Securities).
- Mr
Lombardo deposed generally to various new ventures that he was negotiating and
that he anticipated that "significant liabilities"
might arise if PS Securities
did not meet the (unidentified) obligations in relation to those new ventures
but it is not clear that
any such ventures have yet been concluded. He asserted,
again in general terms, that "significant damages will arise" to PS Securities
if it "fails to perform as has been planned for more than 12 months and if a
freeze order is made against it". (Mr Lombardo said
that he was prepared to
provide the Court and Counsel with more detailed information, but did not
publish further detail in his affidavit
as it was said to be "sensitive
commercial negotiations", thus again suggesting that nothing had been finalized
at that stage.)
- Mr
Lombardo's affidavit asserts that PS Securities "as Trustee for the Joseph
Family Trust will not be transferring, securing or dealing
with its property
other than in the ordinary course of its ordinary business".
- To
similar effect, an undertaking was proffered (on a without admissions basis) by
PS Securities which Mr Young conceded went some
way to curing the problem Ms Hu
faces. However, he took issue with the wording of the undertaking (which, it was
said, did not make
it clear with sufficient clarity what was prohibited). That
undertaking referred to the "property" of the trustee company. (It was
an
undertaking that the first defendant, as trustee of the Paul Joseph Family
Trust, not transfer or deal with its property other
than in the ordinary course
of business.) Mr Young submits that for such an undertaking to be acceptable it
would need to be absolutely
clear that what the undertaking covers is not simply
PS Securities' property but all trust assets as well.
- In
this regard, Mr Young submits that Mr Lombardo's affidavit does not make it
clear whether Mr Lombardo is actually acknowledging
PS Securities' ownership of
the shopping centre as a trust asset and says that there is sufficient doubt to
make the undertaking
proffered by PS Securities not suitable protection for Ms
Hu (since any contempt proceedings for breach of the undertaking or proceedings
to prevent either the transfer of the shopping centre or any further encumbrance
that would prevent the judgment debt being satisfied
would be left in doubt due
to the uncertainty of the scope of the undertaking).
- As
far as the liquidators are concerned, Mr Young submits that Mr Joseph has been
the sole source of information that the liquidators
have in relation to the
company. Certainly, as at August 2010, the liquidators appeared to have relied
on information provided by
him (a statutory declaration confirming that PS
Securities is the current and only trustee of the trust, for example, and a
signed
report from Mr Joseph that did not disclose any an interest in any real
property) although they appear also to have tested some of
Mr Joseph's
assertions (such as his advice that Alphena also traded in its own limited
capacity) against the documentary evidence
and tax returns, so it cannot in my
view be said that they have simply accepted at face value his assertions.
- Furthermore,
Mr Young points to evidence that suggests that the position of the liquidators
has been privately funded by directors'
contributions (presumably including
contributions by Mr Joseph). However, other than the suggestion that the
liquidators might have
been too 'credulous' of Mr Joseph's assertions, there was
no submission that the liquidators were not acting properly (if not as
proactively as Ms Hu might have wished in relation to the claim against PS
Securities).
Legal Principles
- As
Mr Young submits, a freezing order is justified where there is a danger or real
risk that a judgment or prospective judgment of
the court will be unsatisfied as
a result of the defendant or a third party dealing with or disposing of its
assets so as to frustrate
the court's process ( Uniform Civil Procedure Rules
25.11; Ninemia Maritime Corporation v Trave GmbH & Co KG (The
Niedersachsen) [1983] 1 WLR 1412 ; Cardille v LED Builders Pty Ltd (
[1999] HCA 18; 1999) 198 CLR 380 at [428] per Kirby J) . There is no need to prove that there
is an intent to do so, simply that the purpose or effect of so doing would be
to
frustrate or inhibit the court process.
- In
Ninemia the Court of Appeal in England [1983] 1 WLR 1412 confirmed (at
1422) that what must be shown in order to obtain a Mareva (or freezing) order is
that the plaintiff would suffer some
prejudice as a result of a dissipation of
assets in the event of the injunction being refused. Their Lordships said (at
1422):
In our view the test is whether, on the assumption that the
plaintiffs have shown at least 'a good arguable case,' the court concludes
on
the whole of the evidence then before it, that the refusal of a Mareva
injunction would involve a real risk that a judgment or award in favour of
the plaintiffs would remain unsatisfied.
