Legal Tip 52: Who should be the shareholders of a trustee company?

Just wondering...

If Tom knows that he may soon be bankrupt and he owns 100 shares and has 100% control of Tom A Pty Ltd can he not simply issue 2000 shares to his wife, bringing his percentage ownership down to under 5% and then resign as a director, letting his wife instate herself.

He keeps his original 100 shares, even if they are taken by the creditors, they do not have ultimate control. With the correct shareholder agreement in place his wife offers the creditors the $2 buy out value, or simply forces a buyback assuming the company constitution affords her that power.

Potentially this has already been tested as a solution, but I would think the argument could be made that the decision to issue new shares was within his power as trustee as the action was intended to allow the continuation of beneficial ownership of the shares and fulfilment of the corporate trustees originally intended role of protection and care of trust assets for all beneficiaries (not just Tom)?

Sorry, randomly came across this post while looking for something unrelated and got engrossed reading.

 

Assuming Tom is sole shareholder would he consider transfer of his shares to his wife ? Not sure where the 5% issue comes from. However if the shares have value (trading business / property / hard assets etc) then this may be unwise and be a futile attempt to defeat creditors and also be a tax trigger (CGT / property transfer duty perhaps) . Legal advice is wise PRIOR to bankruptcy and acting. Creditors can't "take shares" or company property...You have that misunderstood. Instead the shares are a asset that the trustee in bankruptcy may explore regarding their value and paying creditors. Most strategies around shares and Directorships seek to frustrate a trustee in bankruptcy and bring a negotiation to head.

That said there is no reason why Tom must remain a Director and he may appoint his wife then resign. There is no requirement for a Director to also be a shareholder. Directors typically appoint Directors (s201H / s201F perhaps) ..Shareholders may hold a meeting to appoint Directors too (s1.5.5 ss5.2) .Refer to the constitution for any rules. Bewary of s201F for what a trustee in bankruptcy can do !! This may be averted if the wife is the Director. Also be wary of 1.5.5 since ASIC can disqualify a Director or some circumstances exist when a Director cant pay their debts.

A trustee doesnt issue shares. Only a company can do so. This could also be a CGT event so get legal and tax advice.

If the company acts as trustee this is certainly a matter for legal advice as other trust issues are involved.eg power of appointment etc. It may even be worthy to consider a change of trustee altogether. eg wife.

 

This is likely to be something which would be attacked under s37A Conveyancing act or bankruptcy act, though I am not sure if it would be a 'transfer'.

But since I wrote the initial post in this thread I have come across caselaw which suggests even if a trustee in bankruptcy took control of a trustee of a discretionary trust, it would be an improper purpose if the trustee made a distribution to the bankrupt so that the assets could become available to creditors. I will write about this in the future.

 

Understandable in the case that the trustee pty ltd owns assets directly, or is a trading company then it may no longer be worth the original $2. However I assume that even in the case that the pty ltd is holding assets, or shares in a separate family trading company in trust then they are not considered assets of the trustee pty ltd anyway. I am also assuming that Tom is subject to bankruptcy for his personal dealings which are separate from both the trust and Tom acting in his role as director of the trustee.

My thoughts did relate only a case where the trustee company is and always was just a $2 company setup only to facilitate the role of trustee for the trust, but for argument sake - let's assume that Toms wife has the means and would pay fair market value for her 2000 shares even if the company was holding some assets, would fully pay them and if the creditors did come knocking for Tom's shares in the trustee company then the money from the wife's purchase would still be sitting in the Pty Ltd (not the trust) and will have therefore resulted in the net position of the pty ltd being adequately compensated for the new share issue. Perhaps Toms wife could also offer a token capital injection which would then be used to purchase a minor asset for the business.

You were right. I had meant to say that Tom would issue new shares in his role of Director of the trustee company - not that the trustee would issue the shares (I blame my fingers for not making the same distinction that my brain did while originally contemplating the idea).

