Administrators’ broad powers to dispose of property not wholly owned by the company

September, 2014

We recently acted for the administrators of Bacchus Distillery Pty Ltd (Administrators Appointed) (Bacchus) in Re Bacchus Distillery Pty Ltd (Administrators Appointed) (2014) 98 ACSR 539; [2014] VSC 111 in successfully obtaining a declaration that Bacchus’ administrators have powers pursuant to section 437A(1)(c) of the Corporations Act 2001 (Cth) (Act) to sell trust property not wholly owned by Bacchus.

Facts

In a proceeding commenced by Neobev Pty Ltd (Neobev) against Bacchus in the Federal Court of Australia, it was declared that Bacchus held Australian Standard Patent 2006201593 and the invention of that patent (Trust Property) on trust for itself and Neobev in equal shares.

The Trust Property comprises an invention to make a “clean wine spirit” which formed the base of many of Bacchus’ products and was integral to many of Bacchus’ assets. Neobev did not consent to the disposal of the Trust Property. If neither Bacchus nor the administrators had the power to dispose of the Trust Property, the Federal Court’s declaration would have the stifled the administrators’ ability to: (1) sell the assets of Bacchus’ beverage manufacturing as a whole (and thereby achieve the best price for the assets); and (2) dispose of all of Bacchus’ property and ultimately wind up the company.

Bacchus and its administrators applied to the Supreme Court for directions and declarations, amongst other things, that:

  1. Bacchus had a power of sale to dispose of the Trust Property implied by the terms of the trust (Trust); or
  2. section 437A of the Act empowers the administrators to sell the Trust Property on behalf of Bacchus.

The Decision

Justice Judd held that the evidence of the arrangements between Bacchus and the relevant parties around the creation and the operation of the Trust was such that Bacchus was invested with the right to sell the Trust Property: at [47].

However, Justice Judd went on to say that “even if Bacchus has no independent power of sale, and no right of indemnity as trustee… the administrators may exercise their powers under section 437A(1)(c) to convert the patent into cash to satisfy the claim”: at [58].

His Honour referred to Finkelstein J’s decision in Apostolou v VA Corporation of Australia Pty Ltd (2010) 77 ACSR 84 which indicates that liquidators have a power to sell trust property under section 477(2) of the Act in circumstances where he or she is appointed over a company which: (1) holds legal title to trust property; and (2) also has a proprietary claim by virtue of a trustee’s right of indemnity to be indemnified for trust expenses out of the trust assets.

Justice Judd noted that Apostolou had not necessarily been followed: see Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600 at [17] and Judd J’s judgment at [62]. However, Judd J went on to say that administrators’ powers in section 437A go beyond those which subsisted in the company prior to the administrators’ appointment: see Re Smith (2006) 58 ACSR 410. His Honour stated that “to limit the administrators’ power to those of the company may seriously undermine the utility of the power [in section 437A].”

We are of the view that Judd J’s judgment goes further than Apostolou, in which the liquidator’s power of sale was triggered by the trustee company’s right to be indemnified out of the trust assets for debts which it incurred in relation to the trust.

Justice Judd’s decision indicates that the power to sell the Trust Property was not dependent on any right to indemnity because: (1) his Honour considered that Bacchus had no right to indemnity; and (2) any right that the administrators had to an indemnity and corresponding lien was confined to sections 443D and 443E of the Act (which appears to attach Bacchus’ property generally and not the Trust Property). Furthermore, his Honour’s conclusion at [66] makes no reference to an indemnity: “… the power of sale under section 437A(1)(c) of the [Act] is sufficient to override the objection of a beneficial co-owner of an asset that has been deployed by a company in administration, with the full knowledge and consent of the other beneficial co-owner”.

The breadth of administrators’ and liquidators’ powers to sell trust property absent any right of indemnity is supported by the more recent decision of Kitay, in the matter of South West Kitchens (WA) Pty Ltd [2014] FCA 670. There, McKerracher J found that a liquidator could dispose of trust property, so long as the trustee company over which the liquidator was appointed had legal ownership of the trust assets. This was so even though the company was disqualified by the trust deed from acting as the trustee upon the company’s liquidation. Importantly, McKerracher’s decision suggests that the power of sale is not contingent on the trustee company satisfying any indemnity and makes clear that a liquidator need not approach the Court on every occasion to sell trust assets.

Kitay supports Judd J’s reasons in Re Bacchus and both decisions should give administrators and liquidators a greater degree of confidence in selling trust property. In light of the meagre and conflicting case law on the issue, Re Bacchus represented an excellent outcome for our clients and for insolvency practitioners more generally.

Contact Mills Oakley

If you have any questions in relation to this article, please contact:

ariel-borland-mills-oakley

Ariel Borland | Partner 
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

 

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