- Their
Lordships expressly rejected the suggestion that there was a requirement to show
"nefarious intent" and did not consider that
a distinction between "object" and
"effect" was the right basis for providing the appropriate test.
- In
CSR Ltd v Cigna Insurance Australia Ltd (1997) 189 CLR 345 at [391], it
was said that "the counterpart of a court's power to prevent its processes being
abused is its power
to protect the integrity of those processes once set in
motion".
- Reference
was also made to in Coxton Pty Ltd v Milne (Unreported Judgment, 20
December 1985) where the Court of Appeal said that "without attempting to define
or to limit the extent of
the exception, the necessary circumstances [for the
grant of a Mareva order] will exist when the affairs of a defendant sued by a
creditor for an alleged debt and of the third party against whom the injunction
is sought are intermingled, the alleged debtor and
the disposition of its assets
are effectively controlled, de jure or de facto, by the third party, the
debtor's assets will be insufficient
to meet the debt, the creditor, although
having no vested or accrued cause of action against the third party, may become
entitled
to have recourse to the third party or his assets to meet his debt, and
there is a danger that the third party will send his assets
abroad or otherwise
dispose of them".
- Therefore,
the questions before me are as to the existence of assets presently under the
control of PS Securities (that could be available
to satisfy a judgment against
it if Ms Hu is given leave to commence proceedings in the name of Alphena to
recover trust assets held
by it or otherwise to establish and invoke a right of
indemnification on the part of Alphena) and, secondly, as to whether there
is a
danger or real risk of such assets being dealt with in such a way by PS
Securities that the court's process would be frustrated.
If those answers are in
the affirmative then the question arises as to where the balance of convenience
lies.
Is there a basis on which assets of PS Securities might be
recovered by Ms Hu (or Alphena) in satisfaction of the judgment debt?
- Mr
Young submits that the facts establish a strongly arguable case that the Land
was held by Alphena on trust and is therefore properly
described as trust
property and that, in the circumstances, Ms Hu has a strongly arguable case that
upon the liquidation of Alphena
(as creditor of the trustee company) she has a
right to be subrogated to Alphena's right of indemnity out of trust assets for
liabilities
incurred on behalf of the trust (citing Octavo Investments Pty
Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 367, 370).
- In
Octavo, at 367, the Court said:
We do not understand the general principles concerning the
bankruptcy of a trading trustee to be in dispute. It is common ground that
a
trustee who in discharge of his trust enters into business transactions is
personally liable for any debts that are incurred in
the course of those
transactions: Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319.
However, he is entitled to be indemnified against those liabilities from the
trust assets held by him and for the purpose of enforcing
the indemnity the
trustee possesses a charge or right of lien over those assets ... it applies to
the whole range of trust assets
in the trustee's possession except for those
assets, if any, which under the terms of the trust deed the trustee is not
authorised
to use for the purposes of carrying on business: Dowse v Gorton
[1891] AC 190; [1891-4] All ER Rep 1230.
In such a case there are then two classes of persons having a beneficial
interest in the trust assets: first, the cestuis que trust,
those for whose
benefit the businesses being carried on; and secondly, the trustee in respect of
his right to be indemnified out
of the trust assets against personal liabilities
incurred in the performance of the trust. The latter interest will be preferred
to the former, so that the cestuis que trust are not entitled to call for a
distribution of trust assets which are subject to a charge
in favour of the
trustee until the charge has been satisfied ( Vacuum Oil ).
The creditors of the trustee have limited rights with respect to the trust
assets. The assets may not be taken in execution... but
in the event of the
trustee's bankruptcy the creditors will be subrogated to the beneficial interest
enjoyed by the trustee ( Vacuum Oil; ex parte Garland ) .
These principles lean naturally to the conclusion that the beneficial
interests which, by subrogation, the creditors whose claims
arise from the
carrying on of the business have in the assets held by a bankrupt trustee form
part of the property of that bankrupt
divisible amongst his creditors Savage
v Union; Bank of Australia; Jennings v Mathers; Governor of St Thomas' Hospital
v Richardson.
