What happens if a trustee company goes into liquidation or is deregistered?

What happens if a trustee company goes into liquidation or is deregistered?

We are often approached by clients or accountants with problems relating to their trusts – sometimes the deed has been lost or damaged, or the trust was established some time ago and the terms need to be updated. An issue that has become increasingly common in recent years (particularly following the GFC) is that where a trustee company goes into liquidation or has been deregistered. This can become quite a complex issue to resolve, particularly when the trust owns real property, or when the trust is a self managed superannuation fund. This issue was also recently considered by the Queensland Court of Appeal in Thorne Developments Pty Ltd v Thorne & Anor [2016] QCA 63 (Thorne).

Background

The appellant, Thorne Developments Pty Ltd, was the trustee of a discretionary trust known as the Thorne Family Trust No 3 which was established by deed in 2004.  The appellant’s sole director was Brett John Thorne.  The appellant was deregistered in 2011 and Mr Thorne was declared bankrupt in March 2012.

Pursuant to clause 16.1 of the trust deed, Mr Thorne had a power to appoint a new trustee:

“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..”.

In August 2012, Mr Thorne appointed his wife (who was the respondent in the Court of Appeal matter) and his brother as trustees by way of Deed of Appointment.  His brother subsequently relinquished his office.

In September 2013, the appellant’s registration was reinstated by the Australian Securities and Investments Commission pursuant to section 601AH(1) of the Corporations Act 2001 (Cth) (Corps Act), following a request by Mr Thorne’s trustee in bankruptcy.

The appellant then sought declarations that that Mrs Thorne’s appointment as trustee was invalid.

At first instance, Mullins J in the Supreme Court held that:

• the Deed of Appointment validly appointed Mrs Thorne as a trustee of the Trust;
• the contention that the appointment of Mrs Thorne as trustee was not a bona fide exercise of the power of appointment was without substance; and
• Mrs Thorne was not required to vacate the office of trustee.

The appeal

After abandoning a number of grounds following the resolution of a constitutional issue, the grounds of appeal focussed on the following:

• whether there had been a valid exercise of the power of appointment, based on the construction of the Deed of Appointment; and
• whether, even if she were validly appointed, Mrs Thorne was required to vacate the position of trustee under clause 17.1 of the Trust Deed.

The outcome

(a) Had there been a valid exercise of the power of appointment?

Section 601AD of the Corps Act vests trust property in the Commonwealth on the deregistration of a company.

The Court of Appeal considered both the power of appointment contained in the Trust Deed and the operation of section 12(1) of the Trusts Act 1973 (Qld) (Trusts Act), which provides for the process of appointment of new trustees by a person nominated under a trust deed.  Section 12(1)(h) specifically deals with corporate trustees who “have ceased to carry on business, are under official management, are in liquidation or have been dissolved“.

The appellant contended that because the Deed of Appointment did not specifically invoke the operation of section 12(1)(h) Trusts Act, that clause could not be availed upon.  This contention was immediately dismissed by the Court of Appeal, as there was no requirement that the Deed of Appointment do so.

The appellant also submitted that Mr Thorne exercised the power under the Deed of Appointment under the erroneous belief that deregistration resulted in the vacancy of the office of trustee, when in fact there was no vacancy by virtue of the operation of section 601AD of the Corps Act (by that section the appellant was replaced with the Commonwealth as trustee).  Recital D of the Deed of Appointment stated:

“Consequent upon the deregistration of Thorne Developments the office of Trustee of the trust has become vacant and it has been determined by the parties to these presents that it is necessary, appropriate, convenient and/or expedient that the Appointees be appointed to be a trustees (sic) of ‘Thorne Family Trust No. 3’…”

The Court of Appeal agreed with the judge at first instance who identified that the fact there was no vacancy in the role of trustee due to the operation of s601AD was irrelevant because the operation of section 12(1)(h) Trusts Act required only that the corporate trustee had been dissolved, in which case Mr Thorne became entitled to appoint a trustee in the place of the corporate trustee, in writing, which occurred.

Philippedes JA stated at [30]:

“Even if there was an error as to the effect of deregistration, because s 601AD was overlooked, that was immaterial.  There was no misconception as to the fact of dissolution.  It remained the case that the sole trustee had been dissolved without having appointed a new trustee.  The requirements of cl 16.1 had thus been met.”

(b) Was Mrs Thorne required to vacate her position under clause 17 of the trust deed?

Clause 17 of the trust deed provided:

“17.1   A Trustee, being an individual, must vacate that office and cease to act as such if that person is found to be of unsound mind or becomes subject to any bankruptcy law.

17.2  A Trustee, being a corporation, must vacate that office and cease to act as such if that corporation enters into liquidation, whether compulsory or voluntary (other than in the case of a voluntary liquidation, solely or predominantly, for the purpose of amalgamation or reconstruction.”

The appellant submitted that Mrs Thorne was disqualified from acting as trustee because she had become ‘subject to any bankruptcy law’ by being served with a bankruptcy notice on 28 February 2015 and she had applied to have that notice set aside.

The primary judge rejected this contention, concluding:

“The service of a bankruptcy notice on a trustee may lead nowhere.  The trustees affairs are not subject to the regulation of the [Bankruptcy Act] until the sequestration order or other assignment for the benefit of creditors is made.  I therefore do not consider that clause 17.1 of the trust deed should be construed as requiring the respondent to vacate office as the trustee under the trust deed, unless the [Bankruptcy Act] has effected a change in the status of the respondent.  The respondent would not be subject to the [Bankruptcy Act] until the [Bankruptcy Act] had that effect on the respondent.”

The Court of Appeal found there was no substance to the appellant’s argument, finding that the commencement of a legal process was insufficient to result in a trustee’s disqualification, having regard to the proper construction of the trust deed.

The appeal was dismissed with costs

What should you do if a trustee enters liquidation or is deregistered?

If you are associated with a trustee that has entered into liquidation or has been deregistered, you should obtain legal advice as soon as possible.  This complex issue requires an understanding of the deed itself, the Corporations Act and the Trusts Act.  For a superannuation fund, the provisions of the Superannuation Industry (Supervision) Act 1993 (Cth) must also be considered.

The situation becomes more complex when the trustee is the registered owner of real property.  In some situations, an application to the Supreme Court for reinstatement of the company’s registration may be required, while in other circumstances it may be necessary to liaise with ASIC and other regulatory authorities to effect transfers of the registered property.

We have been involved in a number of matters of this type, and can assist you or your clients in dealing with these situations as cost effectively as possible.

Contact us on (07) 5606 7332 to discuss this or any other matter.