Australia: Appointor of trust trumps deregistration and bankruptcy

The case of Thorne Developments Pty Ltd (ACN 109 570 194) v Thorne (2015) 106 ACSR 481 illustrates the how a suitably drafted deed may assist in protecting a trust from deregistration of the trustee and bankruptcy of its director

Facts

  • Thorne Developments Pty Ltd (TDPL) was trustee of a family discretionary trust (Trust) known as the Thorne Family Trust No 3, made by deed on 21 June 2004 (Trust Deed).
  • On 4 December 2011, TDPL was deregistered. Brett Thorne (Brett) was sole director at the time.
  • On 26 March 2012, Brett became bankrupt.
  • On 22 August 2012, Brett entered into a deed of appointment (Deed of Appointment) with his wife Suzanne Thorne (Suzanne) and his brother Craig Thorne (Craig) to appoint Suzanne and Craig as trustees of the Trust purportedly pursuant to the Trust Deed.
  • Craig later relinquished his office as trustee of the Trust.
  • TDPL was reinstated as a company on 4 September 2013 at the request of Brett's trustee in bankruptcy.
  • On 28 February 2015, Suzanne was served with a bankruptcy notice. Suzanne applied to set aside the bankruptcy notice, and that application was not decided by the time of the Court's decision.
  • TDPL sought declarations that the appointment of Suzanne as trustee of the Trust during TDPL's period of deregistration was invalid.

Issues

  1. Did sections 601-601AH of the Corporations Act 2001 (Cth) (the Act) preclude Suzanne from being appointed a trustee of the Trust unless the Commonwealth consented and a court ordered it?
  2. Was Suzanne validly appointed trustee on the proper construction of clause 16.3 of the Trust Deed and the Deed of Appointment?
  3. Was the appointment of Suzanne as a trustee invalid because the appointment was not made bona fide and/or Suzanne is a near relative of most of the beneficiaries of the Trust?
  4. Did Suzanne on 28 February 2015 vacate the office of trustee due to being "subject to any bankruptcy law" within the meaning of clause 17.1 of the Trust Deed?

Court decision

Issue 1

The Court held that sections 601AD and 601AE of the Act are intended to ensure there is always an entity to deal with the property (including trust property) owned by a deregistered company upon its ceasing to exist:

Section 601AD

(1) A company ceases to exist on deregistration.
...
(1A) On deregistration, all property that the company held on trust immediately before deregistration vests in the Commonwealth. If property is vested in a liquidator on trust immediately before deregistration, that property vests in the Commonwealth. This subsection extends to property situated outside this jurisdiction.

Section 601AE

  1. If property vests in the Commonwealth under subsection 601AD(1A), the Commonwealth may:
    1. continue to act as trustee; or
    2. apply to a court for the appointment of a new trustee.

    Note: Under paragraph (1)(a), the Commonwealth may be able to transfer the property to a new trustee chosen in accordance with the trust instrument.

    ...

However, the Court held that if a relevant trust deed or another statutory provision provided for the appointment of a new trustee on the deregistration of a corporate trustee, then the vesting of property under section 601AD(1A) was defeasible on a relevant exercise of the power under that trust deed or statutory provision. The Court found that the Act did not require the consent of, or notice to, the Commonwealth before such an appointment could take effect.

Accordingly, on the deregistration of TDPL, the Trust property became the property of the Commonwealth. However, on the appointment of Suzanne and Craig as trustees (subject to that appointment being made pursuant to the Trust Deed or another statutory provision that provided for the appointment of a new trustee on the deregistration of TDPL) the property ceased to be the property of the Commonwealth, and became the property of Suzanne and Craig as trustees.

Issue 2

Given the outcome of Issue 1, Suzanne's appointment as trustee was valid as long as she was appointed trustee in accordance with the Trust Deed or another statutory provision that provided for the appointment of a new trustee on the deregistration of TDPL.

TDPL argued the appointment was invalid because there was no vacancy in the office of trustee occupied by TDPL (due to the Commonwealth taking TDPL's place as trustee under sections 601AD and 601AE of the Act).

Clause 16.3 of the Trust Deed read:

16.3 If the Trustee is a sole trustee and has resigned or vacated its office under clauses 17 or 18 or (being a corporate trustee) has been dissolved and the Trustee has not appointed a new Trustee under clause 16.1, the Nominated Person may by instrument in writing appoint a new Trustee.

The Court held that section 12 of the Trusts Act 1973 (QLD) (Trusts Act) provided the relevant power to appoint a new trustee, in the event of a company was deregistered:

12(1) Where a trustee, whether original or substituted, and whether appointed by the court or otherwise --
(h) being a corporation, has ceased to carry on business, is under official management, is in liquidation or has been dissolved;
then the person nominated for the purpose of appointing new trustees by the instrument (if any) creating the trust, or if there is no such person or no such person able and willing to act, then the surviving or continuing trustee or trustees for the time being, or the personal representative of the last surviving or continuing trustee, may by writing appoint a person or persons (whether or not being the person or persons exercising the power) to be a trustee or trustees in the place of the trustee first in this subsection mentioned.

The Court held that the word "dissolved" under the Trusts Act in substance had the same meaning as a corporation being "deregistered" under the Act.

The Court held that although the Deed of Appointment referred to the appointment being made pursuant to the Trust Deed rather than section 12 of the Trusts Act, the appointment was still valid pursuant to section 12 because the Deed of Appointment set out the facts which triggered the exercise of the power of appointment.

Issue 3

TDPL argued the appointment of Suzanne was not bona fide because Brett could not appoint himself (he was bankrupt) and since she was Brett's wife, she would be influenced by Brett.

The Court held that the mere fact that Suzanne was Brett's wife was not sufficient to infer that the appointment was not bona fide or that she was appointed trustee so that Brett would be able to influence her decisions. The Trust Deed contained broad powers to appoint a new trustee.

Issue 4

Clause 17.1 of the Trust Deed states that a trustee who is an individual:

must vacate that office and ceased to act as such if that person is found to be of unsound mind or becomes subject to any bankruptcy law

The Court held that the service of a bankruptcy notice on Suzanne did not mean she fell within the provisions of clause 17.1 of the Trust Deed. The Court held that a bankruptcy notice may not lead to bankruptcy, and she would only be subject to clause 17.1 if she actually became bankrupt.

What do we learn from this case

The key take away from this case is that sections 601-601AH of the Act may be defeated by a suitable trust deed, quick action and good advice. A thorough examination of trust law, corporations law, insolvency law, and the trust instrument are required to determine the best course in any particular circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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