- It
is not disputed that property which is an asset of a trading trust is properly
described as trust property (Mr Young referring
to Octavo , citing
Dowse v Gorton [1891] AC 190 and Jennings v Mather [1901] 1 KB 1
at 111). Although there was a dispute recorded in Mr Skinner's written
submissions as to whether Ms Hu was a creditor
of Alphena in its capacity as
trustee, this did not seem to be a principal point of contention. In that
regard, it seems to me that
the evidence is sufficient to establish an arguable
case as to the judgment debt having been incurred by Alphena in its capacity
as
trustee of the Joseph Family Trust.
- The
liquidators reported to creditors that the main purpose of Alphena was to act as
trustee of the Joseph Family Trust (apparently
relying on information provided
by Mr Joseph to that effect) and they confirmed this in a letter dated 12 August
2010 to the solicitors
acting for Ms Hu. The suggestion that Alphena had traded
to a limited extent in its own capacity was not, they concluded, supported
by
the financial documentation they had reviewed.
- I
was taken to the transcript of Mr Joseph's cross -examination in the District
Court proceedings in which he accepted that the Joseph
Family Trust was the only
trust of which Alphena was a trustee and that it had operated as a trading trust
with a view to making
profits. Discredited as Mr Joseph may have been as a
witness in the District Court proceedings, the instructions he has apparently
given to the liquidators are consistent with a finding being open to be made
that Alphena did incur the debt to Ms Hu as a trustee of the trust.
- If
so, then there must be a reasonable basis for the argument that Alphena would
have a right of indemnification out of the trust
assets in respect of the debt
(and Mr Skinner did not suggest otherwise).
- The
trustee's right of indemnity is a proprietary right ( Octavo ) and once
the right has accrued it continues after the trustee has ceased acting in that
position. In Corowa Fertilizers Pty Ltd v Cranney Farm, unreported
09/291644, Bryson AJ expressed the view that the former trustees' entitlement to
indemnification out of the assets of the
trust crystallised (if it did not exist
earlier) into a proprietary right when they retired as trustees and control of
the assets
of the trust passed out of their hands. His Honour saw this as a
property right "subject to the ordinary qualifications when rights
are
enforceable, in equity are conceived of as property rights" (at [5]).
- There,
in a bankruptcy context, his Honour observed that it is not usually the case
that proceedings under bankruptcy legislation
have any impact on the rights of
persons interested in a trust of which the bankrupt was trustee and considered
that the creditor's
right to be subrogated to the bankrupt trustees' right of
indemnification was not extinguished by the operation of the personal insolvency
agreements that the former trustees had entered into under the provisions of the
bankruptcy legislation. (In HIH Casualty and General Insurance Ltd (in liq) v
Building Insurers' Guarantee Corporation & Anor [2003] NSWSC 1083; (2003) 202 ALR 610,
however, Barrett J at [132] -[133] contemplated that what would otherwise be an
equity of subrogation may be displaced by the existence
of a statutory provision
which evinces an intention to substitute another right or remedy.)
- I
note that in Lerinda Pty Ltd v Laertes Investments Pty Ltd as Trustee for Ap
-Pack Deveney Unit Trust [2009] QSC 251, McMurdo J (in the context of a
corporate trustee which had become insolvent and had entered into a deed of
company arrangement)
had held that the applicant's right to subrogation was
precluded by the deed of company arrangement. His Honour said "the
applicant's case assumes that the equitable remedy of subrogation
would be
granted in this case, and on terms which would have its debt paid in full. But
unless and until it is granted, the applicant
has no equitable interest in the
trust assets or equity which appears to have priority over those of other
creditors of the trustee."
His Honour held that there was no proprietary
interest derived by the commencement of proceedings for subrogation and that
unless
and until some order would be made for the application of property held
by the trustee specifically in favour of the applicant, it
would enjoy no
priority over other creditors of the company.
- In
Adams v Zen 28 Pty Ltd [2010] QSC 36, Daubney J said that the applicant
(there seeking a remedy of subrogation) had, at the highest, at the date of
execution of the deed
of company arrangement and inchoate right to seek to be
subrogated to the trustee's right of indemnity and the lien or charge which
the
trustee enjoys over trust assets.
- I
accept that there may be dispute as to the effect, on a claim of subrogation of
the kind presently asserted, of steps taken in the
liquidation of the trustee
company in whom the right of indemnification reposes (and I note that the
decision in Corowa Fertilizers is presently the subject of an appeal).
