Insights / March 3rd, 2015

Bankruptcy and Trusts

The reasons of Chief Justice Kourakis at [741] record that:

“… Mr Macks agreed that if Ms Hamilton-Smith became bankrupt, her trustee could assume the role of Appointor (consistent with the practice among insolvency practitioners to do so upon the making of a sequestration order).”

We are aware of no such practice among insolvency practitioners.

Assets held in discretionary trusts having a director as appointor are both a challenge and opportunity for practitioners. It is clear, however, that a power of removal and appointment of a trustee is not “property” within the meaning of s 116 of the Bankruptcy Act 1966 (Re Burton, Wily v Burton & Ors (1994) 126 ALR 557). Even if control over a trust was achieved through control of the power of appointment, it would be improper for any trustee of a discretionary trust to exercise the trust powers for the purpose of benefiting not the objects of trust, but instead the creditors in the bankrupt estate of one of the beneficiaries (Dwyer v Ross (1992) 34 FCR 463).

There are options for practitioners in seeking access to trust funds, however. These options will depend on the particular structure and on actions taken by creditors of the director (including potentially a liquidator bringing a claim against a director). If a creditor can persuade a Court that a power of appointment may be exercised to frustrate the creditor’s ability to enforce a judgment through, for example, ensuring no distributions are made to the director the Court may make a Freezing Order preventing steps being taken such as changing an appointor and/or trustee of a trust (Rafferty v Time 2000 West Pty Ltd (No 2) [2008] FCA 1931).

If such a Freezing Order is in place, the trustee of the trust is a company, the director is the shareholder of the trustee company and the director becomes bankrupt, then his or her trustee in bankruptcy may, given such a combination of circumstances, take control of the trust by appointing himself or herself as director of the trustee company then, having obtained appropriate advice, making distributions to beneficiaries which include the bankrupt estate of the director. This type of approach was considered by Justice Mansfield in Donovan v Sheahan as trustee of the Bankrupt Estate of Donovan [2013] FCA 437.

Depending on the circumstances then, a trustee in bankruptcy may find a way to obtain access to a proportion of trust funds held by a discretionary trust which has the bankrupt as appointor, though not by the method described in Viscariello v Macks.

Cowell Clarke has significant experience in matters which concern the interaction between trusts law and insolvency. If you would like to discuss this type of matter or any insolvency related topic please contact us.

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