The reform of the intersection of trust and insolvency law – Killarnee

Once the trustee and insolvency lawyers have explained the law about the insolvency of trading trusts in the decision in Killarnee, [2018] FCAFC 40, there should be some attention given to the law reform comments of Justice Kathleen Farrell.

Justice Farrell refers to one of the questions in the appeal as being the “subject of significant academic debate and conflicting decisions of Courts for the better part of fifty years”.

That is a long period of legal uncertainty given that the trust, said to be a flexible and tax avoidance platform for investment, is an arrangement holding a range of assets worth in the billions of dollars. This is despite it having (Allsop CJ)

“no legal personality, being an equitable institution comprised of rights, duties and obligations, personal and proprietary, constituting (in private trusts) the relationship between beneficiaries, trustee and property”,

and no public reporting requirements.

Not surprisingly, in one of the earlier decisions cited by the Full Court, the Judge queried whether the trading trusts of this kind

“(no doubt entered into for taxation purposes) … should be allowed to exist”.

They have been, and encouraged further.

Putting aside the arcane law which supports trusts, about much of which it seems few can agree, including judges, Justice Farrell made these useful comments:

  1. In my view it is unfortunate that the legislature has not seen fit to make more explicit the extent to which the priority regime set out in the Corporations Act impacts on the interests of those involved with a trading trust where a current or former trustee is a company in liquidation. There are good public policy reasons for a legislated priority regime which expressly encompasses an insolvent corporate trustee given the position that such trusts occupy in Australia’s economy. Some of the economic justifications for establishing unambiguous regimes for priorities in insolvent administrations are so that assets may be efficiently deployed in the economy (rather than locked up during protracted insolvent administrations) and so that returns to creditors, investors and beneficiaries are maximised rather than monies being expended on applications to the courts for directions in order to provide certainty and protect the position of liquidators.

While Justice Farrell goes on to acknowledge the complexity of the law reform task, it is for the legislature to make clear which policy approach it prefers as reflected in the various court decisions, or elsewhere.

“Honest minds can differ about which approach is preferable, even in the relatively straightforward case of a trading trust carrying on only one family business”.

(One might say that may in fact be the easy part, compared to, for an Australian government, the political task of confronting the various vested interests involved).

The Judge suggests it would be important that any re-drafting of the priority regime accommodates the more complex situations of a trustee of multiple funds or where the trustee also conducts a business in its own right. As she explains,

“in the more complex situations, trusts are a vehicle for investments from the Australian public, often in the context of superannuation savings, where many funds may be involved and the interests of diverse beneficiaries and creditors will need protection. This is a matter of important public policy, given the benefits of relative certainty referred to above, Australia’s adoption of a policy of compulsory superannuation savings and the proliferation of trusts which operate businesses”.

Comments

As Dr Nuncio D’Angelo writes, the concern is that “substantial entities structured as commercial trusts are permitted, and indeed encouraged, to exist in 21st century Australia” without a dedicated policy-based insolvency regime to support them.  All the more surprising, he says, given that such entities are permitted to raise funds from the public: Commercial Trusts, 2014, [6.81].

A 2015 Productivity Commission report, in relation to the potential for export of trustee services by Australia, referred to submissions describing our trust law as out dated, saying that it has not been reviewed for many years and that in the time, the way that trusts are used has changed considerably.

It took the government 15 years to amend a section on the Corporations Act to replace the word ‘Court’ with ‘court’, an important change, on the recommendation of a Judge in 2002.

One of Justice Farrell’s easy reform suggestions, to make it clear whether trust assets can be used to pay the costs of the application to wind up the trustee company, might at least be attended to a bit more quickly.

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One comment

  1. The mood of the current government is to encourage risk taking. It is therefore hardly likely to pass legislation to cause the consequences of risk taking to be sheeted home to the assets controlled by the risk takers.

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