However, for the purposes of considering whether there is a sufficiently
arguable case to
sustain the relief claimed by Ms Hu on the present application
(i.e. that Ms Hu could claim a right of subrogation to the trustee's
right of
indemnification), I am of the view that there is. Indeed, at one level Mr
Skinner did not seek to contend otherwise. Rather,
what he submitted was that
the claim for indemnification was a claim that lay with Alphena (through its
liquidators) and was not
one that Ms Hu had standing to bring.
- Mr
Skinner's principal submission was that the present application was wholly
misconceived; in particular, as to the effect of the
winding up resolution and
the lodgment of the proof of debt by Ms Hu.
- In
essence, what Mr Skinner submitted was that Alphena's right to seek indemnity
out of the trust assets in the hands of the new trustee
(PS Securities), in
reliance on the principles in Octavo , was solely the right of the
liquidator (more precisely, this must be a reference to Alphena) and that Ms Hu
could not pursue that
right because of the merger in the winding up of her debt
claim, arising by the lodgment of the proof of debt. Mr Skinner invoked
s 553 of
the Corporations Act in support of that submission.
- Section
553, however, addresses the debts or claims that are provable in a winding up
(being those legally enforceable in an action against the
company). Section 553
does not in terms provide that a creditor who has lodged a claim in a winding up
cannot (at least until that claim is satisfied by
a distribution out of the
assets of the company on winding up) separately maintain a claim seeking to be
subrogated to the right
of indemnification of the bankrupt or insolvent trustee
(and I do not read Octavo or Corowa Fertilizers as suggesting
otherwise). As to the doctrine of merger, Ford notes that on the making of an
order for the liquidation of the company
a creditor's debt is not extinguished
but remains an existing debt, stating that "The debt is, however, at least
provisionally merged
in an equitable execution (because the claim is then
against the fund held on trust for the general body of creditors)" though noting
that amounts owing may still be described as debts (citing Clyne v DCT (No 3)
[1984] HCA 44; (1984) 154 CLR 589 at 594; [1984] HCA 44; 55 ALR 143). Ford goes on to recognize that a
creditor has a right to have all assets realized and applied pro rata for the
benefit of all unsecured
creditors [5.6.0205].
- The
nub of Mr Skinner's submissions, as expounded orally, seemed to rest on the fact
that Ms Hu has not yet obtained leave to commence
proceedings in the name of
Alphena against PS Securities. Mr Skinner drew my attention to the fact that the
application before the
Court later this month is in fact for leave under s
500(2) to commence or continue proceedings against a company in liquidation, not
an application for leave to commence a derivative suit
or an application under s
511 as such. (Pausing there, the Statement of Claim itself seeks relief by way
of a declaration that Ms Hu is entitled as a creditor
of Alphena to be
subrogated to its right of indemnity for the debt and to exercise that right of
indemnity "on behalf of" Alphena,
which seems to contemplate a derivative suit
of the kind adverted to by Mr Young.)
- Mr
Skinner submitted that the lodgment of a proof of debt converted Ms Hu's debt
into a right to prove in the winding up of the company
and that she therefore
lost any right to bring proceedings against PS Securities in her own name when
the proof of debt was lodged
due to the doctrine of merger. I am by no means
satisfied that the lodgment of the proof of debt precludes action by the
creditor
to compel the realization of assets for the purposes of the
liquidation. However, insofar as Mr Skinner accepts that the trustee's
right of
indemnification is not extinguished by the entry of the trustee into liquidation
and remains with that company (Mr Skinner
asserting that the critical part of
the Slaven decision was that legal title to all the company property
including the trust property remains in the company and is not passed to
the
liquidator), and that the change in the identity of the trustee does not
extinguish the retired trustee's property rights, then
it seems to me it follows
that there is a sufficiently arguable case (and a serious question to be tried)
as to the claim by Ms Hu
to be subrogated to Alphena's (acknowledged) right of
indemnity for trust debts against any assets of the Joseph Family Trust,
notwithstanding
the lodgment of the proof of debt.
- As
to the perceived difficulty that Ms Hu is said not to be seeking to sue in the
name of Alphena, as noted above the pleading suggests
that she is indeed seeking
the benefit of declaratory relief on behalf of Alphena. In any event, the matter
comes before me on an
interlocutory application. Mr Young informs me that the
purpose of the application is to preserve the status quo pending the application
on 25 March 2011 (by which occasion presumably any amendment to the motion
necessary to accommodate the pleading issues raised by
Mr Skinner will have been
made).
