Trust Assets are not Available to Creditors
The ruling issued by Justice John Lyons that the costs of the liquidation of Dominion Investments (Nassau) Ltd. (“Dominion”) be deducted from the trust assets held by the company for the benefit of its investors has promoted some discussion within and outside of The Bahamas.
Arising from these discussions, some unfamiliar with Bahamian law or the body of Bahamian case law, question whether the trust assets held by a company are available to its creditor(s). To this question, the unequivocal answer is NO; there are no circumstances where trust assets held by the company for the benefit of its investors are available to a creditor of the company.
A report in a local newspaper brought attention to the judgment by Justice Lyons. In effect his judgment confirmed that (i) Dominion held the funds and securities in trust for its investors (ii) that such assets in the normal course were not the company’s assets at all and (iii) that the Companies Act only made statutory provision for the payment of Liquidation expenses (including liquidator’s remuneration) out of the assets of the company.
He decided that notwithstanding the same, the court could exercise its inherent jurisdiction to make provision for the payment of the costs of the liquidator out of the trust assets, where the liquidator had, as put in the re Berkeley Applegate case quoted at length in his judgment, expended “skill and labour…in connection with the administration of the property” and where the company’s assets were insufficient to meet the liquidator’s expenses incurred in that regard.
Justice Lyons’s judgment is fully supported by case law in Australia, Canada, Hong Kong and New Zealand. Costs of the liquidator were charged against trust assets in each case. Of equal importance, two key pre-conditions are common to all five cases, including Dominion. These prerequisites make these cases unique and limit the circumstances where a portion of liquidation costs may be deducted from the trust assets held by a company for the benefit of its investors or clients.
The first limiting principle is that in order for the expenditure incurred by one person in relation to another persons’ assets to be borne out of those assets without the persons consent, the party claiming remuneration must establish that his efforts were of benefit to the owner of the assets and there was a need to distinguish trust assets from company assets, and to identify which assets were held for each investor. It must be made clear that when the cases refer to benefit they are not referring to some ephemeral concept of benefit but to some real and tangible benefit to the beneficiaries.
The second limiting principle that can be taken from the cases is that it is only where the liquidator is effectively administering trusts that he is entitled to be remunerated out of trust assets and, in any case, only in the event that the company’s assets are insufficient. This principle was made clear in the Australian case of 13 Coromandel Place Pry Ltd v CL Custodians Pty Ltd., where Justice Finkelstein in delimiting the tasks for which a liquidator will be entitled to be remunerated, said at 385:
“….provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realizing or attempting to realize trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them.”
Excerpts from related cases, below, support the judgment of Justice Lyons:-
*Re Ararimu Holdings Ltd.  NZLR 487. *
“…Holland J , however made it clear that he was restricting the power of the liquidator to be remunerated from the trust assets to remuneration qua trustee and thus remuneration in relation to those assets and not to remuneration generally as a liquidator in respect of which his rights were restricted by the Act. I respectfully agree with that limitation. It seems to me that the priority afforded by the statute is that the liquidator’s costs are to be met out of the assets of the company first and those costs will include the remuneration for the whole of the liquidator’s services in winding up the affairs of the company whether in relation to the company’s own property or in relation to trust property held or administered by it. In the event of a deficiency then in the exercise of the inherent jurisdiction which the Court has to protect trust property the liquidator (or in this case the statutory receivers and managers) may be remunerated out of the “trust” property to the extent to which their services relate to the preservation and proper disposal thereof but not further.”
*Eron Mortgage Corporation (Trustee of) v Eron Mortgage Corporation (1998) 53 BCLR (3d) 24
“The general principle which I extract from these authorities is that the Court does have an inherent jurisdiction to order that trust assets be charged with the remuneration and expenses of a third party if the work done by the third party is of benefit to the trust property or is necessary for the management and preservation of the trust assets. Implicit in the statement that the work be necessary for the management and preservation of the trust assets is that another person would have been required to perform the work if the party claiming compensation had not done it. Two of the cases say that the Court should exercise its discretion sparingly, which I interpret to mean that the Court should proceed cautiously to ensure that it is just and equitable for the owners of the trust property to bear the expense of a third party who was not engaged by them.”
C.A. Pacific Finance Limited (in Liquidation)
“I made a Berkeley Applegate order as it was clear that but for the intervention of provisional liquidators (and later, liquidators), an orderly presentation of the various issues which have arisen- as to title, order of distribution and (later) classification of clients- and implementation of the decisions made by the Court would not have been possible. The situation in this case had never been encountered previously, and the numbers of clients, and quantities and amounts of shares involved were also substantial. “*
Further, Re French Caledonia Travel 2003 NSWSC 1008, on an application for an order that the liquidator be entitled to recoup all of his costs and expenses from the trust accounts, prior to any distributions to any beneficiary, the Court held that the liquidator was entitled to remuneration from the only assets available – the trust assets.