Legal Tip 36: Clauses in Trust deeds removing Appointors upon Bankruptcy

Discussion in 'Legal Issues' started by Terry_w, 24th Jul, 2015.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    18th Jun, 2015
    Clauses in Trust deeds removing Appointors upon Bankruptcy

    An 'Appointor' is a person appointed by the trust deed that is given the power to remove and insert the trustee of a discretionary trust. It is a very important position as it is the ultimate controller of the trust. With some trusts the Appointor may be called the 'Guardian' or even the 'Protector'.

    When a person becomes bankrupt their property is transferred into the name of the trustee of bankruptcy who then sells it off to pay creditors (and their hefty fees).

    But what a person who becomes bankrupt is an Appointor of a discretionary trust? If a trustee in bankruptcy was able to become the Appointor of the trust then he/she could change the trustee to him/self or a company he controlled and then distribute all the income and capital of the trust to the bankrupt (assuming they are beneficiary) and then this income and capital would fall into the hands of creditors.

    The case law in this regard is that the role of Appointor and its powers are not ‘property’ and therefore cannot pass upon bankruptcy. Burton (1994) is the case law for this.

    Nevertheless it is a good idea to have provision in the deed to remove the Appointor if they become bankrupt or insolvent, as an extra measure. This would give added protection to the trust assets. It would also avoid claims of the Appointor breaching their powers by influencing the decisions of the trustee.

    Also it is very important that a bankrupt is removed, automatically, as a beneficiary while they are bankrupt. So if the control of the Appointor position where to fall into the hands of a trustee in bankruptcy they could not distribute to the bankrupt person.

    What does ‘your’ trust deed say in this regard?