- Mr
Young, in reply, submitted that there were three different routes by which Ms Hu
could proceed to seek relief in relation to the
trust assets held by PS
Securities - first, by exercising the right of subrogation to Alphena's right of
indemnification; secondly,
by the general law as a creditor able to sue in
Alphena's name; and, thirdly, by way of an application for the determination of
questions
as to the liability of PS Securities to account to Alphena (or perhaps
Ms Hu) under s 511 of the Corporations Act.
- I
have considered the first of those avenues above and consider that there is a
strongly arguable case that such an entitlement exists
or will be found to be
exercisable by Ms Hu.
- As
to the second, in circumstances where it was said that the liquidators have to
date failed and/or refused to bring proceedings
against PS Securities (or may be
unable to do so through lack of funds) to recover the judgment debt, it is
submitted that Ms Hu
has an arguable basis on which to seek to bring a
creditor's derivative action under the general law to enforce the trustee's
right
of indemnity against trust assets in the hands of PS Securities (Mr Young
relying upon Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 9 ACLC
1530 ; ACT Commissioner for Revenue v Slaven [2009] FCA 744).
- Similarly,
as to the third avenue, as noted in Slaven , under s 511, a creditor may
apply to the court to exercise all of any of the powers that the Court might
exercise if the company were being wound
up by the court and if the Court is
satisfied that the determination of the question or exercise of the power will
be just and beneficial,
the Court may accede wholly or partially to such an
application on such terms and conditions as it thinks fit or make such other
order on the application as it thinks just. Rares J in Slaven was
satisfied that s 511 was the source of "the Court's undoubted jurisdiction and
power to permit a person other than the liquidator to commence proceedings
in
the company's name when it is in voluntary liquidation".
- Section
511, relevantly, provides:
(1) The liquidator, or any contributory or creditor, may apply to
the Court:
(a) to determine any question arising in the winding up of a company; or
(b) to exercise all or any of the powers that the Court might exercise if the
company were being wound up by the Court.
(2) The Court, if satisfied that the determination of the question or the
exercise of power will be just and beneficial, may accede
wholly or partially to
any such application on such terms and conditions as it thinks fit or may make
such other order on the application
as it thinks just.
- Although
there are some differences (and in this regard I note that the Court's power to
give directions under s 479(3) in a court ordered winding up is not limited by
the requirement that it be satisfied it is 'just and beneficial' to do so as is
here
the case), applications made under s 511 in a voluntary winding up are
determined in much the same way as applications in a court ordered winding up
under s 479(3) of the Corporations Act (Dean -Willcocks v Soluble Solution
Hydroponics (1997) 42 NSWLR 209 at 212 ; Crawford v Oswald Park Pty Ltd
(in liq) [2006] NSWSC 987 at [10] ; and S & D International v
MIG Property Services [2010] VSC 336 at [7]) .
- The
requirement that the Court be satisfied that it is "just and beneficial" to
determine the question or exercise the power the subject
of the application is
said to involve a similar concept to that comprised by the expression "just and
equitable" (Austin & Black's
Annotations to the Corporations Act
[5.511]), allowing the Court a discretion whether to make such an order by
reference to whether the relief sought by the liquidator
is "of advantage in the
liquidation" ( Soluble Solution Hydroponics at [212] ; S&D
International at [7]).
- The
advantage identified (for the liquidation) of the relief now sought is
presumably the potential for the recovery of assets to
permit the satisfaction
of the judgment debt (Ms Hu being the largest creditor of the company).
- Mr
Skinner submits that the liquidators have not yet refused to bring proceedings
and I accept that is the case. However, it seems
fair to say that they have not
shown any real alacrity in their response to the pleas for action by Ms Hu and,
in any event, all
that is required to be shown for present purposes is that
there is a serious question to be tried or sufficiently arguable case that
Ms Hu
would be permitted to bring such an action (or that there are assets in PS
Securities' hands that could by this means become
available to satisfy the
judgment). If, on the determination of the 25 March 2011 application, a
different result ensues, then it
may be that any interlocutory freezing orders
would properly be discharged at that stage.
