This week’s TGIF considers the decision of Simpson & Anor v Tropical Hire Pty Ltd (in liq) [2017] QCA 274 in which the Queensland Court of Appeal considered whether a disposition of property by a company after the commencement of its winding up was void

BACKGROUND

Mr Simpson was the sole director and shareholder of Tropical Hire Pty Ltd (company). It had operated a successful business until that business was sold in 2009. After the sale, the company did not trade.

In May 2013, Mr Simpson and his wife paid $250,000 to Investors Central Pty Ltd. It was an unsecured loan which was to be repaid after 3 years with monthly interest. This transaction was recorded in an “Application Form”, which identified the company as the lender.

On 28 February 2014, the company was ordered to be wound up in insolvency.

On 27 February 2015, Mr Simpson directed Investors Central to “cancel” the investment and “transfer” the invested funds to a bank account held by him and his wife. Investors Central complied with Mr Simpson’s request.

ISSUES

The liquidator asserted that payment was a disposition of property of the company post-winding up and was therefore void under s.468(1) of the Corporations Act.

Mr and Mrs Simpson argued that the company had made the investment as the trustee of their family trust (notwithstanding that the Application Form did not mention any trust) and that, as the company had ceased to be trustee, it had no entitlement to those funds.

The issues for determination by the Court of Appeal were as follows: (1) were the funds invested by the company as trustee; and (2) was the disposition void under s.468 nonetheless?

Orders had been made below that the disposition was void under s.468(1) and that the company had not invested the funds on trust as trustee of the Simpson Family Trust.

TRUST OR NO TRUST?

The Court of Appeal concluded that the company had invested the monies in Investors Central as trustee for the Simpson Family Trust.

Mr Simpson and his accountant had given evidence about the establishment of the trust prior to the investment being made and the trust deed itself was in evidence. The decision to make the investment via a trust was made for tax reasons and the company was chosen as trustee to avoid the need to establish a new trustee company.

The evidence included bank account statements which clearly showed that Mr and Mrs Simpson (rather than the company) were the source of the monies invested in Investors Central. The monies had come from available funds in a mortgage offset account in their name.

In separate proceedings by the liquidator against Mr Simpson, the liquidator alleged that Mr Simpson had breached his duties as a director by failing to ensure that the company was in sufficient funds to discharge its liabilities to the ATO. The claim was premised on Mr Simpson leaving the company without funds, which was inconsistent with the proposition advanced by the liquidator in this proceeding that the invested funds were those of the company.

WAS THE PAYMENT VOID NONETHELESS?

The Court of Appeal noted that there was uncertainty as to whether s.468 could strike down dispositions of legal and beneficial interests in property, or whether it was confined of dispositions of beneficial interests only. Cases such as Wiley v Commonwealth of Australia (1995) 131 ALR 712 suggested that s.468 applied only to dispositions of beneficial interests whereas the Court in Ng v Van Der Welde [2011] FCAFC 35 held that s.468 “strikes at all dispositions”.

The Court did not make a ruling on this issue and proceeded on the assumption that s.468 applied to dispositions of legal and beneficial interests in property. Accordingly, even though the company may not have had a beneficial interest in the trust property, it had parted with legal title which put the disposition at risk of being declared void under s.468.

Ultimately, the Court concluded that there was no basis for the liquidator to insist upon the money being returned to the company by Mr and Mrs Simpson. The only basis upon which the trust property could be available in the winding up of the company was if the company had incurred debts acting as trustee which it could satisfy via its right of indemnity against the trust assets. There was no evidence that the company had incurred any such debts. The theoretical possibility that such debts could emerge was not a sufficient basis to establish that the company had a beneficial interest in the trust property in the form of an undischarged right of indemnity.

The Court therefore set aside the orders made by the Court below and resolved the matter in favour of Mr and Mrs Simpson.

There are two important takeaway messages from this case.

First, the existence of a trust will not always be clear on the face of a document, such as the “Application Form” in this case. A closer examination of all of the circumstances will be required to form a concluded view.

Secondly, if a liquidator makes a claim against trust property, he or she will first want to establish that the trustee company has a beneficial interest in that property (e.g. in the form of an undischarged right of indemnity) that warrants the claim being made. If no beneficial interest exists, then there is no real reason for a liquidator to pursue a claim in respect of the relevant trust assets.