The validity of a trust deed executed by a non-existent Company

By Jen Singh, Solicitor – [SOURCE]

In a recent matter before the Federal Court, O’Sullivan J was tasked with considering whether the Court should grant directions pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) (IPSC) (contained in Schedule 2 to the Corporations Act 2001 (Cth) (Act)) where:

• Mr Craig Bolwell was appointed Liquidator of Mandalay Road Holdings Pty Ltd (Company) on 30 June 2020 and later, Receiver of the assets of the Mandalay Road Trust (Trust).
  
• The Company was named as Trustee as per the Deed of Settlement dated 14 January 2013.
  
• Mr Stephen Barber (now deceased) executed the Deed of Settlement on behalf of the Company and was named as director of the Company in the execution clause.
  
• Four days later, the Company, as Trustee, entered into a contract for the purchase of property located at Eumundi, Queensland (Property).
  
• However, the Company was not incorporated until 5 February 2013 – subsequent to the execution of the Deed of Settlement and the purchase of the property. Mr Barber was appointed sole director and secretary of the Company and was also its sole shareholder.
  
• In 2018, the Company was replaced as Trustee of the Trust by Ms Suzanna Goldsmith-Medd and resultingly, the Company transferred the Property to Ms Goldsmith-Medd, in her capacity as Trustee.
  
• On 21 March 2022, Downes J ordered that Mr Bolwell, in his capacity as Receiver of the Trust, recover possession of the Property. The Property was later sold at auction under the instruction of Mr Bolwell, as Receiver for $3,210,000. Mr Bolwell, as Receiver, holds the balance of the funds relating to this sale.

Subsequently, Mr Bolwell, in his capacity as Liquidator of the Company and Receiver of the Trust, sought the following from the Court:

‘In the circumstances, Mr Bolwell as Liquidator ofthe Company and Receiver of the Trust, seek directions pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (IPSC) (contained in Schedule 2 to the Corporations Act 2001 (Cth) (Act)) that as Liquidator and Receiver, he would be justified and otherwise acting reasonably in proceeding on the basis that the Trust was validly constituted; that the Company’s director, Mr Barber, became the trustee of the Trust upon execution of the Trust Deed; that the Company became the trustee of the Trust upon its incorporation; that the Property was, prior to its sale by the Receiver, characterised as Property held by the Company as trustee of the Trust; and that the possession, realisation and any distribution of the proceeds of sale of the Property are each governed by Parts 5.4B and 5.6 of the Act.’

O’Sullivan J identified the issues necessary to consider when determining if such directions should be made:

‘The issues in this matter are:

1. Was the Trust validly constituted?
2. Did Mr Barber become the trustee of the Trust upon execution of the Trust Deed and did the Company become the trustee of the Trust upon its incorporation?
3. Was the Property held by the Company in its capacity as trustee of the Trust?
4. Should the Court give directions to the Liquidator and Receiver pursuant to s 90-15 of the IPSC? and
5. Is the realisation and any distribution of the proceeds of sale of the Property governed by Parts 5.4B and 5.6 of the Act.’

With respect to (a), O’Sullivan J ultimately considered that the Trust Deed revealed a clear intention to create the Trust, certainty of the subject matter and certainty of the object, being the beneficiaries and classes of beneficiaries. Thus, O’Sullivan J determined that the Trust had been validly constituted.

When considering (b), O’Sullivan J had to consider whether Mr Barber intended for the Company to ratify his pre-incorporation actions upon incorporation. O’Sullivan J considered that various actions of the Company indicated that the Company ratified Mr Barber’s pre-incorporation actions after incorporation and was satisfied that the Company became Trustee of the Trust after its incorporation. O’Sullivan J also found that prior to the incorporation of the Company, Mr Barber was the Trustee of the Trust in his personal capacity.

This led to a finding for (c) that the Property was in fact held by the Company in its capacity as Trustee of the Trust.

When considering (d), O’Sullivan J determined that Mr Bolwell, as Liquidator of the Company and Receiver of the Trust, was eligible under s 90-20 of IPSC to make the application for under s 90-15. It was clarified that the directions, outlined above, were sought for the following purpose:

‘In this application, in his capacity both as Liquidator and Receiver of the assets of the Trust, Mr Bolwell seeks directions so that accurate tax calculations can be made prior to both the distribution of the proceeds of the sale of the Property to creditors and payment of remuneration’

As such O’Sullivan J was satisfied that Mr Bolwell was entitled to seek directions under s 90-15.

With respect to (e), O’Sullivan J considered the High Court case of Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 and found:

‘It is well-settled that the realisation and distribution of the proceeds of sale of the Property in the circumstances of this matter are each governed by Parts 5.4B and 5.6 of the Act.’

It was also raised that Ms Goldsmith-Medd filed written submissions – as Trustee of the Trust and also in her personal capacity – and did not object to the directions sought by Mr Bolwell. After considering each of the above issues, O’Sullivan J made an order granting the requested directions and also one further direction – that, by its actions after incorporation, the Company ratified Mr Barber’s pre-incorporation actions. It was also ordered that the Plaintiffs’ costs of the interlocutory process were to be their costs in the winding up of the Company.