- (In
that regard, I note that I was informed that directions were made the week
before the application came before me for the liquidators
to serve a draft
statement of claim and evidence in the matter. Mr Young says that if the
liquidators identify an intention (with
funding) to commence the proceedings
then Ms Hu may not need to pursue an application for derivative suit.)
- For
present purposes, I simply say that I consider there to be a sufficiently
arguable case that Ms Hu may, through one or other of
the avenues identified by
Mr Young, maintain a claim against the assets of the Joseph Family Trust in the
hands of PS Securities.
Risk of dissipation of assets
- It
is submitted that there is a strongly arguable case for Ms Hu on this issue as
well. I am invited, in effect, to infer that the
appointment of a new trustee
(and the subsequent resolution to wind up Alphena) was an attempt to place the
trust assets beyond the
reach of Ms Hu and to deprive Alphena of the ability to
meet the judgment debt. I am informed by Mr Young that Ms Hu fears that because
Mr Joseph (as appointor of the Joseph Family Trust and director of PS
Securities) has already once taken steps pursuant to which
trust assets have
been transferred to a new trustee and is now a director also of the new trustee
company, she is at risk of further
such action which could leave her unable to
obtain satisfaction of the judgment debt.
- In
this regard, reliance is placed on a number of matters - the circumstances in
which the trust assets were removed from the hands
of Alphena (the judgment
creditor) shortly after the adverse judgment; the significant encumbrance placed
over the Land once in the
hands of PS Securities; the intimation from Mr
Lombardo that there will be significant investment in other ventures by PS
Securities
as trustee of the trust; and the background to the matter itself.
- As
to the first, while Mr Lombardo explains in his affidavit the process of due
diligence undertaken by him in 2009, it does not explain
why it would have been
thought that it was necessary (to avoid the collapse of the trust) to appoint a
co -trustee - if, in fact,
the assets of the trust as valued by Mr Lombardo are
in the order of $4 or 5m, then the likelihood of a forced insolvency event (by
reference to the unpaid District Court judgment debt) seems low. Mr Young
submits that what has occurred has been an attempt to place
the funds outside
the hands of creditors. That may or may not be the case but suffice it to say
that the involvement of Mr Joseph
in the transitional trust arrangements
(without any explanation by him as to the reason for those arrangements and
without first
making any provision for the payment of the judgment debt) seems
to me to have the flavour of a restructure for a purpose or with
the effect of
the kind asserted by Mr Young. At the very least, it, coupled with the apparent
difficulty of extracting solid information
as to the company's assets (Mr
Lombardo's affidavit being criticised, as noted above, and the plaintiff's 17
February notice to produce
being complied with only by the production of some
documents at the commencement of the hearing of the application), suggests that
the risk of dissipation of assets is not so far -fetched as to be dismissed out
of hand.
- More
significantly, there is a clear indication in Mr Lombardo's affidavit of an
intent to enter into various business opportunities
or ventures that may require
significant funding - and the encumbrance over the Land at present is some
indication of this. In paragraph
28 of his affidavit, Mr Lombardo said that
"currently [PS Securities] as trustee of the Joseph Family Trust is committed to
supporting
and participating in investments in new ventures. The assets of the
trust are be used to fund expansion and investments in small
and medium
enterprises which have good business models but are struggling to fund those
businesses because of the global financial
crisis. ... [PS Securities] as
trustee of the Joseph Family Trust will be taking up equity in due course in the
new ventures and
significant damages will arise to it and other parties who will
not be able to fund its expansion and growth if [PS Securities] fails
to perform
as has been planned for more than twelve months and if a freeze order is made
against it."
- As
noted earlier, Mr Lombardo affirmed that PS Securities, as trustee for the
Joseph Family Trust, "will not be transferring, securing
or dealing with its
property other than in the ordinary course of its ordinary business." However,
it is somewhat unclear to me what
the ordinary course of this trustee's business
is thought to be (or whether PS Securities acknowledges that the Land is a trust
asset).
- Mr
Young submits that the Land was transferred to the new trustee when both Alphena
and PS Securities must be taken to have been aware
of the judgment debt (given
the involvement of Mr Joseph in both companies) and chose to do so rather than
Alphena retaining possession
as trustee to satisfy a liability incurred on
behalf of the trust. It seems to me that there is some force in that submission
and
that it is such as to give rise to a real apprehension or risk that if a
freezing order is not made then the assets may be dealt
with in such a way as
would have the effect of defeating a claim under the trustee's right of
indemnification.
