Are trust assets safe if a corporate trustee is liquidated?

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.