An important decision for liquidators of trustee companies – there is a power of sale

In brief

• It is very common for trust deeds to provide that if the corporate trustee falls into liquidation, then that corporate trustee is effectively disqualified from continuing to act as trustee.
• Over the last 3 years or so, a series of Federal Court decisions have found that the liquidator of such insolvent corporate trustees can only sell the trust assets (for the purposes of a liquidation) with the express authority of an order of the court. Such applications for authority to sell are inconvenient and costly, often consuming a significant proportion of the assets of the insolvent estate.
• In the recent decision of Kitay, in the matter of South West Kitchens (WA) Pty Ltd [2014] FCA 670, the Court found that it will usually not be necessary for a liquidator to apply to the court to be permitted to sell trust assets, as the liquidator of an insolvent corporate trustee has such a power of sale by reason of section 477(2)(c) of the Corporations Act.

Kitay, in the matter of Southwest Kitchens (WA) Pty Ltd (in liquidation)

In 2004, a trust was created by a trust deed under which Southwest Kitchens (WA) Pty Ltd (SW Kitchens) was appointed as the trustee of a trading trust. The assets of the trust were the only assets of SW Kitchens.

The trust deed included the usual clause to the effect that the corporate trustee is to be disqualified from holding office in the event that the trustee is wound up.

In 2014, Kitay was appointed liquidator of SW Kitchens by way of a voluntary winding up. Upon the liquidator’s appointment, SW Kitchens was therefore disqualified from holding the office of trustee.

In the course of the winding up of SW Kitchens, the liquidator proposed to sell the trust assets and distribute the proceeds to the creditors in the ordinary course. The difficulty facing the liquidator was the conflicting authorities, as to whether a liquidator of a corporate trustee, who was disqualified from acting as trustee, needed to apply to the court to obtain an order authorising a sale of the trust assets. That is:

• on one hand, there were a series of decisions¹ which appeared to be to the effect that in order to be able to sell trust assets, the liquidator needed to obtain authority to sell, pursuant to an order of the Court,
• on the other hand, there was the earlier decision of Finkelstein J in Apostolou v VA Corporation of Aust Pty Ltd (2010) 77 ACSR 84² (which was not referred to in any of the subsequent decisions) in which the Court found that such a power of sale is conferred by section 477(2)(c) of the Corporations Act, and therefore, no order of the Court was necessary.

As was found in the SW Kitchens decision, there was common ground between both lines of authorities, to the following effect:

• a trustee has a right of indemnity out of trust assets for expenses and liabilities incurred and a right of exoneration from liability,
• a trustee is entitled to the benefit of an equitable lien over the trust assets as a means of securing its rights of indemnity and/or exoneration,
• when a liquidator is appointed to a trustee company, the liquidator acquires the same rights of indemnity and exoneration,
• despite the removal of a trustee (or disqualification of a trustee) from the trust, the trustee generally retains that right of indemnity and exoneration, and
• the equitable lien securing the trustee’s right of indemnity and exoneration does not give to the (removed) trustee a power of sale, rather it is a security which is enforceable by the trustee only by judicial sale or appointment of a receiver with a power of sale.

The question which therefore arose was as to whether it was necessary for a liquidator of a trustee to apply to the court to enforce the equitable lien by exercising the power of sale, or whether that power of sale existed, in the case of a liquidator of a trustee company, by reason of section 477(2)(c) of the Corporations Act. It will be recalled that section 477(2) of the Corporations Act sets out the powers of a liquidator, which include, at sub-paragraph (c), a power of sale. To the extent that the 2 lines of authority referred to above were inconsistent (and McKerracher J was not certain, given the different relief sought in the different cases), His Honour preferred the decision in Apostolou, in which the specific power under section 477(2)(c) of the Corporations Act was considered by the Court.

In the SW Kitchens case, McKerracher J considered that there was no reason why the liquidator’s power of sale, which is conferred by the Corporations Act, should be limited. Further, His Honour recognised that it would be highly inconvenient if a liquidator could not rely on the statutory power and, instead, was required to go to the Court to have a power of sale with respect to trust assets conferred on each occasion.

As a consequence, His Honour concluded that there was no reason why a liquidator ought not be permitted, in a straightforward case, to discharge his or her duties by conducting the sale of trust assets in the ordinary way. His Honour was satisfied that it made good commercial sense to recognise that the power of sale in section 477(2)(c) of the Corporations Act gave to the liquidator of a corporate trustee a relevant power of sale, as it thereby avoided the need for liquidators of trustee companies, on every occasion, to approach the court to seek approval to sell assets.

His Honour did note, however, that there may be some occasions in which seeking the assistance of the court is appropriate, but it should not be necessary on every occasion.

The decision of McKerracher J in South West Kitchens, therefore:

• resolves an apparent inconsistency in the authorities, and provides certainty to liquidators, and
• has the important consequence that liquidators of trustee companies, in the vast majority of cases, will not need to unnecessarily incur legal costs in making application to the court to be permitted to sell trust assets.

Yun Yong