Right of liquidators to be paid from the trust account of a regulated company – Insolvency/Bankruptcy

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In Re Jahani (as joint and several liquidators of Ralan Property Services Qld Pty Ltd (in liq) and Another [2022] FCA 107, the Federal Court of Australia determined that the liquidators of Ralan Property Services Qld Pty Ltd (in liquidation) (Company) were entitled to receive their remuneration from funds held in the company’s trust account, which was regulated by the Officers Financial Management Act 2014 (Qld) (Administration Act).

The Administration Act contains various laws relating to the treatment of client trust funds held by agents, including real estate agents. Section 20 of the Administration Act provides that an amount paid into a trust account cannot be:

(a) used for the payment of a debt of a creditor of an agent; Where

(b) seized or enforced pursuant to a court order or proceeding by a creditor.

This decision highlights that funds held in a company’s regulated trust account are, in certain circumstances, capable of being distributed for the payment of a liquidator’s compensation and may be subject to an equitable lien in favor of the liquidator. The Federal Court accepted that the distribution of trust funds to compensate liquidators was authorized under section 90-15 of the Calendar of insolvency practices (corporations)(IPS), annex 2 of the Companies Act 2001 (Cth).

Background

Directors were appointed to the Company and 57 other entities on July 30, 2019, including real estate development giant Ralan Group. The Ralan Group, known for its high-rise projects on the Gold Coast, has been characterized by administrators as a partial Ponzi scheme, born out of the Ralan Group’s unsustainable business model, accumulated losses and alleged mismanagement.

At the time of the directors’ appointment, the Company held $2,154,809 in a trust account associated with the Ralan Group Real Estate Services, which was regulated by the Administration Act. The Administrators have been appointed as Liquidators of the Ralan Group pursuant to the creditors’ resolutions of December 17, 2019.

As part of the liquidation process, the liquidators requested that their remuneration be paid into the trust account. The request was met with resistance from several interested parties – primarily depositors on the account and those who had contracted with the Ralan Group to purchase”out of plane“. They argued, among other things, that this would violate the Administration Act, in particular because it was a payment of a debt to a creditor of an agent.

Decision

The Federal Court found that the liquidators held an equitable lien on the funds in the trust account as security for their reasonable remuneration and expenses incurred as administrators and liquidators in connection with the identification, collection, realization and to the distribution of assets in trust for the benefit of depositors for the trust account, in accordance with “rescue principle“: In re Universal Distributing Company Pty Ltd (in liquidation) [1933] HCA 2.

The Federal Court rejected the argument that section 20 of the Administration Act excluded the liquidators’ equitable lien on the statutory fund. The Federal Court held that there was an implied obligation to pay the reasonable remuneration and expenses of the liquidators (or administrators) from the work they performed for the benefit of the depositors in the trust account, and not as an agent of the Corporation, which would otherwise be an excluded payment under sections 20(a) and 20(b) of the Administration Act.

The Federal Court also referred to its earlier decision dealing with a receivership application in which it held that pursuant to section 40 of the Administration Act, compensation for the remuneration of receivers and directors secured by an equitable lien on the trust account was not affected or limited by the operation of the Administration Act.1 Section 40 of the Administration Act expressly provides that “nothing in this Act affects or limits any civil remedy a person may have against an officer or other person for a matter. »

The Federal Court observed that there would be an unfair result if neither the contributors to the trust fund nor the Managing Director of the Office of Fair Trading (Qld) (who was allowed to appear) had appointed a receiver, but had rather required the liquidators to undertake work for the benefit of these contributors if they were prevented from recovering their remuneration from this statutory fund.

In concluding that the liquidators were entitled to payment of their remuneration and expenses in connection with the liquidation of the Ralan Group, from the trust account, the Court made the following observation:

“While it may be unpleasant for creditors to obtain little return when orders are made for the payment of an outside director’s remuneration and expenses from a fund, there is nevertheless an advantage for creditors and beneficiaries to see their position resolved and for the community not to allow assets to remain unproductive in the hands of a defunct business”.2

Consequences

This decision highlights the broad application of IPS 90-15 with respect to obtaining judicial direction on the proper course of action in appointing an outside director and also clarifies the operation of a liquidator’s privilege over statutory trust accounts.

It also reflects the Court’s tendency to allow the levying of remuneration and expenses by insolvency practitioners in circumstances where the statutory work they performed was for the benefit of creditors and beneficiaries.

Insolvency practitioners must also ensure that all work is carefully documented and properly initiated to avoid unpleasant legal commentary on compensation or disputes over the subject.

Footnotes

1 Heenan, in Ruby Apartments Pty Ltd (in liq) v Ralan Paradise No. 1 Pty Ltd (in liq) (no. 2) [2021] FCA 1314.

2 Re Jahani (as joint and several liquidators of Ralan Property Services Qld Pty Ltd (in liq) and Another [2022] CIF 107 to [123].

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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