Re Mamounia - Insolvency, Trusts and Costs
In another decision concerning the issues of insolvency, trusts and costs, the Supreme Court of Victoria has recently directed that the liquidators of a bare trustee are justified in proceeding on the basis that they are entitled as of right to be reimbursed from the trust assets for their reasonable costs and expenses incurred in conducting examinations and pursuing recovery actions, as those activities fall within the salvage principles in Universal Distributing.
This CaseFlash considers the facts and findings of the Court’s decision in Re Mamounia Pty Ltd (In Liq)  VSC 230, highlighting that it remains reasonable for insolvency appointees to err on the side of caution when it comes to the above issues and utilise their statutory powers to seek the Court’s directions, when in doubt.
The relevant facts are as follows:
- Mamounia was the trustee of a family trust that operated a restaurant. The company did not trade in its own right and held no assets other than trust assets;
- the restaurant was run by five brothers who were also the beneficiaries of the trust;
- the brothers had a falling out and the directors appointed liquidators for the purpose of a members voluntary winding up, which ultimately proceeded as a creditors’ voluntary winding up as a declaration of solvency was never passed;
- the liquidators realised $1.3 million in assets which, as a result of the liquidation, was held by the company as bare trustee;
- the liquidators identified unsecured claims of creditors (unrelated to the family) totalling $800,000;
- in addition, certain family members and their related entities made claims totalling $9 million. The liquidators were unable to determine the validity of those claims without further investigations, but noted that if the claims were valid, Mamounia would be insolvent and the potential for insolvent trading or voidable transaction recoveries would arise; and
- the liquidators sought undertakings from the family members that they would not seek to prove in the liquidation to enable the unrelated creditors to be paid in full and allow the family disputes to be resolved by way of mediation without the costs burden of an ongoing liquidation – the undertaking was not provided.
The liquidators sought directions that they are justified in being reimbursed, out of the trust assets, for reasonable costs and expenses in conducting examinations and investigations regarding the family claims against the trust assets and any claims that the company may have against the brothers under part 5.7B of the Corporations Act 2001.
It is well established that, in the context of corporate trusts, the Universal Distributing principle applies such that a liquidator will be entitled to his or her expenses ‘reasonably incurred in the care, preservation and realisation’ of the trust property.
On the other hand, where work done by a liquidator in relation to trust assets may properly be considered as having been done for the purposes of ‘winding up the affairs of the company,’ the costs attributable to that work ought to be borne by the non-trust property of the company, to the extent that the assets permit.
The question in this case was whether the liquidators were entitled to be indemnified out of the trust assets for work done in carrying out their investigatory and other duties under the Corporations Act.
Justice Robson answered the question affirmatively. In doing so, he undertook a detailed analysis of the jurisprudence (including certain conflicting authorities) on the issue of liquidators’ recourse to trust assets.
His Honour held that:
- the ‘care and preservation of trust assets’ by liquidators generally includes identifying trust creditors and assets, recovering or attempting to recover and realise trust assets, admitting and rejecting proofs of debt, paying trust creditors and then distributing the balance to beneficiaries;
- in this case, the conduct of examinations and further investigations were necessary for the liquidators to properly identify the trust creditors and trust assets (including where any such assets may only arise under the recovery provisions of the Corporations Act);
- as Mamounia had no non-trust assets of its own, the liquidators were entitled under the Universal Distributing principle to be indemnified from the trust assets for reasonable expenses incurred in taking the above steps; and
- the liquidators were justified in bringing the application for directions and entitled to recover the associated costs from the trust assets.
In light of the consequences of failing to properly administer trust assets, and given the divergence of judicial reasoning in cases concerning trusts and insolvency, it remains important for appointees to proceed cautiously when dealing with insolvent trusts. The Courts continue to support the use by insolvency practitioners of statutory powers to defer to the Court for directions in such cases.
Kirsten Farmer, Partner
Manit Oberoi, Associate
Alice Gant, Solicitor