Liquidating a trustee company of multiple trusts: How do you effectively get a Pooling Order when you can’t get one?
In the complex field of liquidation, liquidators often encounter a myriad of challenging scenarios that can significantly complicate their role.
Recently, we acted for liquidators in a particularly intricate case involving a company which was the trustee for several trusts. The trusts’ affairs had been intermingled without proper records to distinguish the assets and liabilities of each trust. It was likely that the trusts also had claims against each other. The lack of clear records left the liquidators facing significant administrative hurdles and legal uncertainties in finalising the affairs of the company and the trusts.
If this involved multiple companies in a corporate group structure an application under s 579E of the Corporations Act (‘the Act’) could be made for a pooling order. This allows all the companies in the group to be treated as one company for the purposes of liquidation.
However, this section does not apply to multiple trusts where the same company was acting as the trustee.
In response to these challenges, we employed a strategic approach by making an application for special directions under more general powers of the Act and the Trusts Act 1973 (Qld) to effectively obtain the benefits of a pooling order (‘de facto pooling order’).
This form of de facto pooling order allowed the trusts to be administered collectively, treating their assets and liabilities as a single pooled group. We were able to convince the court this order was the most economical and practical way to avoid the complexities of the trusts while enabling the liquidators to recover their costs, expenses, and remuneration, without engaging in exhaustive and costly investigations. This also meant substantially more of the assets could then be paid in a dividend to the employee creditors.
Factors supporting the De Facto Pooling Order
The Court granted the order, due to several key factors:
- The trusts’ records were inadequately maintained, leading to irreversible intermingling of the trusts’ assets. As a result, there was no clear way to trace individual transactions or determine which assets belonged to which trust.
- By pooling the assets, creditors were more likely to receive some return (even though this meant the liabilities were also shared).
- Even if tracing were possible, further investigations would have been wasteful and unproductive as the limited trust funds would have been consumed by the costs of administration, leaving creditors with little or no return after costs were deducted.
- Extensive affidavits and supporting evidence demonstrated to the court that sufficient investigations into the company’s affairs had been undertaken without incurring the full costs that would have occurred in a complete investigation.
- It was unlikely that a complete investigation would allow for the assets and liabilities of each trust to be determined so those costs would most probably be wasted in any event with no benefit to creditors.
Key Takeaways
The grant of the de facto pooling orders reflects the courts’ acknowledgment of the complexities liquidators face and their willingness to approve solutions that balance practicality with creditors’ interests. These orders also provided a mechanism that reduced administrative burden, enhanced efficiency, and ensured fairness in dealing with the multiple trusts.
This case provides valuable insights for liquidators facing similar challenges. Key considerations include:
- Before carrying out extensive investigations, liquidators should assess if determining the assets and liabilities of each trust is economically viable. If the costs of investigation outweigh the benefits, engaging lawyers to seek a de facto pooling order is likely to present a more commercial and practical solution.
- Clear and open communication with creditors about trust administration and liquidators’ remuneration at an early stage, especially regarding these applications, can help manage expectations and secure support. Even if creditors do not respond, efforts to consult with them can strengthen your case in court in the future.
- Comprehensive documentation of the challenges encountered during liquidation is essential as the courts rely on evidence to understand why these orders are necessary and how it serves the best interests of creditors.
- A careful balance needs to be struck in carrying out sufficient investigations to show a court why the orders should be made without carrying out too much work before seeking these orders;
- As the courts look favourably on liquidators who act responsibly, it is crucial to ensure that all investigations are properly documented, and that a de facto pooling application is made at the appropriate time.
If you are managing complex trust structures as part of a liquidation, facing similar challenges when considering restructuring your business, or want to discuss other complex potential insolvency problems, please contact Andrew Lambros of Bennett & Philp Lawyers for advice.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific circumstances. It is intended for information purposes only and should not be regarded as legal advice. Further professional advice should be obtained before taking action on any issue dealt with in this publication.