Arkmill Pty Ltd v Tippers & Co Pty Ltd [2006] QSC 248

1 SUPREME COURT OF QUEENSLAND CITATION: Arkmill Pty Ltd v Tippers & Co Pty Ltd [2006] QSC 248 PARTIES: ARKMILL PTY LTD (ACN 117 840 963) (applicant) v TIPPERS & CO PTY LTD (ACN 114 819 779) (respondent) FILE NO/S: BS 4506 of 2006 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court of Queensland DELIVERED ON: 31 July 2006 DELIVERED AT: Brisbane HEARING DATE: 31 July 2006 JUDGE: McMurdo J ORDER: 1. The statutory demand be set aside 2. The respondent pay the applicant’s costs of the application to be assessed CATCHWORDS: CORPORATIONS – WINDING UP – GROUNDS FOR WINDING UP – INSOLVENCY – APPLICATION TO SET ASIDE STATUTORY DEMAND – where the applicant made an application to set aside a statutory demand – where the debt is genuinely disputed – where the demand was for the total of various invoices in an amount of $20 000 – where the invoices were issued prior to the incorporation of the applicant – where the applicant argues the debts were incurred by another company – whether the statutory demand should be set aside EQUITY – TRUSTS AND TRUSTEES – POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES – INDEMNITY, LIEN AND REIMBURSEMENT – where the respondent argues it is entitled as a creditor of the former trustee to a right of subrogation– whether a former trustee has a right of indemnity against the trust estate – whether the new -- 1 of 10 -- 2 ORDER 1 10 20 30 40 50 60 trustee is personally liable as a debtor of its predecessor COUNSEL: A J Taylor for the applicant C D Coulsen for the respondent SOLICITORS: Colwell Wright for the applicant Reardon & Associates for the respondent -- 2 of 10 -- 3 ORDER 1 10 20 30 40 50 60 SUPREME COURT OF QUEENSLAND CIVIL JURISDICTION McMURDO J No BS4506 of 2006 IN THE MATTER OF ARKMILL PTY LTD (ACN 117 840 963) atf CHAY PROPERTY TRUST ARKMILL PTY LTD (ACN 117 840 963) Applicant and TIPPERS & CO PTY LTD (ACN 114 819 779) Respondent BRISBANE ..DATE 31/07/2006 ORDER -- 3 of 10 -- 4 ORDER 1 10 20 30 40 50 60 HIS HONOUR: This is an application to set aside a statutory demand upon the basis that the debt is genuinely disputed. The demand was for the total of various invoices in an amount of $20,000. The invoices were issued however, prior to the incorporation of the applicant. The applicant's case is that the invoices represent debts incurred by another company called Big Resource & Venture Enterprises Pty Ltd which I will call the former trustee. I will call it that because the evidence well establishes that the applicant has become the trustee of a trust which owns land as a new trustee to replace that former trustee. The relevant documents showing that replacement of trustee are in evidence and they are dated in February of this year. So the applicant's case is simply that these were debts incurred by its predecessor and it has had no dealings with the respondent and is not indebted to it. The respondent's argument proceeds as follows. It accepts that its dealings were with the former trustee. It then says that it can be fairly inferred that the former trustee has no assets because what it held it had held as trustee and all of that has now gone to the applicant. So it says that it is entitled as a creditor of the former trustee to a right of subrogation. It is entitled to stand in the shoes of its debtor, the former trustee, and to enforce what rights that former trustee had. Next, it says that the former trustee has rights against the applicant as the new trustee. It is at that point that I think the difficulty in the respondent's argument arises as a matter of principle. The respondent argues that standing in the shoes of the former trustee it is -- 4 of 10 -- 5 ORDER 1 10 20 30 40 50 60 entitled to payment of its debt, albeit out of the trust estate, but that is an entitlement which creates the relationship of creditor and debtor between it and the applicant. The respondent's argument relies principally upon two decisions of the Queensland Court of Appeal: one being Ron Kingham Real Estate Pty Ltd v. Edgar [1999] 2 Qd.R 439; the other being Belar Pty Ltd (in liquidation) v. Mahaffey [2000] 1 Qd.R 477. In Ron Kingham the Court was concerned with a claim by a creditor against beneficiaries of a trust, pursuant to which a trustee had carried on business and had become indebted to the claimant. The claimant, the respondent in the appeal, had obtained a judgment against that trustee. But while the judgment remained unsatisfied all of the trust assets were transferred to the beneficiaries. As appears from the judgment of McPherson JA at 441 to 442, the claim there was not founded so much on the right of a trustee to be indemnified out of the trust estate but instead was founded upon the alternative right which a trustee has to be indemnified by the beneficiaries personally for liabilities properly incurred in the trust and in that respect his Honour cited Hardoon v. Belilios [1901] AC 118 at 125. The Belar decision also involved a claim made against beneficiaries but this time by a former trustee, which was the -- 5 of 10 -- 6 ORDER 1 10 20 30 40 50 60 company in liquidation. That claim was described in the judgment of the Court at page 487 as: "In essence a claim by a former trustee to be indemnified by the beneficiaries personally for liabilities properly incurred in the execution of a trust." As it happened one of those beneficiaries was also