Family Court: ‘I’ve Got the Power’** to make orders against third parties

The powers of the family court in relation to structures such as trusts are potentially extensive.

At a simplistic level, there is the specific power to force the change of a trustee of a trust.

Potentially, there is also the ability to bring forward the vesting date of a trust to require it to end immediately and thereby crystallise the interests of a party to the relationship.

One leading case in this regard is the decision in AC and ORS & VC and ANOR [2013] 93 FLC 540 FamCAFC 60. As usual, if you would like a copy of the decision please contact me.

Briefly in that case:

1. The husband’s mother was in control of the corporate trustee and the trust at the relevant times.
2. The husband and his former wife had a fixed entitlement to the capital of the trust on its vesting, which, at the time of the property settlement, was still 50 years in the future. That is, the trust was not a traditional discretionary trust where there are no fixed entitlements.
3. The court found that the entitlement was rightly considered property of the parties and therefore ordered the trustee to vest the trust.
4. The Attorney General intervened in the proceedings, given that the practical result of the decision was that the property entitlements of a third party were substantially altered.
5. Critically, it was held that the husband and wife did in fact have an interest in the trust property despite the fact that it was accepted that the control of the trust was with the husband’s mother.
6. In other words, the ability to alter the structure of trusts can be made even where a party to the marriage is not in control of the trust.
7. In a more traditional discretionary trust however there may not be the required nexus between the trust assets and the parties to the marriage.
8. For completeness however, in this particular case, the forced vesting of the trust ultimately failed due to the appeal court’s conclusion that procedural fairness had not been given to the husband’s mother, particularly given that the parties to the marriage had other assets that could have likely achieved financial closure between the parties without the need to impose orders on a third party

** For the trainspotters, ‘I’ve Got the Power’ is a song by Snap! from 1990 see hear (sic):

I’m gonna break into your heart** (and anything else you get): family law and post separation inheritances

One ongoing area of contention (admittedly amongst many others) in family law is how post-separation inheritances are treated on a matrimonial property settlement.

In very broad terms, the Family Court is required to consider all relevant factors before distributing any share of one party’s inheritance to their former spouse.

Depending on the exact factual matrix, the Courts will, in broad terms, take one of the following approaches:

1. Completely ignore the inheritance for all purposes in relation to the division of matrimonial property.
2. Exclude the inheritance from the division of matrimonial property, however make an adjustment on the division of the matrimonial property to take into account the access to the inheritance that one spouse will have.
3. Include the inheritance as part of the pool of property to be distributed between the parties, while making some adjustment to acknowledge the ‘contribution' that one party made to bringing the asset to the matrimonial pool.
4. Simply including the inheritance as part of the matrimonial asset pool, with no specific adjustments.

However, based on the published cases to date, it is important to note that it is very rare for the recipient of an inheritance or similar ‘windfall' to have those assets completely quarantined, regardless of when they are received up until the final date of the property settlement.

** For the trainspotters, ‘Break into your heart’ is a song by Iggy Pop from his album with Josh Homme (QOTSA) in 2016 ‘Post Pop Depression’ see hear (sic):

Unit trusts and excluding trustee Liability**

When establishing a unit trust structure, it is important to ensure the deed is properly crafted to expressly limit liability of the unitholders for debts of the trust.

As is well known, in a corporate structure, shareholders are not liable for the debts of the company.

Similarly, there is generally no right of indemnity for a trustee of a discretionary trust from the beneficiaries of the trust as they are not absolutely entitled to the trust assets.

In relation to unit trusts however there is a general principle that unless specifically excluded by the trust deed, the trustee will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders.

Failing to exclude this right of indemnity against the unitholders can therefore significantly undermine the asset protection advantages offered by structuring the investment through a unit trust.

The position in relation to unit trusts was confirmed in the decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355. As usual, if you would like a copy of the case please contact me.

In this case a liquidator of a trustee company of a unit trust was able to force the unitholders to make good the deficiency of trust liabilities over its assets. The unitholders would have not been liable however if the trust deed had contained the relevant exclusion.

Including this type of exclusion expressly in a unit trust deed has been a relatively standard practice by most deed providers since this decision, for firms that do specialise in the area.

Where the exclusion does not exist in a current deed it is normally possible to implement the provisions by a deed of variation, so long as there are no potential issues on foot.

