Powers laid bare: bare trustees, liquidators, and the sale of trust assets
A version of this case note originally featured in the Commercial Bar Association’s blog, the CommBar Law Digest. A link to the original article can be found here.
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The decision in Break Fast Investments Pty Ltd v Sclavenitis[1] involved a plaintiff, as corporate trustee in liquidation, claiming to be assignee of a right to recover a debt paid for by a guarantor. The plaintiff commenced an action seeking to enforce that right. In ruling on the question of whether or not the plaintiff had standing to bring its action, the Court addressed the law governing the power of a former trustee as bare trustee to deal with trust assets and the powers of a liquidator of a bare trustee in similar respects.
The facts
The proceeding concerned the enforcement by the plaintiff, Break Fast Investments Pty Ltd, of certain of the rights of C&O Voukidis Pty Ltd (COV) which were alleged to have been assigned to the plaintiff by COV (by its liquidator). The proceeding arose in the following way.
In around 2006, the first defendant, Mrs Sclavenitis, and her spouse owed money to National Australia Bank (NAB), secured by a mortgage over a property (Wyatt Avenue) which in turn was owned by COV as trustee of the Voukidis Family Trust. COV, in its capacity as trustee, guaranteed the liability of the first defendant and her spouse to the NAB.
In 2014, COV was ordered to be wound up. The second defendant, Voukidis Management Pty Ltd, was appointed in its stead.
In about February 2015, NAB, as mortgagee, sold Wyatt Avenue for $1.8m.
In about April 2015, NAB, pursuant to the terms of the guarantee, appropriated the proceeds of the sale of Wyatt Avenue in reduction of amounts owed by the first defendant and her spouse. In that way, COV was taken to have discharged its liability to NAB under the guarantee and, as a consequence, to have become entitled to recover the amount it had paid to NAB from the principal debtors, being the first defendant and her spouse (Guarantee Debt).
In 2019, by deed of assignment between COV and the plaintiff, COV by its liquidator sought to assign to the plaintiff certain rights, including:
its common law right of indemnity as guarantor against the first defendant and her spouse (clause 2.1.1 of the deed was directed to this issue); and
its equitable rights of indemnity (relevantly, the right of exoneration to apply trust assets for the purpose of discharging liabilities incurred in acting as trustee of the trust) (clause 2.1.2 of the deed was directed to this issue).
A central commercial purpose of the deed was to allow the plaintiff to collect the Guarantee Debt from the first defendant and/or her spouse for the purpose of raising a fund from which the right of exoneration could be exercised in respect of a related debt incurred by COV (being the so-called ‘Perpetual Debt’ which had been assigned to the plaintiff via a different means).
The plaintiff, as assignee, sued upon COV’s right of indemnity against the first defendant. Following commencement of the proceeding, the plaintiff was appointed as interim receiver of all causes of action against the first defendant.
The first defendant claimed the plaintiff’s claim was a nullity on the basis the plaintiff had no proprietary interest in the Guarantee Debt when it commenced the proceeding. The first defendant also disputed the amount of the Guarantee Debt.
At trial
Riordan J distilled the main issues for the Court’s determination into the following questions:
Did clause 2.1.1 of the deed assign both the legal interest and beneficial interest in COV’s right of indemnity regarding the Guarantee Debt, or only the legal interest subject to the beneficiaries’ interests under the trust?
If clause 2.1.1 assigned both types of interest, and if COV as bare trustee had no power to sell the Guarantee Debt, what was the effect of clause 2.1.1?
If the purported assignment was otherwise a nullity, was the liquidator of COV nonetheless empowered to assign both the legal and beneficial interests in the Guarantee Debt pursuant to s 477 of the Corporations Act 2001 (Cth) (Act)?
Did clause 2.1.2 effect an assignment of COV’s right of exoneration with respect to the Perpetual Debt, and did it give the plaintiff standing to file the proceeding to enforce the Guarantee Debt?
In finding substantially for the plaintiff, his Honour answered the above questions as follows.
What did clause 2.1.1 assign?
Riordan J found that a reasonable business person in the position of the parties to the deed would have understood the expression ‘all its right title and interest’, as featured in clause 2.1.1, to include an assignment of the legal interest which COV had in the Guarantee Debt (which, given the plaintiff took with notice, would in turn be transferred subject to the interests of the beneficiaries). In reaching that conclusion, his Honour addressed the competing interpretations which the parties advanced and observed that the construction of the clause was in any event of limited importance since was established law that the holder of a legal interest in a trust asset was taken to have transferred the whole of the asset (not merely part of the asset), but with the beneficiaries’ equitable interest ‘engrafted’ on it (unless the sale was to a bona fide purchaser for value without notice).[2]
What was the effect of clause 2.1.1 in circumstances where COV was bare trustee?
