Corporations Act 2001, a receiver may be appointed over a trust where a relevant person (eg: a director of an insolvent company) is a beneficiary and effectively controls the trust or is the alter ego of the trust. The Court reached this conclusion on the basis that such person has at least a contingent interest and possibly a proprietary interest in the property of such trust.
Definition of interest
The Court made the above findings after considering the meaning of interest in the phrase any legal or equitable interest in real or personal property in the definition of property in s.9 of the Corporations Act 2001. A review of the meaning of interest was necessary as before a receiver could be appointed over property, the relevant interest must exist.
Proprietary Interest
The Court considered that a person who may exercise powers over property in favour of any person has a general power, tantamount to ownership. A person who may exercise powers in favour of any person within a class of persons has a special power and a person who may exercise powers in favour of any person, other than designated persons has a hybrid power.
By analogy, the Court found that a beneficiary of a discretionary trust who effectively controls the power of selection because the beneficiary is a trustee or has the power to appoint a new trustee may have what approaches a general power and hence a proprietary interest in the property of the trust.
The Court further noted that in the ordinary case, a beneficiary of a discretionary trust does not have any interest, not even an equitable interest, in the trust income or capital which would fall within even the most generous definition of property in s.9.
The Court then however distinguished the ordinary case from the case in which a beneficiary effectively controls the trustee’s power of selection in which case that beneficiary had something akin to a proprietary interest.
Contingent Interest
The Court also agreed with longstanding authority that in the ordinary case a beneficiary of a discretionary trust did not have a contingent interest, but only an expectancy or mere possibility of a distribution of trust property in their favour.
The Court however then again distinguished the ordinary case, from the case in which a beneficiary is the alter ego of the trust or effectively controls the trust in which cases such a beneficiary may have a contingent interest because it is more than mere possibility rather it is as good as certain that the beneficiary will receive a distribution of trust property in their favour.
Examples of when a Beneficiary will have an interest
In this case, the following were scenarios in which an interest was found.
Example 1:
the beneficiary is the director and secretary of the trustee company
the trustee has a wide discretion as to the distribution of income and capital
the beneficiary is the original appointor but their wife is the current appointor
Example 2:
the beneficiary is the trustee
no more than a certain percent of the income or capital of the trust can be distributed without the consent of the appointor
the appointor is the beneficiary’s wife
Example 3:
the trust is a unit trust
the only unit holder is a company being a trustee of a super fund
the director and secretary of the company are husband and wife
the husband owns all the shares in the company
Example 4:
the beneficiary is the appointor
the trustee has a complete range of powers tantamount to ownership
Appeal?
Although family law Courts have applied the alter ego concept for the purposes of including property held by trusts in the pool of assets for the last 20 years or so and without the same need to mould the beneficiary’s position into an interest, this is the first time that the concept has been used in a purely commercial context.
There is more than just a mere possibility that this case will go on to appeal having regard to:
its importance in the context of asset protection planning and insolvency
that it is a judgement from a single Judge
the analysis of the interest a beneficiary of a discretionary trust in trust property in light of past authority that such beneficiaries do not have such interests in the trust property per se but rather have interests such as a right to be considered as a potential beneficiary
the analysis of a person controlling a trustee which does not, for example, address the case that a person may be restrained from exercising his power of appointment maliciously or for improper purposes.
Actions?
What should you do?
At the very least, review, and if necessary amend, the identity of the appointor of your trust. You should also review who the beneficiaries are, who the trustee is and what the powers of the trustee and appointor are. These issues should also be in the forefront when considering and advising on establishing new trusts. You should not however, make any changes to your trust deed without first taking legal advice.
July, 2006
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