** For the trainspotters, the title today is riffed from Lorde’s song of the same name from 2017 listen hear (sic):

Presumption** of disclosure of beneficial share ownership

Recent View posts have considered a number of aspects of the ASIC requirement that the beneficial ownership of shares in a private company be disclosed.

 
One potential difficulty in relation to ASIC’s requirements in this regard involves situations where the legal owner holds the share on an undisclosed trust for another party or entity.

 
In this type of situation reading of the relevant ASIC provisions suggests that the company report should disclose the fact that the legal owner holds the share non beneficially.

 
This said, in a true undisclosed trust situation most advisers will recommend that the ASIC records in fact are completed in a way that shows the legal owner is also the beneficial owner.

 
If this approach is adopted then full supporting documentation should be retained by the legal owner to rebut the presumption created by the way in which the ASIC records are completed.

** For the trainspotters, ‘presumption’ is a key word from Midnight Oil’s song from 1998, ‘Blot’ see here:

(Stripped) Bare** trust share ownership

Recent View posts have looked at the various issues in relation to notifying the ASIC of the beneficial ownership of shareholdings in a private company.

 
One aspect of this style of situation that arises relatively regularly relates to companies that were incorporated prior to 1997. Before this date, every private company was required to have at least two shareholders.

 
In order to provide a practical solution where a person was wanting to be the sole shareholder a practice developed whereby a second party would be listed as a legal shareholder, however they would simply hold that share on a bare trust for the intended sole shareholder.

 
Where such a structure exists, assuming that the articles of association or constitution have now been updated, it is generally possible to vest (or bring to an end) the bare trust arrangement and have the ASIC records updated to simply list the sole shareholder.

** For the trainspotters, ‘stripped bare’ is a line from the U2 song from 1983 ‘October’ see hear (sic):

Updating ASIC records – Simple (Simon)**

Last week’s post touched on some of the issues in relation to disclosure of beneficial ownership of shares on ASIC records.

In situations where the beneficial ownership is incorrectly recorded there are three broad alternatives available, namely:

1. Leaving the ASIC records unchanged. From a compliance perspective while this approach is possible, it is not recommended.
2. Simply lodging an annual return or ASIC form 484 that updates the ASIC records from that date. In many cases this approach will be pragmatically appropriate and is certainly the easiest and most cost effective approach. There is a risk however that there may be adverse revenue consequences or challenges from a third party (for example a trustee in bankruptcy).
3. The final approach involves effectively rectifying ASIC records from the date the error first occurred and then arranging for the annual returns for every subsequent year to also be amended. Obviously, this approach can be a significant exercise and is generally only adopted where there are concerns from a tax, stamp duty or asset protection perspective.

** For the trainspotters, the title today is riffed from INXS’ first ever single, from 1980, watch here:

Relationships of share ownership** and the ASIC

Happy New Year!

Up until the early 2000’s, the ASIC required only very basic information in relation to the share ownership in companies.

From around 2002, the ASIC began requiring that all private companies disclose the basis on which shares were owned, in particular whether shares were owned beneficially or non beneficially.

Broadly the distinction is as follows:

1. If a share is owned beneficially this means that the legal owner listed in the ASIC records also has full beneficial ownership.
2. If a share is owned non beneficially then the legal owner holds the share subject to the terms of some form of trust arrangement (often this trust will be a standard discretionary trust).

Unfortunately the disclosure of beneficial ownership is an area of significant confusion and often the confusion does not arise until resolution of the issue is time sensitive (for example in lead up to a sale transaction or as part of an asset protection audit).

Some of the issues that arise in this regard include:

1. anecdotally, it appears that when ASIC was first imputing this data following the change of approach, many companies had their notifications reversed during the data entry process (that is shares that were owned beneficially were noted on ASIC records as being owned non beneficially);
2. similarly many companies were confused about the distinction and therefore provided incorrect notification to ASIC; and
3.  in some instances a full search of all company records was not performed (for example all aspects of the company register) so the company provided incorrect information to ASIC.

Next week’s post will consider the three main alternatives for rectification where the beneficial ownership of shares is incorrectly recorded on ASIC records.

** For the trainspotters, ‘relationships of ownership’ is a line from the Bob Dylan song from ‘Gates of Eden’ listen hear (sic):