It was uncontroversial that COV, as former trustee of the family trust, held the Guarantee Debt on trust as bare trustee. The first defendant submitted that because COV was bare trustee, the liquidator’s purported sale (assignment) of the Guarantee Debt was made without power and was therefore void.
In analysing the law — beginning broadly with a discussion of property rights before descending to rights of indemnity more particularly and to the powers of a bare trustee to sell trust assets — his Honour summarised:
[A] sale by a bare trustee in breach of trust is effective to convey the legal title even if the purchaser has notice; but the purchaser will be subject to a court of equity granting remedies …[3]
It being the case that a disposal by a bare trustee of trust assets, even if inadvertent, amounted to a breach of trust, his Honour held that the liquidator’s assignment was not a nullity and was effective to transfer legal title. His Honour held that the first defendant had not provided any authority in support of her submission that asset transfers by bare trustees were void, although his Honour noted that such transfers might be set aside by a court in equity, thereby making them voidable. His Honour also observed that in each of the cases to which his Honour referred involving sale of assets by a liquidator of a former trustee without power — which otherwise amounted to a breach of the liquidator’s duty — the liquidator was excused from breach by operation of s 1318 of the Act.
If the assignment was otherwise a nullity, was the liquidator still empowered to assign both the legal and equitable interests in the Guarantee Debt pursuant to s 477 of the Act?
The plaintiff submitted that s 477(2)(c) of the Act, which provided that a liquidator may ‘sell or otherwise dispose of, in any manner, all or any part of the property of the company’, empowered the liquidator to assign both the legal and equitable interests in the Guarantee Debt. The first defendant submitted a narrower reading of that provision, claiming that it did not extend the powers of a liquidator to assign trust property beyond that which a former trustee had as a bare trustee, and that if the assignment by a bare trustee was a nullity so too should be an assignment of that same property by the liquidator.
Having found, in response to the second question raised in the proceeding, that the assignment was not a nullity and was effective in transferring legal title, it was not necessary for the Court to rule on the application of s 477. Nonetheless, his Honour observed the following two key matters in obiter.
First, s 477(2)(c) of the Act does not authorise the sale of trust assets by a former corporate trustee contrary to its obligations as trustee; the provision ‘gives liquidators of former trustees no greater powers of sale than those of the corporation over which they have been appointed’.[4]
Second, any unauthorised sale by a former corporate trustee was subject to remedies which applied where a bare trustee sold an asset in breach of trust. Such remedies included declarations of constructive trust, the intervention of equity to restrain completion of a sale or, if the sale completed, orders setting it aside on the basis it was voidable (even if not, strictly speaking, void).
Did clause 2.1.2 effect an assignment of COV’s right of exoneration and did it give the plaintiff standing to file the proceeding?
Having found that the plaintiff had standing to bring the proceeding based on an effective assignment to it of the Guarantee Debt, the Court’s consideration of whether the plaintiff lacked standing on the other basis — as assignee of COV’s right of exoneration under clause 2.1.2 — was merely academic. His Honour did note, however, that were the latter the only basis on which the plaintiff brought the proceeding, it would have been a nullity; his Honour observed:
The right of exoneration and its supporting charge confers no power of sale of assets and … did not entitle COV (or the assignee of the bare right) to commence a proceeding to recover a debt owed to the trust …[5]
Comment
Although the conclusions reached in Break Fast Investments Pty Ltd v Sclavenitis turned on the Court’s interpretation of the particular terms of the deed of assignment in issue, the decision provides answers to questions raised in the proceeding in a way which draws together legal topics such as property rights, powers of a former trustee, and powers of a liquidator of a former trustee. Paragraphs 45 to 56, in particular, contain a useful summary of the nature of rights of indemnity and the powers of bare trustees.
In light of the way in which the Court ruled on some of the questions raised in the proceeding, some matters of interest were consigned to obiter. Nonetheless, the Court’s comments in respect of those matters are worth noting given the way in which they follow a close examination of jurisprudence on topics including the powers of bare trustees to deal with trust assets and the consequences, both substantive and procedural, of their doing so.