Tuesday, October 27, 2020

Spinning around?** - Joint tenants and bankruptcy

View Legal Blog Spinning around - Joint tenants and bankruptcy

Previous posts have considered the distinction between owning an asset as joint tenants compared to tenants in common, let me know if you would like access to this content.

From time to time, we have advisers, on behalf of their clients, contact us about whether there is any advantage in ensuring an asset is owned as joint tenants so as to try to prevent a trustee in bankruptcy getting access to the asset.

The argument being that because each joint tenant effectively owns an interest in the entire property, this makes it very difficult for a trustee in bankruptcy to seize the property.

The reality however is that under the Bankruptcy Act, as soon as a person who owns an asset as joint tenant with somebody else becomes bankrupt, the joint tenancy is effectively severed, so the trustee in bankruptcy can unilaterally secure their ownership of the relevant share of the property discretely.

Where a trustee in bankruptcy gains ownership of a discrete share of a property, the remaining co-owners are able to negotiate with the trustee in bankruptcy to acquire it for market value.

The trustee in bankruptcy is however not obliged to accept the offer from a co-owner, and can proceed to sell the property on the open market.

Even if the co-owner wanted to oppose such a sale, the trustee in bankruptcy can obtain court permission for a statutory sale.

Following the statutory sale, the co-owner and trustee in bankruptcy share the proceeds in accordance with their proportionate ownership interests.

** for the trainspotters, the title here is riffed from the Kylie Minogue song ‘Spinning around’.

Tuesday, October 20, 2020

‘The Vibe’, family trusts and family law (part 2)

View Legal Blog ‘The Vibe’, family trusts and family law (part 2)

Last week's post considered some of the key issues in relation to the Family Court's ability to access assets of a trust.

The decision in Harris & Dewell and Anor [2018] FamCAFC 94 provides more context to the approach of the court in this area. As usual if you would like a copy of the case please contact me.

In summary, the factual matrix was as follows:
  1. A unit trust was established about 5 years before the start of the relevant relationship.
  2. The husband and husband’s father were the sole shareholders in the corporate trustee of the unit trust (the father owning 67%, the husband 33%). Although the husband was for many years a director of the corporate trustee, he had retired from this role some years before the trial, replaced by his solicitor. The solicitor was however accustomed to acting in accordance with the husband's wishes.
  3. At trial the husband’s father was the sole unit holder of the unit trust (and the husband had never owned any units), although it was assumed that the husband would inherit the units on his father's death (the father was aged 99 at the time of the trial).
  4. It was concluded that the level of control held by the husband over the trust was clearly significant.
In holding that the trust was not an asset of the husband (although it was taken into account as a financial resource) the court confirmed as follows:
  1. Property of a trust can be treated as property of a party only where evidence establishes that the person or entity in whom the trust deed vests effective control is the ‘puppet’ or ‘creature’ of that party.
  2. Control of itself is not sufficient to deem trust assets to be the property of a party to a relationship. Instead, what is required is control over a person or entity who, by reason of the powers contained in the trust deed can obtain, or effect the obtaining of, a beneficial interest in the property of the trust.
  3. In other words, the spouse must have an actual ‘lawful right to benefit from the assets of the trust’.
  4. Here, despite the extensive control held by the husband, he did not have the ability to guarantee benefit of the assets to himself - that right at all times rested with the husband's father.
  5. In a sentence, the trust was not the husband's alter-ego nor a device used by him for his sole benefit.
Therefore, the assets of the trust were not property of the husband for the purposes of the settlement proceedings with the former wife.

** for the trainspotters closely behind Dennis Denuto and his vibe principle is the refrain ‘tell ‘em they’re dreaming’.

Tuesday, October 13, 2020

‘The Vibe’, family trusts and family law (part 1)**

View Legal Blog ‘The Vibe’, family trusts and family law (part 1)**

Previous posts have referenced the legal principle known as ‘The Vibe’, as developed by the legendary Australian movie ‘The Castle’.

In an arguably analogous decision the family law case of Romano & June [2013] FamCA 344 is relevant. As usual, if you would like a copy of the decision please let me know.

The case was complex and the judgement took over 19 months to be issued by the court following completion of the trial and ran to almost 100 pages in length.

It is important to note that the court held that the husband was not being honest about many of his arguments concerning the trust. Furthermore, several of the witnesses whose evidence the husband also relied upon (for example, close friends and colleagues) was also held not to be honest.

One, of many examples, listed in the case of the courts view of the husband is best captured in the following extract -
“I am quite satisfied that the husband’s resignation as a director of [British Virgin Island company] X1 and several other companies, after the commencement of these proceedings, was effected not for the reasons advanced by the husband and those of his witnesses who gave evidence about the matter, but so that he could not be required to obtain access to any of the records of the companies that directors lawfully have access to. That he did so resign after being put on notice by the solicitors for the wife that he should not do so gives me added cause for such satisfaction, on the balance of probabilities.”
Briefly, the factual matrix was as follows:
  1. the relationship was around 16 years in length (9 years of marriage);
  2. there were no children of the union;
  3. the husband had set up a family trust some years before meeting the wife as part of a number of entities, including (for example) a company the husband was deemed to control (despite having no legal ownership) in the British Virgin Islands, that was set up around the time the husband was advised to (and did) move to Monaco (apparently for tax planning purposes);
  4. at all relevant times the husband was one of two directors of the corporate trustee of the trust and a primary beneficiary of the trust; and
  5. the husband however was never an appointor of the trust, nor a shareholder of the corporate trustee.
In rejecting the husband's argument that he did not control the trust (and was merely a potential beneficiary of future distributions), the court confirmed:
  1. while the husband did not have legal control of the trust, he did have effective control;
  2. the husband deliberately looked to avoid being in legal control of the trust, while in reality regarding the assets of the trust as his; and
  3. given the level of control the husband exercised over the trust assets, it was appropriate to include them as assets of the marriage and available for division in the property settlement.
The key aspect of the court's reasoning is arguably best captured by the combination of its assessment of the husband's lack of honesty and the following extract from the judgement
“The question whether the property of the trust is, in reality, the property of the parties or one of them.... is a matter dependent upon the facts and circumstances of each particular case including the terms of the relevant trust deed ... [Here the] husband’s actual control would allow him to cause those assets to be appointed to himself or his wife along with his and her right to due consideration constitute property of the parties.”
** for the trainspotters Dennis Denuto and his need no introduction.

Tuesday, October 6, 2020

Trusts structuring checklist - part III**

View Legal Blog Trusts structuring checklist - part III

The last two posts have each mentioned seven key issues that should generally be considered whenever establishing or amending a discretionary trust deed.

Set out below are a further seven issues that should generally be taken into account:
  1. If there is an appointor, is the role automatically terminated on certain events (for example death, bankruptcy)?
  2. If the appointor ceases to act, do their powers pass to anyone else, and if so, who?
  3. If there is more than one appointor, must they act jointly?
  4. Is the appointor a beneficiary of the trust?
  5. Will the trust own more than one asset class?
  6. For an existing trust, has there been a pattern of income or capital distributions to at risk individuals associated with the trust?
  7. For an existing trust, have there been variations to the deed following establishment that impact on the overall control of the trust?
** for the trainspotters, a classic song from Led Zeppelin album ‘III’, namely ‘Immigrant song’.