Are trust assets safe if a corporate trustee is liquidated?

View All Articles

The answer is no.

In the recent Federal Court of Australia decision of Kitay, in the matter of South West Kitchens (WA) Pty Ltd [2014] FCA 670 (“the decision of Kitay”) the Federal Court held that a liquidator of a corporate trustee could sell the trust assets without first obtaining a court order.

In the decision of Kitay the facts were:

  1. In 2004, a trust was created by a trust deed under which South West Kitchens (WA) Pty Ltd (“SW Kitchens”) was appointed as the trustee of a trading trust.
  2. The assets of the trust were the only assets of SW Kitchens.
  3. The trust deed included a clause, whereby the trustee would no longer be the trustee in the event the corporate trustee is placed into liquidation;
  4. In 2014, Kitay was appointed liquidator of SW Kitchens. Upon this appointment SW Kitchens was disqualified from being the trustee.
  5. Kitay, acting as liquidator wanted to sell the trust assets and distribute the proceeds to the creditors.
  6. Kitay did not wish to obtain an order of the court due to the inconvenience of the process.
  7. The court held that an order of the court was not required as section 477(2)(c) of the Corporations Act 2001 (“the Act”) provided a liquidator with the requisite power to sell the trust assets.

Prior to the decision of Kitay a liquidator of a corporate trustee had to apply to the court for an order authorising the sale of trust assets. Obtaining such orders are inconvenient, time consuming and costly – usually consuming a significant proportion of the assets of the insolvent corporation. This reduced the frequency of orders sought by liquidators to sell trust assets.

However, the decision of Kitay provides authority for the liquidator to exercise the power of sale pursuant to section 477(2)(c) of the Corporations Act 2001 (“the Act”). In other words, now, a liquidator does not have to obtain express authority from the court to sell trust assets in straight forward cases.

What are the effects of the decision of Kitay on you?

The decision of Kitay may affect you if the following circumstances are present:

  1. A company is appointed trustee of a trust (the corporate trustee);
  2. The corporate trustee is placed into liquidation; and
  3. A trust deed exists, which provides that:
    •  If the corporate trustee falls into liquidation, then the corporate trustee is effectively disqualified from continuing to act as trustee.

Once a liquidator is appointed, the liquidator will be able to sell the assets of the trust without obtaining a court order. This has the potential to reduce asset protection and should be remembered when appointing a company as trustee of a trust.

What should you do if you are unsure as to whether your trust assets are safe?

If you are unsure as to whether or not your trust assets are safe, it is important to speak to an experienced lawyer as soon as possible. Please contact me if you have any questions with respect to the above.

The information provided in this article is for general information and educative purposes in summary form on legal topics which is current at the time it is published. The content does not constitute legal advice or recommendations and should not be relied upon as such. Whilst every care has been taken in the preparation of this article, FC Lawyers cannot accept responsibility for any errors, including those caused by negligence, in the material. We make no representations, statements or warranties about the accuracy or completeness of the information and you should not rely on it. You are advised to make your own independent inquiries regarding the accuracy of any information provided on this website. FC Lawyers does not guarantee, and accepts no legal responsibility whatsoever arising from or in connection to the accuracy, reliability, currency, correctness or completeness of any material contained in this article. Links to third party websites or articles does not constitute any endorsement or approval of those sites or the owners of those sites. Nothing in this article should be construed as granting any licence or right for you to use that content. You should consult the third party’s terms and conditions of use in relation to any third-party content. FC Lawyers disclaims all responsibility and all liability (including liability for negligence) for all expenses, losses, damages and costs you might incur as a result of the information being inaccurate or incomplete in any way. Appropriate legal advice should always be obtained in actual situations.