Trust law and insolvency – views of the NSW Chief Justice; law reform prospects

A paper given by the NSW Chief Justice, Tom Bathurst – ‘Commercial trusts and the liability of beneficiaries: are commercial trusts a satisfactory vehicle to be used in modern day commerce?’ – discusses the need for law reform despite, as he says, insolvency law and trust law being “perhaps the world’s most unexciting and complex area in which to initiate reform”. 

Some current issues not referred to are the federal government’s announcement that an inquiry into the intersection of insolvency and trust law will be held, (though not, it seems, into discretionary trusts and their use in protecting assets?); and the government’s proposed collective investment vehicle regime, to replace managed investment schemes, which are generally founded on trusts.   

The Chief Justice explains that

“despite the passage of almost 40 years since Professor Harold Ford published ‘Trading Trusts and Creditors’ Rights’, and despite numerous calls for reform, there remains no comprehensive legislative regime governing what is colloquially described as the insolvency of commercial trusts”.

He asks

“why has there been such stagnation?”, answering that with “combine insolvency law with trust law and you have perhaps the world’s most unexciting and complex area in which to initiate reform. The terms ‘beneficiary’, ‘sui juris’ and ‘liability’ are not the glamorous, discussion-generating buzzwords governments seek when spearheading reforms”.

He goes on to offer another explanation for the paralysis being that

“simply, there is no magic solution. The intersection of trust law and insolvency law is far too technical and complex for there to be a simple solution”.

He does refer to some “progress” “after decades of stagnation” with NSW abolishing the rule in Hardoon v Belilios, limiting the liability of beneficiaries under a trust, accepting a recommendation of the NSW Law Reform Commission to add s 100A to its Trusts Act, given “the failure of the Commonwealth to respond to the issue over many years”.

But any reform must be uniform across Australia. “It would lead to absurdity if states enact different provisions”, with s 100A raising potential difficulties where the trust trades in a number of state jurisdictions. “Piecemeal reform” is not an adequate solution to the complexities of the issue and would likely create more problems.

Managed investment schemes are referred to, in so far as they are structured as trusts, with trust law applying alongside the statutory regime of Chapter 5C of the Corporations Act. The complexities in that intersection are the subject of the governments proposed corporate collective investment vehicle regime.  Corporate Collective Investment Vehicles | Murrays Legal.

Financial literacy

The government’s focus is said to be “on ensuring the CCIVs framework would offer internationally recognisable investment products, flow-through tax treatment, commercial flexibility and strong investor protections”. As to the latter, Chief Justice Bathurst did not see financial literacy a solution in respect of trusts, and their extended use across commerce and investment.  He pointed out that “even professionals working in the field mistake the nature of trusts”, referring to a case where accountants held “the incorrect but prevalent notion that a trust is a legal person … despite their academic and professional qualifications, and despite the fact that the accountancy practice was conducted by the trustee of a unit trust”. The point being that “if even accountants are mistaken, it is hardly surprising that retail investors are under this illusion”.

Reform?

After those decades of delay, or certainly since the 1988 Harmer Report offered some solution, the federal government has announced a proposed review into how trusts, which the government says are commonly used by small businesses, are treated under insolvency law: see Further insolvency reforms to support business dynamism.

Discretionary trusts?

Beyond a media release, no further details of the inquiry are given.  As to the use of trusts by many of those in business, there is the issue of the extensive use of discretionary trusts in protecting assets from creditors in any insolvency, a review of which would usefully provide some law reform dynamism.

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