This week's TGIF considers Fordyce v Ryan &
Anor; Fordyce v Quinn & Anor  QSC 307, where the
Court considered whether a beneficiary's interest in a
discretionary trust amounted to 'property' for the purposes
of the Bankruptcy Act 1966 (Cth).
The case centred around the Fairdinks Discretionary Trust
– which held two thirds of the units of the 99 George Street
Unit Trust and all the units of the Shore Street Unit Trust. The
Bankrupt was the sole director and shareholder of the trustee
company of the Fairdinks Discretionary trust and the trustee
companies of the unit trusts.
Prior to his bankruptcy, the Bankrupt had caused the trustee
company of the Fairdinks Discretionary Trust to distribute the
income of the trust to him alone in his capacity as a beneficiary
of the trust.
The trustee in bankruptcy (the Applicant)
sought to recover the Bankrupt's interest in the trusts by
applying to the Court to appoint receivers to have the trusts wound
THE APPLICANT'S SUBMISSIONS
The Applicant submitted that the Bankrupt's interest as a
beneficiary of the Fairdinks Discretionary Trust amounted to
"property" vested in the Applicant for the purposes of
the Bankruptcy Act 1966 (Cth) (Bankruptcy
The Applicant relied on the decision of the Federal Court in
Australian Securities and Investments Commission v Carey
(No 6) (2006) 153 FCR 509 (Richstar) to argue that
the Bankrupt's interest amounted to property because he
essentially controlled the trustee of the Fairdinks Discretionary
THE COURT'S DECISION
Does a bankrupt's interest in a discretionary trust
amount to property vested in the trustee in
Justice Jackson considered the wording of the Fairdinks
Discretionary Trust Deed and found it was a purely discretionary
His Honour then considered s 5 of the Bankruptcy Act, which
provides a broad definition of "property" (including
"any estate, interest or profit, present or future, vested or
contingent, arising out of or incident to any such real or personal
property"), and s 58, which provides that property of a
bankrupt, other than after-acquired property, vests in the trustee
in bankruptcy of the bankrupt.
His Honour noted that under usual analysis, a beneficiary of a
purely discretionary trust does not have a property interest in the
Therefore, the Bankrupt's interest as a beneficiary under
the Fairdinks Discretionary Trust would not be property vested in
What is the effect of a beneficiary's control of a
The Applicant argued that an exception to the usual analysis is
where the beneficiary effectively controls the discretionary
In Richstar, Justice French compared the interests of a
beneficiary of a discretionary trust who is at arm's length
from the trustee, with those of a beneficiary who is "in truth
the alter ego of the trustee". Where the former only has an
"expectancy or mere possibility of a distribution", the
latter has, "at the very least a contingent interest" as
"it is as good as certain that the beneficiary will receive
the benefits of distribution" from the trust.
However, Justice Jackson noted that "to the extent that
Richstar might be thought to support a principle, it has
not been followed or applied subsequently and it has been
Justice Jackson instead followed the Federal Court decision of
Dwyer v Ross (1992) 34 FCR 463, which held that a
bankrupt's interest under a discretionary trust was not an
interest in any assets of the trust and was not property that
passed to a trustee in bankruptcy.
Justice Jackson could not accept that the de facto control of
the trustee altered the character of the interests of the
beneficiary such that it became property of the Bankrupt for the
purposes of the Bankruptcy Act.
The Applicant also argued that, in effect, the trust was a sham
That argument was rejected by Justice Jackson. His Honour found
that the nature of the trust did not change, simply because he had
caused the trustee to make distributions to himself alone.
Justice Jackson concluded that:
the Bankrupt's interest as beneficiary under the Fairdinks
Discretionary Trust did not vest in the Applicant as property of
the Bankrupt within the meaning of ss 5 or 58 of the Bankruptcy
if the trustee of the Fairdinks Discretionary Trust made a
distribution to the Bankrupt, it would form part of the
His Honour found that the Applicant's applications should be
This decision supports a conclusion that the assets of a trust,
even where effectively controlled by a beneficiary, do not form
part of the beneficiary's estate in bankruptcy.
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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