Sanderson, in the matter of Jabaluka Pty Ltd (in liq) [2022] FCA 1012: Federal Court considers application for appointment of receiver of a corporate trust

Jabaluka Pty Ltd (Jabaluka) was the Trustee of the Morgan Unit Trust, which operated an IGA Supermarket (the Supermarket) from 22 September 2010 to 13 March 2020. This case concerned an application by the Liquidator of Jabaluka (the Liquidator) under s 57 of the Federal Court of Australia Act 1976 (Cth) for an order that the Liquidator be appointed without security as receiver and manager of the assets and undertaking of the Morgan Unit Trust.

In undertaking its role as Trustee, Jabaluka had incurred various liabilities, including financial facilities from ANZ which were secured against its assets. At the time of the proceedings, Jabaluka was indebted to ANZ for approximately $527,000. Jabaluka also had outstanding employee entitlements, and unsecured creditors including the ATO and Akulabaj Pty Ltd (a related entity). The total value of the creditors’ claims was approximately $3,212,000. The Liquidator’s investigations led him to conclude that there would be insufficient funds realised in the liquidation to pay each of the creditors in full.

Accordingly, the Liquidator sought appointment as a receiver to deal with the assets of Jabaluka. The Liquidator intended to pay out the debt owing to ANZ to minimise interest accruing against the ANZ facilities, to maximise return to creditors and to facilitate further investigations as required into the solvency of Jabaluka at different points in time.

The application involved two key considerations:

(1) whether the affidavit of the Liquidator could be kept confidential; and

(2) the appointment of the Liquidator as receiver.

On the confidentiality issue, the Liquidator sought an order that one of his affidavits be kept confidential as it was commercially sensitive (because it concerned the confidential terms of an agreement entered into by Jabaluka and information about investigations into Jabaluka’s solvency, which the Liquidator was contemplating). The Federal Court of Australia (the Federal Court) was satisfied that it was necessary and appropriate to make confidentiality orders on the basis that those orders were required to prevent prejudice to the proper administration of justice and facilitate the due and beneficial administration of Jabaluka.

In considering the appointment of the Liquidator as receiver and manager, the Federal Court summarised the applicable principles as follows:

(1) the corporate trustee has a right of indemnity or exoneration out of trust assets secured by an equitable lien or charge over those assets. It follows that the liquidator of a corporate trustee is entitled to apply the assets of the trust to satisfy debts properly incurred by the company in the performance of its duties as trustee;

(2) where a corporate trustee is removed by operation of a disqualification clause, the right of indemnity or exoneration persists as does the trustee’s right to hold assets. However, the powers of the now bare trustee[1] do not extend to a power of sale to realise its rights of indemnity;

(3) in these circumstances, if a sale is necessary, the liquidator or administrator must obtain a court order permitting the sale or otherwise seek an order for the appointment of a receiver;

(4) the common course is to appoint the liquidators as receivers over all trust property for the purpose of realising the assets for the benefit of creditors.

Under the relevant Trust Deed, the Trustee was entitled to indemnification from the trust assets in relation to liabilities incurred as Trustee. Jabaluka was disqualified as Trustee on the Liquidator’s appointment and was from that point a bare trustee. Upon appointment, the Liquidator took control of funds that were trust property and were available to be realised for the benefit of trust creditors and payment of the Liquidator’s remuneration.

In these circumstances, the Federal Court found that it was appropriate to make an order that the Liquidator be appointed without security as receiver and manager over the assets of the Trust. In making the order, the Court specified the powers of the receiver and manager, and that the costs, expenses and remuneration incurred by the Liquidator in acting as receiver and manager were to be paid from the property of the Trust.

In this case, the Federal Court reiterated the principle that where a corporate trustee is removed by operation of a disqualification clause (for example, upon appointment of a liquidator), the right of indemnity or exoneration under the trust deed persists, as does the trustee’s right to hold assets. However, these powers do not extend to a power of sale to realise the trustee’s rights of indemnity. If a sale is necessary, the liquidator or administrator must obtain a court order permitting the sale, or an order to appoint a receiver. In these circumstances, a court will typically appoint the liquidator as receiver over trust property for the purpose of realising the assets for the benefit of creditors.

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Authored by:

Scott Couper, Partner
Irene Gallagher, Solicitor

[1] A ‘bare trustee’ has no interests in the trust assets and no active duties to perform, other than those which exist by virtue of the office of the trustee, with the result that the property awaits transfer to the beneficiaries or some other disposition at their direction. See e.g. CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174, [36].