In the last few years, case law has established several important key principles in trust law in the context of insolvent trustees.
It is now well established that:
- the trustee does not beneficially own the assets of the trust, and cannot directly access and apply them;
- however, a trustee has a right of indemnity from trust assets for debts properly incurred, secured by a lien over those assets—in that way, a trustee can indirectly access and apply trust assets; and
- finally, while the right of indemnity entitles a trustee to access the cash assets of the trust, neither it nor the accompanying lien, entitles the trustee to liquify non-cash assets and apply the proceeds — for a power to sell, the trustee must look elsewhere.
Insolvent trustees: A common issue
A common issue can arise, however, in the context of an insolvent company trustee when the appointed liquidator is unable to sell trust assets for the benefit of creditors.
In ‘active’ trusts, the trustee has a power of sale under the trust deed. However, just as commonly, if a trustee company is wound up, the deed will automatically trigger the trustee’s resignation, resulting in the power of sale being lost. But there are also plenty of trusts where a trustee lacks a power of sale by design.
Insolvent trustees: In practice
In a recent case, Macpherson Kelley acted initially to recover unpaid body corporate levies owing on a townhouse at Doolandella, registered to Victorian company. The levies were not paid, and the company was wound up in insolvency on application by the body corporate and liquidators appointed.
Shortly after appointment, it became apparent that the sole activity of the company in liquidation was to act as trustee of a limited recourse borrowing arrangement (LRBA). The trust was bare, and the relevant trust deed did not provide for any power of sale.
What is a limited recourse borrowing arrangements?
Under the Superannuation Industry Supervision Act 1993 (Cth) (SIS Act), the LRBA is a particular type of arrangement that provides an exception to the general prohibition against borrowing by super funds. This allows the trustee of a self-managed fund to borrow funds to acquire a single asset.
How could liquidators realise the assets without breaching the company’s trust obligations?
It is now settled that, trust property not being ‘property of the company’ s.477 of the Corporations Act 2001 (Cth) cannot be relied upon to sell it. Accordingly, any power of sale must be given to liquidators by obtaining judicial order.
As has been recently observed, the Courts are generally willing to make such orders, which can be obtained either by varying the terms of the trust or by appointing the liquidators as receivers of its assets and undertakings.
However, where the relevant trust is part of an LRBA, it is inappropriate to obtain those orders by variation of the trust. That is because the SIS Act makes it an offence for a ‘disqualified person’ including, relevantly, a company in liquidation, to continue to act as a ‘custodian’ of property for the purposes of the LRBA.
Appointing the liquidators as receivers
Where the relevant trust is part of an LRBA, the preferable course is for the liquidators to cause the trustee company to resign as trustee of the LRBA and, in the absence of another suitable trustee, to be appointed as receivers of the trust assets.
Accordingly, Macpherson Kelley on behalf of the liquidators sought and obtained orders:
- approving the resignation of the company to resign as trustee of the LRBA trust;
- appointing the liquidators as receivers and managers of that trust, with powers required to sell the sole trust asset and apply the proceeds to trust liabilities; and
- making clear that, as the company had never acted other than as the trustee of the trust, the proceeds of sale could be applied against all of the company’s liabilities, including the costs and remuneration of both the liquidation and the receivership.
At the time of writing, it is expected that, after satisfaction of the secured creditor, trust liabilities and costs – the sale of the property will result in a dividend being paid to the superannuation fund.
Though issues can arise with insolvent company trustees, there are legal avenues available to ultimately enable the sale of trust assets for the benefit of creditors.