the person appointed as the new trustee but as is clear from page 489, the claim was not made against him in his capacity as trustee. The Court held that a declaration which had been made in the District Court that the beneficiaries were obliged to the former trustee should not have been granted for various reasons which need not be discussed here, save that one of them was that the claimant company had "failed to show that it had exhausted its remedies against the continuing trustee." That remedy had been discussed by the Court at pages 487 to 488, when the Court said: "The creditor's right of subrogation of course depends on the rights of the trustee. This may be affected by the trust instrument and in the present case where there had been a change of trustee the focus must be upon the position of the new trustee. A former trustee may assert its claims for indemnity against the continuing trustee, and in that respect may assert the right of the new trustee to indemnity by bringing an action against him. But in our view it must be shown that there is a fund or asset to which the lien may attach." The precise nature of the outgoing trustee's right against the continuing or new trustee is important for the present application. Is the right of the former trustee one which is proprietary in the sense that is a right to enforce a right of -- 6 of 10 -- 31072006 T7/YRL25 M/T 1/2006 (McMurdo J) 7 ORDER 1 10 20 30 40 50 60 indemnity against the trust estate for which the new trustee is an appropriate respondent, or is the nature of the remedy one, as the respondent here suggests, of a personal liability of the new trustee as a debtor of its predecessor? In Octavo Investments Pty Ltd v. Knight (1979) 144 CLR 360 at 367, there is a discussion within the joint judgment of the rights of a trustee to be indemnified out of the trust assets against its liability as a debtor to creditors who have traded with the trust. Their Honours there stated these principles. A trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions. He is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets. The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purposes of carrying on the business. In such a case there are two classes of persons having a beneficial interest in the trust assets, first the beneficiaries, those for whose benefit the business was being carried on, secondly the trustee in his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the -- 7 of 10 -- 31072006 T7/YRL25 M/T 1/2006 (McMurdo J) 8 ORDER 1 10 20 30 40 50 60 former. The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution but in the event of the trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee. The entitlement of the former trustee in the present case is one which is in the nature of a beneficial interest in the trust assets. Assuming for the moment that the former trustee is without assets and is therefore insolvent, I would accept that the creditors of the former trustee are entitled to be subrogated to that beneficial interest enjoyed by the former trustee. The remedy in this context which is available to the creditor is described in Jacob's Laws of Trusts in Australia, 6th edition, at [2112] as follows: "The better view then is that the subrogation should be enforced only in proceedings to which creditor trustee and beneficiary are parties and it is not appropriate to allow the creditor to proceed directly against the trust assets without joining the trustee." This indicates the nature of the former trustee's rights insofar as a suit against the new trustee is concerned. I am not persuaded that the right is as the respondent here argues, one under which there is a personal liability. Rather, the right if any of the former trustee is to be indemnified out of the trust estate. That is a right which is to be enforced by -- 8 of 10 -- 31072006 T7/YRL25 M/T 1/2006 (McMurdo J) 9 ORDER 1 10 20 30 40 50 60 proceedings to which the new trustee is a necessary respondent. That is not to say, however, that at least before there is any judgment in such proceedings, there is a relationship of creditor and debtor between the old and the new trustee. It follows that the legal basis for the respondent's claim to be a creditor of the applicant should be rejected. In any event there is a factual question, which is not satisfactorily answered in the present application, as to whether the respondent has a right of subrogation being a question as to whether the former trustee is without assets. I am asked to infer that and it is said that the onus in every respect is upon the applicant. In my view the applicant has discharged its onus by showing that there was no dealing between it and the respondent as the respondent had claimed and, if the respondent is to seek to support its demand upon this different legal basis, there is some evidentiary burden upon it to establish the facts which are necessary for that argument. The result is that the applicant has shown at least a genuine dispute as to the debt and the statutory demand will be ordered to be set aside. Subject to any further submission it is my view that the respondent must pay the applicant's costs of that application to be assessed. -- 9 of 10 -- 31072006 T08/KC31 M/T 1/2006 (McMurdo J) 10 ORDER 1 10 20 30 40 50 60 MR COULSEN: I can't say anything sensible against that, your Honour. HIS HONOUR: That will be the order. ----- -- 10 of 10 --