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Liquidators break serve on a “Quistclose trust” argument

Re BBY Limited (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Limited (Receivers and Managers Appointed) (in liq) [2022] NSWSC 29 (28 January 2022)

Gleeson J finds payments to be unfair preferences, rejecting an argument that one of those payments was simply the return of trust funds.

This case neatly illustrates why it is critical to prove an objective mutual intention when asserting the existence of a “Quistclose trust”.

Liquidators were appointed to BBY Holdings Pty Ltd (Holdings) and its wholly owned subsidiary, BBY Limited (BBY). The BBY group operated a financial services business.

Glenn Rosewall was a director and the executive chairman of BBY and Holdings. Glenn invited his father, Ken Rosewall (a former Australian tennis player) to also become a director of the companies.

Ken and Glenn were also directors of Ficema Pty Ltd (Ficema), which acted as trustee of a trust whose beneficiaries included Ken and Glenn.

In June 2014, BBY sought short-term financial assistance from its shareholders, including Ficema, to meet margin calls on a particular transaction, known as the “Aquila trade”. On 16 June 2014, Ficema advanced $3 million to BBY. As events transpired, these funds were not needed or used by BBY to pay any margin calls. BBY repaid $3 million to Ficema on 24 June 2014 (the $3 million payment).

Between January 2014 and April 2015, Ficema received six payments from BBY totalling $341,890.27.

The liquidators commenced proceedings alleging that the $3 million payment and the other six payments were unfair preferences, insolvent transactions and voidable under s 588FE(4) of the Corporations Act (the Act).

The $3 million payment – did it give rise to a “Quistclose trust”?

Ficema contended that the $3 million payment was not a preference because:

  • the funds were advanced to BBY for a particular purpose in relation to the Aquila trade, and so the advance was impressed with a “Quistclose trust”; and

  • that purpose having failed, the funds were held on trust by BBY for Ficema and so the $3 million payment was simply the return of trust property.

Gleeson J reviewed the authorities explaining “Quistclose trusts”. His Honour did not wade into the debate about whether a “Quistclose trust” was a type of express trust or a resulting trust.

Though his Honour explained at [53] that a “Quistclose trust” was essentially, a trust arising where a transferor advances funds to a transferee with the mutual intention that it be used for a specific purpose (rather than becoming part of the transferee’s assets), so that if the funds are not applied for that stated purpose, the transferee holds the funds on trust for the transferor.

His Honour observed that an important indicator of whether parties intend to create a “Quistclose trust” is whether or not there is an intention that the subject funds be kept separate from the recipient’s other funds.

His Honour said at [121] that:

The question is whether the objective intention of the parties was that the funds advanced would remain the beneficial property of the lender (even if not an exclusive beneficial interest) until the borrower applied those funds in the manner required by the stipulated purpose.

His Honour reviewed the detailed and heavily contested evidence. In short summary, his Honour found that:

  • on 12 June 2014, Glenn (on behalf of BBY) requested from Ken (on behalf of Ficema) a short-term loan on the express basis that it be repaid within a short time;

  • Ken was not aware that the intended purpose of the loan was to assist BBY to pay margin calls to the ASX – no one placed any restrictions on how the funds were to be used by BBY, or the ability of BBY to mix the funds with other BBY funds; and

  • though the funds were deposited into BBY’s trust account, Ken was not aware of this, and Glenn gave no undertaking that the funds would not be mixed with BBY’s other funds.

His Honour concluded that Ficema did not retain a beneficial interest in the $3 million funds that were advanced and that the advance did not give rise to a “Quistclose” trust. Instead, BBY received those loan funds as creditor of Ficema. The return of those funds to Ficema was an unfair preference.

The other six payments

Of the other six payments to Ficema totalling $341,890.27:

  • three of those payments totalled $186,526.64 and were paid by BBY; and

  • the other three payments totalled $155,363.73 and were paid by Holdings.

His Honour accepted that all six payments were on account of interest on various loans made by Ficema to Holdings.

Even though there was no evidence of a written direction given by Holdings to BBY to make the payments totalling $186,526.64 to Ficema, his Honour inferred that Holdings did so direct that BBY make these payments on Holdings’ behalf.

His Honour drew this inference because, among other things, BBY was the group’s main operating entity and had an operating account from which the group’s expenses were paid.

Therefore, his Honour concluded that the six payments were unfair preferences made on behalf of the debtor, Holdings.

Insolvency and a presumption of insolvency

In separate recovery proceedings, known as the “GARF proceedings”, it was established that BBY was insolvent from 1 January 2014 to the relevant “relation-back date” of 17 May 2015. Therefore, a statutory presumption of insolvency in respect to BBY arose under s 588E(8)(a), by reason of the finding in those proceedings.

His Honour found that Ficema had not rebutted that presumption in relation to BBY.

In any event, his Honour found – after an extensive review of the evidence – that BBY and Holdings were in fact insolvent from 1 January 2014 to 17 May 2015.

Therefore the $3 million payment and the other six payments were insolvent transactions under s 588FC and so voidable under s 588FE(4).

Relief and payment of interest

His Honour ordered that Ficema pay BBY and Holdings the respective sums of $3 million and $341,890.27.

His Honour accepted the authorities suggesting that pre-judgment interest in accordance with s 100 of the Civil Procedure Act 2005 (NSW), should run from the date the liquidator demands the return of a preference or, at the latest, the date on which the proceedings were commenced.

His Honour ordered that interest be calculated from the date that the proceedings were commenced, because the liquidators sent no letter of demand prior to commencement.


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