NEWSLETTER SPRING 2006
01 09 2006
This publication is produced by Foremans Business Advisors specifically focusing on insolvency issues relevant to accountancy practices. In this edition we consider some recent cases involving ASSET PROTECTION and the impact these cases may have when considering asset protection for your clients.
THE DEMISE OF DISCRETIONARY TRUSTS?
The Court is now prepared, in insolvency matters, to “look through” the discretionary trust structure to determine the ownership of assets. This has been done for some time in Australia in respect of Family Court matters but not insolvency matters until the decision of Australian Securities and Investments Commission In the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) [2006] FCA 814 was handed down on 29 June 2006 in the Federal Court of Australia.
The Judge commented that “the beneficiary who effectively controls the trustee’s power of selection because he is the trustee or one of them and/or has the power to appoint a new trustee has something approaching a general power and the ownership of the trust property”. On that basis the Court was prepared to extend the receivership of a director’s personal property to the assets of a discretionary trust of which that person was a beneficiary or a member of a class of beneficiaries of a trust. This was because the trustee was effectively the alter ego of the relevant beneficiary or otherwise subject to his or its effective control, the beneficiary had at least a contingent interest, if not effective ownership, of the trust property.This decision is not the “death knell” of the discretionary trust. What it highlights however is that accountants should be reviewing their client’s trust deeds and structure as the assets of the discretionary trust are clearly at risk where the party at risk is:
- an Appointor of the trust; or
- a Trustee of the trust (or an officeholder or shareholder of the trustee).
WILL SEVERING JOINT TENACY PROVIDE SOME ASSET PROTECTION TO MY CLIENT?
How many accountants have considered the severing of joint tenancy of a property as a means of asset protection for their clients, particularly where there may be an “at risk” party (e.g. director of a company or in a partnership)? It is of significantly greater relevance when the spouse may have health issues. The matter of Peldan v Anderson [2006] HCA 48 (4 October 2006) eventually went to the High Court of Australia with the decision being handed down on 4 October 2006.
What was in dispute was the remaining one-half of the proceeds of sale of a property (the other half having already been paid to the bankruptcy Trustee). Mr and Mrs Pinna had purchased the property in 1995 and they were registered proprietors as joint tenants. Under joint tenancy, on the death of one joint tenant their full interest in the property passes to the other joint tenant. In 2003 Mr Pinna unilaterally severed the joint tenancy, the result of such severing being that each party was now a tenant in common with a 50% interest each in the property rather than a full interest as under joint tenancy.
Mrs Pinna died on 12 January 2004 and not for the severing of the joint tenancy her interest at that time would have passed to her husband (i.e. he would have had a 100% interest in the property). Mr Pinna became bankrupt on 21 April 2004 and the property was sold for $600,000 after his bankruptcy.
The bankruptcy trustee argued that the unilateral severance of the joint tenancy was a transaction (resulting in a transfer of property) by Mr Pinna which was void against the bankruptcy trustee by operation of Section 121 of the Bankruptcy Act (i.e. Transactions to Defeat Creditors). The Court noted that at the time of the severing in 2003, had Mr Pinna been declared bankrupt at that time, the bankruptcy of Mr Pinna would have worked as a severance of joint tenancy in any case and the bankruptcy trustee would have only been entitled to a 50% interest. Accordingly, the Court held that the bankruptcy trustee was not entitled to the additional 50% interest in the sale proceeds. This is an important decision given that if the severance had not occurred prior to her death the bankruptcy trustee would have been entitled to 100% of the property. Most husbands and wives hold their matrimonial home on a joint tenancy arrangement which has the potential to take at least 50% of that property out of the hands of their children etc and into the hands of a bankruptcy trustee on the death of one spouse prior to the bankruptcy of the “at risk” party.
CUMMIN'S CASE - IS THE FAMILY HOME STILL SAFE?
Most of you would be aware of the decision of The High Court in Cummins wherein the Court said “where a husband and wife purchase a matrimonial home, each contributing to the purchase price and title is taken in the name of one of them, it may be inferred that it was intended that each of the spouses should have a one half interest in the property regardless of the amounts contributed”.
The Court held that the transfer by Mr Cummins in 1987 of his interest in the property to his wife was void under Section 121 of the Bankruptcy Act (in respect of his 2000 bankruptcy) and, in addition, his wife would only be entitled to 50% of the proceeds despite her providing substantially greater contributions to the property. The judges of the High Court (in a unanimous decision) decided that Mr Cummins’ true motive in transferring the asset was the avoidance of a then existing obligation to the Australian Taxation Office (despite no returns being lodged and therefore no assessments having been issued).
As a result of this case, unless supported by clear evidence to the contrary at the time of the original purchase (or transfer), the Courts may find a property to be held jointly and each spouse entitled to a one-half share of the equity even though one party may have contributed a greater amount to the purchase.
Financial advisers should, at the very least, ensure there is sufficient evidence at the time of the purchase (or transfer) that the property was intended to be purchased solely for the benefit of the “non at risk” person.
To clarify the law under the Bankruptcy Act:
- if you are recommending to your clients the transfer of the family home, then, if the purpose of the transfer is to defeat creditors (whether existing or contingent) there is an unlimited time period available to a bankruptcy trustee for recovery under Section 121 of the Act.
- if you are recommending to your clients the transfer of the family home, then, if the purpose of the transfer is NOT to defeat creditors (whether existing or contingent) there is still an “at risk” period under Section 120 of the Act being:
- up to four (4) years if full consideration was not paid and the transferee was solvent at the time of the transfer to a related party (only up to two (2) years if not related and solvent at the time); or
- up to five (5) years if full consideration was not paid and the transferee was insolvent at the time of the transfer.