Australia: Liquidators entitlement to be paid from regulated company trust account

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 be paid their remuneration from the funds held in the Company's trust account which was regulated by the Agents Financial Administration Act 2014 (Qld) (Administration Act).

The Administration Act contains various laws in relation to the handling of client trust money held by agents, including property agents. Section 20 of the Administration Act provides that an amount paid to a trust account cannot be:

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

(b) attached or taken in execution under a court order or process by a creditor.

This decision highlights that funds held in a company's regulated trust account are, in certain circumstances, capable of distribution towards payment of a Liquidator's remuneration and can be the subject of an equitable lien in favour of the Liquidator. The Federal Court accepted that the dispersal of trust funds to remunerate the Liquidators was permitted under s90-15 of the Insolvency Practice Schedule (Corporations) (IPS), Schedule 2 of the Corporations Act 2001 (Cth).

Background

The administrators were appointed to the Company and 57 other entities on 30 July 2019 which comprised the property developing giant, the Ralan Group. The Ralan Group, known for its high-rise projects on the Gold Coast, was characterised by the Administrators as a partial Ponzi scheme, arose as a result of the Ralan Group's unsustainable business model, accumulated losses and asserted poor management.

At the time of the Administrators' appointment, the Company held $2,154,809 in a trust account associated with the Ralan Group's real estate services, which was regulated by the Administration Act. The Administrators were appointed Liquidators of the Ralan Group pursuant to resolutions of creditors on 17 December 2019.

As part of the winding up process, the Liquidators made an application for their remuneration to be paid out the trust account. The application was resisted by several interested persons – primarily depositors into the account and those who had contracted with the Ralan Group to purchase "off-the-plan" properties. They argued, among other things, that this would contravene the Administration Act, including because it represented a payment of debt to a creditor of an agent.

Decision

The Federal Court found that the Liquidators had an equitable lien over the funds in the trust account as security for their reasonable remuneration and expenses incurred as administrators and liquidators in relation to identifying, recovering, realising and distributing trust assets for the benefit of the depositors to the trust account, consistent with the "salvage 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 precluded the Liquidators' equitable lien over 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 to the trust account, not as an agent of the Company, which would otherwise be a precluded payment under section 20(a) and 20(b) of the Administration Act.

The Federal Court also referred to its earlier decision dealing with an application by receivers where it had held that by operation of section 40 of the Administration Act, the receivers and managers indemnity for remuneration secured by an equitable lien over 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 a civil remedy that a person may have against an agent or another person for a matter."

The Federal Court observed that there would be an unfair result if neither of the contributors to the trust fund nor the chief executive of the Office of Fair Trading (Qld) (who was granted leave to appear) had appointed a receiver, but instead, required the Liquidators to undertake work for the benefit of those contributors if they were prevented from recovering their remuneration from that statutory fund.

In reaching the conclusion that the Liquidators were entitled to be paid their remuneration and expenses in the winding up of the Ralan Group, from the trust account, the Court made the following observation:

"While it may be distasteful to creditors that they get little return where orders are made for payment of an external administrator's remuneration and expenses from a fund, there is nonetheless a benefit to creditors and beneficiaries in having their position resolved and to the community in not permitting assets to remain unproductively in the hands of a defunct company".²

Implications

This decision highlights the broad application of s 90-15 IPS in respect of obtaining judicial directions about the appropriate course of action in an external administrators' appointment and otherwise provides clarity around the operation of a liquidators' lien over statutory trust accounts.

It also reflects the Court's inclination to permit the drawing of remuneration and expenses by insolvency practitioners in circumstances where the statutory work performed by them was for the benefit to creditors and beneficiaries.

Insolvency practitioners should also be careful to ensure that all work is carefully documented and properly incurred to avoid unpleasant judicial commentary on remuneration or disputes on the topic.

Footnotes

¹ Heenan, in the matter of 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] FCA 107 at [123].

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