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07
Aug 2017

Taking a cautious approach when dealing with trust assets

Liquidators of corporate trustees are continually faced with the conundrum – what powers do I have to deal with trust assets? Often, the corporate trustee will have served no other function than to act as trustee and the only assets available to satisfy debts owed by the company will be those held by the company in its capacity as trustee of the relevant trust.

Putting aside the practical difficulties of identifying and separating trust and non-trust assets, complications in dealing with the assets of a corporate trustee are compounded when the trust deed appointing the corporation contains an ipso facto clause disqualifying the corporation from acting as trustee upon an insolvency event. Far too often the corporate trustee will enter into an insolvency event without a replacement trustee being appointed. Whilst the corporate trustee’s right to be indemnified from the trust assets for liabilities incurred in exercising its function as trustee subsists, as a bare trustee of the relevant trust, questions arise as to an insolvency practitioner’s ability to deal with those assets absent some other power.

Case study

In the recent decision of Combis, in the matter of Reehal Holdings Pty Limited (in liquidation) (Trustee) v Reehal Holdings Pty Limited (in liquidation) (Trustee) [2017] FCA 793, the Federal Court of Australia granted an application by the liquidators of Reehal Holdings Pty Limited (in liquidation) (Company) seeking, among other things, their appointment as receivers of the property and assets of the Reehal Property Trust (Trust), as well as their costs, expenses, and remuneration as liquidators of the Company or receivers of property of the Trust from the Company’s right of exoneration as trustee.

Background

The Company was at all material times the trustee of two trusts: The Balwinder Family Trust and the Trust. The Company did not trade in its own right and only traded in its right as trustee of the Trust.  The Balwinder Family Trust had little or no activity or assets.

On 9 November 2016, the Company was ordered to be wound up.  The liquidators’ subsequent investigations found that the Company, in its capacity as trustee of the Trust, owned three apartments on Queensland’s Gold Coast.

The trust deed appointing the Company as trustee contained an ipso facto clause vacating the office of trustee upon an insolvency event (in this instance the presentation to the court of a winding up petition). In addition to this all too familiar clause, the trust deed contained the following clause:

Clause 14.5 – Simultaneous

Notwithstanding anything herein contained in this Trust Deed, if the removal of a Trustee would leave the Trust without a Trustee, then that removal shall only be effective and operate simultaneously with the appointment of a new trustee.

Not surprisingly, the liquidators were faced with uncertainty due to the apparent conflict between the above clause and the ipso facto clause removing the Company as trustee upon the presentation of the winding up petition. Did the Company remain as trustee, thereby affording the liquidators the power to deal with company property as provided by section 477(2) Corporations Act 2001 (Cth) or did the Company assume the position as a “bare trustee” whereby the Company’s powers to deal with the Trust’s assets were limited to protecting and preserving those assets?

Sensibly, the liquidators brought their application seeking their appointment as receivers of the Trust’s assets in order to resolve any uncertainty created by the concurrent application of the ipso facto and appointment clauses.

What the Court said

It was submitted by the liquidators that it was necessary to be appointed receivers of the property of the Trust in circumstances where the Company ceased to be the trustee of the Trust by reason of the insolvency event.  Accordingly, the liquidators sought to be appointed receivers pursuant to section 57 of the Federal Court Act 1976 (Cth).

This issue was recently dealt with in Aced Kang Investments Pty Limited [2017] FCA 476.  There the Court opined at [12]-[13] (references omitted):

In circumstances where a company that is the trustee of a trust goes into liquidation, and thereupon ceases to be the trustee of the trust, does the liquidator’s power of sale of the property of the company in s 477(2)(c) of the Corporations Act 2001 (Cth) extend to trust assets that remain registered in the company’s name? The answer is uncertain on the present state of the authorities. There is no issue that, in such cases, the company holds the real property registered in its name as a bare trustee. Nor is here any issue that the company, as a former trustee, has a right of indemnity from the trust assets, secured by an equitable charge over those assets. However, a difference of opinion has emerged as to whether the power of sale of the property of the company in s 477(2)(c) extends to trust assets in such circumstance.

This followed on from Justice Brereton’s decision in Stansfield DIY Wealth (in liquidation) [2014] NSWSC 1484 where his Honour said at [10]:

However, the equitable lien securing the trustee’s right of indemnity and exoneration does not of itself give the former trustee a power of sale; rather, it is a security which is enforceable by the trustee only by judicial sale or appointment of a receiver with a power of sale. If the company has ceased, or ceases, to be a trustee of the trust, the power of sale given to the trustee under the trust deed (or otherwise given, for example by statute, to a trustee) are no longer available to it. 

Having regard to the state of the recent authorities and the apparent conflict in the terms of the deed establishing the Trust, the Court considered it appropriate to grant the relief sought, appointing the liquidators as receivers over the property of the Trust and the power to deal with those assets pursuant to section 420 Corporations Act 2001 (Cth).

In addition to the above, the Court confirmed the Company’s right of indemnity for liabilities incurred in acting as trustee of the trust and the liquidators right to be subrogated to the the Company’s right of indemnity (secured by an equitable lien over the assets of the Trust). This included the expenses of identifying the Trust’s creditors, and identifying and realising the Trust’s assets, the costs of which would necessarily fall upon the Trust’s creditors if they pursued recovery action themselves.

Take away point

Whilst there continues to be conflicting authority as to the rights of insolvency practitioners to have their remunerations and expenses paid from trust assets, what has become apparent from recent decisions is the need for a liquidator appointed to a company which is a bare trustee to seek directions from the Court before dealing with the trust property.

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