Legal Tip 154: Unit Trusts and Asset Protection

Unit trusts are different to discretionary trusts in that the units are 'property' under the bankruptcy act and can fall into the hands of creditors if the unit holder became insolvent.

See
Legal Tip 140: A Unit Holder of a Hybrid Trust Becoming Bankrupt
https://propertychat.com.au/community/threads/legal-tip-140-a-unit-holder-of-a-hybrid-trust-becoming-bankrupt.11725/

Some people even see little point in owning property via a unit trust because the income will come to the unit holders anyway - as if they were the owners of the property itself.

For this reason unit trusts are often thought of as having no asset protection.

But unit trusts do offer some degree of protection.

The first level is against creditors of the trust itself. if the unit trust has a limited liability company as trustee this company should have no other assets so if a tenant sues it will sue the owner of the property which is the company. The personal assets of the directors, shareholders and unit holders will generally be safe.

The next level is on the insolvency of a unit holder. The assets of the trust are generally safe but the units can fall into the hands of creditors. Their only rights will be as unit holders - a right to income of the trust in proportion to their unit holdings, rights to vote, rights to property administration of the trust etc.

The third level of protection are the terms of the trust. Where the unit holder has the required voting power the creditors could then sack the trustee and appoint a new trustee which they control but there the unit holders do not have this power the creditors would only be entitled to income and capital under their rights as unit holders.

Example
X and Y are unit holders of a Unit Trust owning 50% of the units each. X and Y separately have personal assets. This unit trust owns one investment property and a tenant slips and brakes their cocyx bone and sues the landlord. X and Y's assets are largely safe if the deed provides that unit holders are not liable for the debts of the trust. The assets of the trust are at risk = the equity in the property (note the tenant may be able to sue the director of the trustee in some situations).

Shortly after X goes bankrupt by investing in something unrelated - share options for example. The assets of the unit trust are safe from the creditors of X.

But they will seize the units X owns in the unit trust. The deed has decisions such as changing the trustee requiring 75% of unit holders to approve. Creditors only control 50% so they cannot force a change in control of the trustee. The credits can just sit back and receive 50% of the income of the trust after expenses. They cannot force a sale. Y may later make an offer to buy out their units. Or X may make an offer after his bankruptcy ends - he may have learned his lesson and have another entity buy the units off the creditors.

 

Interesting.
Its mentioned that the directors of company as trustee(s) are generally not able to be sued, under what circumstances could they be sued? Is it something like deliberate negligence?
Thanks

 

Providing a personal guarantee
Trust debts incl tax
Directors Penalty Notices (unpaid super, payg withholding)
Misfeasance
Corporate negligence ie worker death or injury
Fraud and misuse of trust property - Breach of Trustee obligations to a beneficiary
Breach of Corporations Act
Insolvent trading
Crimes (eg from red light offences, tax offences and more)...eg Copyright has two penalties - One for individuals and another for Corporations. So the trustee decides to make and sell counterfeit MoPro cameras which GoPro seeks enforcement orders on....The Directors may be liable for their personal actions.

And perhaps the trust was trading with another related entity that is focus of actions. It could be drawn into a claim too.

Terry will likely identify a far more comprehensive list. Question is - would anyone bother ?

 

Another is
false and misleading statements - common in real estate sales

and in HR managers and directors etc can be personally liable.