An often complicated and at times mysterious issue that arises for practitioners and their lawyers in the insolvency space is how one should approach trusts and trust assets. This year, there have been at least three Supreme Court of New South Wales decisions (all, incidentally, delivered by Justice Brereton) that may provide some much needed judicial guidance on the matter.

Recently, in AAA Financial Intelligence Ltd (in liquidation) ACN 093 616 445 [2014] NSWSC 1004, the Court held that the applicant liquidators were entitled to their reasonable and proper costs and expenses from trust assets, but only in respect of such work as was referable to the administration of the trust assets. Similarly, in In the matter of North Food Catering Pty Limited [2014] NSWSC 77, the Court held that the applicant liquidators were entitled to apply trust assets in payment of their remuneration. Earlier in the year, a decision that went somewhat more unnoticed was ICS Real Estate Pty Ltd (in liquidation); and In the Matter of Independent Contractor Services (Aust) Pty Ltd (in liquidation) [2014] NSWSC 479.

The facts

Pursuant to two trust deeds each dated 16 November 2006, two companies (ICSRE and ICS) were appointed as trustees of two discretionary trusts (Trusts). Both companies carried on business under similar models - they engaged persons (Representatives and Consultants) to deliver consultancy, sales and marketing services to banks, real estate agencies and engineering and IT consultancies (Agencies).

Although the remuneration of the Representatives and Consultants was paid by the companies, the Agencies agreed to pay the companies a commission-type fee. Representatives and Consultants were required to apply to become general beneficiaries of the Trusts and also expressly acknowledge that they were not employees of either company.

The issue

The applicant Liquidator (who had been appointed to both companies) collected debts owing to the companies from the Agencies after his appointment. Further monies were owing to the companies by the Agencies at the time of the Court application. The fundamental question in this case was whether the Trusts were shams and whether the monies collected and due belonged to the companies beneficially or as trustees for the Representatives and Consultants. Even Justice Brereton acknowledged that the Liquidator was in this case confronted with a “substantial dilemma”.

The difference is significant. If, on the one hand, the monies belonged to the companies beneficially, then they could be added to the companies’ pool of assets and distributed among creditors in accordance with the Corporations Act 2001 (Cth). If, on the other hand, they belonged to the companies in their capacity as trustees, then they could only be divisible in accordance with the relevant Trusts to their respective beneficiaries.

The argument – the Trusts are a sham

The Liquidator argued that the Trusts were shams and that these were assets that belonged to the companies beneficially. A number of arguments were advanced in support of his case, primarily that the companies did not exercise any actual discretion when making payments to Representatives and Consultants – the Liquidator’s position was that they believed with a high degree of certainty that they would be paid by the companies and gave payment directions to the companies accordingly.

The decision

The Court was not persuaded by the Liquidator’s arguments and ultimately concluded that the evidence before the Court did not make good the “very serious allegation that the trust arrangement was a sham”. In particular, the Court was not persuaded that the true arrangement was such that the companies were not able to exercise discretion as trustees. A fundamental feature of the arrangement was that the Representatives and Consultants acknowledged they were not employees and waived any rights they might have had under the laws of employment.

Judging by the frequency of recent applications in which the Court has been asked for directions on how trust assets ought to be applied, it seems this issue will continue to arise. Thankfully, the Courts have and will continue to provide timely and apt judicial guidance on this routinely difficult issue.