- That
then raises the issue as to the undertaking proffered by PS Securities. If that
were sufficient to protect the position of Ms
Hu, then it would be difficult for
her to contend that a freezing order should be made. While this issue gave me
some pause, in the
end I accepted that the general terms in which it was
expressed (coupled with the reference to the Land in Mr Lombardo's affidavit
as
an 'indirect interest' of the trust - see for example paragraph 27 in which he
said "I have no current valuation of the indirect
interest in the shopping
centre of the Joseph Family Trust and am unable to provide an estimate of the
value of the property") meant
that I could not be confident that Ms Hu's
position was protected in the absence of such an order. (I note that an
undertaking in
accordance with the usual freezing order was not proffered by PS
Securities notwithstanding that it was on notice of the criticisms
made by Mr
Young of the content of the undertaking it had earlier proffered.)
- (I
should for completeness note that I have not placed reliance in this regard on
the findings made in the District Court proceedings
or the history of the matter
to date as I am not satisfied that I can infer a propensity on Mr Joseph's part
to frustrate the processes
of the court in avoiding payment of the judgment debt
by reference to the conduct that had led indemnity costs to be awarded against
Alphena in those proceedings.)
- I
nevertheless accept that the effective transfer of ownership of the trust
assets, without provision for the payment of the judgment
debt, and the
substantial encumbrance of the Land (coupled with the expansive investment plans
referred to in general terms by Mr
Lombardo) gives rise to a sufficient risk or
danger of the court's process being frustrated, so as to satisfy this second
requirement.
Balance of convenience
- I
have noted above the concerns expressed by Mr Lombardo as to the significant
damages PS Securities claims it will suffer by the
imposition of a freezing
order. However, those business plans do not appear yet to have been finalized
(his affidavit being couched
in prospective terms) and the duration of the
freezing order is relatively limited in the first instance, whereas the
prejudice Ms
Hu will suffer if the trust assets are disbursed will be
substantial (given that Alphena has no assets of its own to meet the judgment
debt and it is for a not inconsiderable amount).
- As
to discretionary factors generally, it was noted that Ms Hu was the major
creditor of Alphena in liquidation; that the transfer
of the Land occurred
without her knowledge (she did not become aware of the transfer until early
August 2010); and that the Land
is now valued at some $6 million and therefore
it might be inferred that it is unlikely that a freezing order limited to a far
smaller
amount will materially impinge upon the trustee carrying on business in
the ordinary course. Mr Young submitted that, on balance,
the risk of the
court's processes being frustrated by the transfer of the Land to a new trustee
and/or PS Securities encumbering
the land in a manner that would wholly or
partly avoid satisfaction of the judgment debt as a result of the proceedings,
was a real
risk greatly outweighing any potential prejudice to PS Securities
caused by the grant of a freezing order. On balance, I agree.
- Mr
Lombardo, in his affidavit, asserts that any undertaking as to damages by Ms Hu
will be insufficient to protect PS Securities in
its trustee capacity from
damage if it cannot otherwise deal with all of its assets in ordinary course of
its ordinary business.
However, the assertion of damage by PS Securities is
expressed without any precision and it is by no means apparent that the
preservation
of an amount referable to the judgment debt (for what may be a
limited time) will have such an impact.
- It
is further submitted that the imposition of a freezing order would be oppressive
having regard to the "yet unresolved" standing
of Ms Hu to commence these
proceedings (and to the submission that Ms Hu's rights have merged into her
right to lodge a proof of
debt in the liquidation under s 553 of the
Corporations Act) . It was submitted that any right to subrogation (and
hence any freezing order) must necessarily be postponed to the rights of the
liquidators (although that would not seem to be the effect of Bryson AJ's
judgment in Corowa Fertilizers ) but that in any event should be
postponed until the determination of the application on 25 March 2011.
- On
balance, it seemed to me that the discretionary considerations favoured the
imposition of a freezing order (at least pending the
determination of the March
application and perhaps until the determination of the proceedings as a whole).
I therefore made orders
in accordance with the standard freezing order but, on
Mr Skinner's application, I gave liberty to apply on three days' notice to
discharge the freezing order.
**********
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