Almost inevitably, trust deeds will contain a clause which automatically removes the trustee or requires the trustee to resign in certain events, particularly receivership or liquidation. Trustees of self managed super funds will also be a ‘disqualified person’ and be required to resign upon commencement of any winding up of the trustee company, by reason of the provisions of the Superannuation Industry (Supervision ) Act 1993.
A recent requisition from the Queensland Titles Office has brought the issue to the forefront, with practical consequences for financiers exercising enforcement rights, receivers appointed by them (used in this alert to include receivers and managers, liquidators and administrators), buyers of real property and their financiers.
The requisition arose from the sale of a Queensland property by the receiver and manager appointed to a corporate trustee. The trust was disclosed on title.
Under the terms of the trust deed, the trustee’s role was automatically vacated if a receiver was appointed. That clause had not been removed by way of variation before the receiver was appointed.
The sale of the property was completed, with the transfer signed by the receiver and manager, and a copy of the ASIC form 504 provided at settlement.
The Titles Office reviewed the trust deed and issued a requisition seeking evidence of the receiver and manager’s power to sell the property, given the automatic vacation clause.
A trust is not a legal entity in itself, and cannot ‘own’ property. Instead, property of the trust is owned by the trustee and held for the benefit of the beneficiaries. Secured creditors of a trust have a right against the trustee, who is personally liable for debts incurred as trustee, and the trustee is then given a right of indemnity from the trust assets for properly incurred debts, essentially creating the nexus between the secured creditor and the trust assets.
If a trustee’s role as trustee is automatically vacated then, in the absence of any deemed appointments under the trust deed, the trustee becomes a ‘bare trustee’, with very limited powers. The removal of a trustee severs the creditor’s link to the trust assets, leaving secured creditors without recourse.
In that situation, it would be necessary for a receiver to apply to the Court for a declaration that they have the power to sell the trust asset.
A number of cases in recent years have considered whether a liquidator has the power to sell trust assets where they have been appointed to a corporate trustee. Earlier cases suggested that liquidators did have such a power under the Corporations Act 2001 (Cth) (Corporations Act), largely removing the need for approval by the Courts. Arguably, however, more recent cases have substantially limited that principle.
The position of a receiver is somewhat analogous to that of a liquidator, including the power under the Corporations Act, to enter into possession of and sell property of the corporation.
Ramifications and cautions
If a receiver is unable to satisfy a purchaser or its financier that it has power to sell a trust asset, particularly real property, following the removal of a trustee under an automatic vacation clause, or if having satisfied them that it has that power, the Titles Office issues a requisition as happened here, there are obviously substantial ramifications for a number of persons, including:
- the secured creditor, who may be unable to realise valuable assets
- the receiver, who may need to approach the Court to confirm their power to sell or find themselves personally liable
- a buyer and their financier who may find they are unable to achieve registration of the transfer of the real property they sought to purchase and finance, and
- any advisors of those people who either gave incorrect or incomplete advice.
It is critical that any financier seeking to take security over an asset of a trust reviews the trust deed and, if an automatic vacation clause is present, has it removed by variation prior to advancing funds. In doing that, particular care should be taken to satisfy the variation requirements of the deed (i.e. third party consents and form).
Obviously, should the issue not be identified until default arises and a receiver is about to be appointed, it will be much more difficult to negotiate the variation to the trust deed.
If the secured creditor is on notice not only of an automatic vacation clause but also that a change of trustee has occurred, it has a period of only five business days to re-register its security interest against the new trustee under section 588FN Corporations Act, unless that period is extended by the Court.
If there is a risk that the nexus to the trust asset has been severed and the receiver may not have a power to sell, it would be prudent to apply to the Court for a declaration that the receiver does have power of sale. However, that is a costly exercise, and should be avoided if possible.
Alternatively, it will usually be possible to effect a sale of the secured property as mortgagee (under the mortgage) and or secured party (under a GSA), subject to ensuring compliance with the appropriate requirements for such a sale (i.e. service of notice of exercise of power of sale and the swearing of appropriate statutory declarations of service and default). The financier’s powers of sale under the mortgage and GSA continue despite any change of trustee.
Receiver’s sale contracts often contain clauses entitling the parties to effect the sale as a mortgagee sale (rather than a receiver sale) should there be some impediment to effecting a sale as receiver.
Potentially one of the most at risk parties is the buyer of real property owned by a trustee in receivership.
If the purchase is settled without review of the trust deed and without considering the receiver’s power to sell the asset, a purchaser of land may find the transfer requisitioned by the Titles Office and that they are unable to obtain registration as purchaser of the property (as was the case here). If the secured creditor and receiver fail to cooperate in addressing the requisition, it would be necessary to start Court proceedings to address the issue and seek appropriate declarations or orders to allow the sale to be effected. Again, this is a significant and expensive step.
In any purchase from a trustee in receivership, the buyer (or their advisors) should:
- review the trust deed and any variations to satisfy themselves that the receiver has power to sell (notwithstanding any warranties as to title which may be present in the contract)
- ensure that an original or certified copy (complying with the Titles Office requirements) of a deed of variation removing any automatic vacation clause is provided at or before settlement, and
- ensure that the sale contract obliges the receiver to procure the transfer of the property by the receiver’s appointor (the financier), as mortgagee or secured party exercising power of sale, or by obtaining an order of the Court validating the sale, should there be an impediment or legal challenge to the sale.
Great care must be taken when advising clients in this area to ensure that all relevant issues are identified and dealt with efficiently and effectively. There may be potential liability for advisors if the circumstances and law are not correctly understood and explained.
Ultimately, it is clear that this is becoming an area of significant practical consequence. Anyone involved with security over trust property should take the time to clearly understand the circumstances and legal implications in the specific case, with the starting point being the trust deed and always bearing in mind that early intervention is key. Failure to do so can leave all parties involved in a risky position.