Publications / Finance
Trust deeds often contain a clause which automatically removes or disqualifies the trustee from acting as trustee of the trust upon an event of insolvency. The effect of triggering an automatic termination or disqualification clause in a trust is to render the trustee a ‘bare trustee’ of the trust assets. The powers of a bare trustee are to preserve the trust assets, and do not ordinarily extend to a power of sale.
As a consequence, in this situation, prudent administrators, liquidators and receivers have had to make Court applications seeking orders to sanction their power to sell trust assets.
The recent case of Kitay, in the matter of Southwest Kitchens (WA) Pty Ltd  FCA 670 has provided some clarity on:
- when a liquidator should apply for a court order to sell trust assets, and
- whether a liquidator of a corporate trustee has a statutory power of sale over and above the corporate trustee’s powers under a trust deed and at general law.
Kitay (Liquidator) was the liquidator of Southwest Kitchens. At the time the Liquidator was appointed, Southwest Kitchens was trustee of the Southwest Kitchen Unit Hybrid Trust (Trust). All assets were owned by Southwest Kitchens in that capacity.
The trust deed for the Trust provided that Southwest Kitchens was immediately disqualified as trustee if it became insolvent. The Liquidator wanted to sell the Trust assets in the course of winding up the corporate trustee, but was concerned as to his or her power to do so in circumstances where Southwest Kitchens had been automatically disqualified from acting as trustee upon its insolvency.
Key issues before the Court
The main question the court considered was whether the Liquidator was entitled to dispose of the Trust assets under the power of sale conferred on him or her by section 477(2)(c) Corporations Act 2001 (Cth), even though the corporate trustee was disqualified from acting as trustee of the Trust.
Prior to the decision, there were competing authorities on the ability of a liquidator to sell trust assets where an automatic disqualification clause was triggered, namely in:
- a series of decisions which stipulated that a court order was required before the liquidators had the authority to sell the trust assets (e.g. Theobald, in the matter of Finplas Pty Ltd  FCA 31; Capital Financial Australia Limited v Ovens Nominees Pty Ltd  FCA 677), and
- the decision of Apostolou v VA Corporation of Aust Pty Ltd (2010) 77 ACSR 84, where the Court found that a liquidator had a general power to sell the property of a company pursuant to section 477(2)(c) Corporations Act 2001 (Cth) which provides that:
‘a liquidator may sell or otherwise dispose of in any manner, all or any part of the property of the company’.
The Court found that:
- whilst the effect of a trust deed to preclude the corporate trustee continuing to act as trustee after the appointment of a liquidator cannot be doubted, equally there is no reason as to why a liquidator’s power of sale, which is part of their statutory duties, should be limited by the terms of a private trust agreement
- section 477(2) Corporations Act 2001 (Cth) provided the Liquidator with a power of sale and there was no limitation on the statutory power of sale insofar as the assets of the company are held on trust
- the former trustee had both legal ownership of Trust assets as the bare trustee and beneficial interest in the Trust assets as the holder of an equitable lien, and
- a liquidator does not need to approach the court on every occasion for approval to sell assets in the trust, but should do so if there are statutory constraints or other complications exist.
Applications for administrators and receivers
Although this case involved a liquidator, it will also apply by analogy to:
- an administrator of a company given an administrators powers under section 437A Corporations Act 2001 (Cth) to dispose of any property of the company, and
- a receiver of company property as a receiver has a broad statutory power under section 420 Corporations Act 2001 (Cth) to do all things necessary or convenient to the attainment of the objectives for which a receiver is appointed, including exercise of the power of sale.
Ramifications and limitations
The decision provides more certainty to administrators, liquidators and receivers. It ensures that administrators, liquidators and receivers avoid the need to approach the Court on every occasion to seek approval to sell trust assets and avoid the legal costs of making the application in appropriate cases.
However, it is important to keep in mind the limitations to the application of this decision:
- the winding up in that case was simple and did not involve any complicating factors
- there was no doubt as to the capacity in which an insolvent company held certain assets, and its legal title to the assets was clear, and
- if a new trustee has been appointed to the trust, title to some trust assets will automatically pass to the new trustee and the former trustee will not retain power to sell them and may have to seek court orders to sell trust assets to recoup money for the former trustee’s creditors. However, title to other trust assets (such as land, where title does not pass until a transfer of the land has been registered on title) will not automatically pass to the new trustee and the former trustee will still be able to sell them in reliance on the Kitay decision.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.