Use of the trustee company shares to bring about negotiation makes sense too. I suppose they could simply seize the shares, replace the director and refuse to distribute (assuming a discretionary trust). At that point more or less forcing potential resettlement of the trust or retained earnings receiving unfavourable tax treatment - which depending on the size of the trust and asset mix might be a big enough stick for them to force through an agenda.

I had thought that even if a creditor was to seize assets they would most likely still be bound by the duties of acting as trustee and any restrictions created by the trust deed. Obviously, the company constitution would be fair game as they can simply instate their own from the position of director and major shareholder. I did notice that it was an older post, but was simply curious if there might be another option beyond the appointer simply replacing the trustee.

 

Is it actually an issue if creditors seize the shares of the trustee $2 company?

Can the appointor, powers that are not affected by bankruptcy, not just change trustees to another $2 company?

 

Normally they would. But sometimes appointor decisions may be defective. There are cases where change of trustees were not properly done. Which will mean the new trustee is not actually the trustee and the old one is still trustee, for example.

 

but thats a procedural issue, and would work if proper legal advice on the procedure was taken and acted upon?

 

Yes. If done correctly.

But I have actually seen a fair few where accountants have tried to prepare legal docs to change trustees. One deed required the trustee to be changed via deed with the appointor's consent in writing. but it was done via a trustee resolution. All trustee decisions for the past 5 years were defective.

 

I'd really like some feedback on the below scenario? Any info would be greatly appreciated.

There is three sides to this scenario, 1 asset protection and 2 distribution of income 3 Succession planning.

Davo already owns a couple of houses personally and realises now that he didn't really structure them properly in the first place but as time goes on he will resolve this when doing some debt recycling in the future.

Davo is self employed under a company structure. Davo pty ltd t/a Davo's slightly risky business.

Davo currently owns all of the shares in Davo pty ltd and is the sole director but he recognises that his slightly risky business opens him for the potential to be sued one day so he embarks on setting up Davo's asset holdings pty ltd ATF Davos family trust where he will transfer the shares of Davo pty ltd to.

Davo's wife is mostly a stay at home mum but does do some casual admin work for Davo's slightly risky business from time to time but generally wouldn't be considered at risk of being sued.

From an asset protection perspective is Davo correct in thinking.
1. Davo's wife should be 100% shareholder of Davo's asset holdings pty ltd?
2. Should Davo or his wife be the director of Davo's asset holding pty ltd?

From a distribution of income perspective.
1. Davo and his wife have older retired (gov pension) parents they would like to help out and will do so by distributing up to their income limit to ensure their pensions aren't effected.
2. Davo and his wife's children are under 18 so they will also receive the $416 per annum each.
3. Davo and his wife would eventually like to set up a completely different much more passive business in the future. They will set up Davo's passive business pty ltd and distribute to it as a beneficiary of Davo's family trust to get it going.
4. Davo's wife's income is minimal, just some rent and some payg so she will also receive a distribution.

From a succession planning perspective.
Succession needs a lot more thought from Davo but he thinks it is likely that his children won't be interested in taking over either Davo's slightly risky business or Davo's Passive business when he is ready to retire. It is more likely that he will sell both businesses but is confident that by setting up the way he plans it will give him some flexibility for succession planning.

Has Davo got this right? Is he missing something really important?

 

No
Yes heaps. The main thing is legal advice.

 

Co Shareholders are not ordinarily liable for matters to creditors of a trading company. And even a Director may have limited risks eg insolvent trading. A Director wont usually be called upon to remedy a company product / service defect for example. A shareholder is generally protected from making good any loss so the company assets must be considered as it these that are at risk to a creditor. What are the AP risks ? Are they insured ? Can they be insured ? This makes no sense as there is likely no asset protection purpose to change shareholder/s. The reason to change shareholders may ONLY be to enable dividends / profits to flow to a trust for discretionary distribution but if its PSI that isnt a operative choice. And then it may need to be paid or the trustee may be a unsecured creditor ranking beside a creditor. There may be a CGT event of concern to change shareholders too.

Sort of sounds like a PSI (personal services income) issue could be involved and if that the case profit retention in the company may be contrary to tax law. And no deduction is allowed to pay wife. PSI may actually fix the asset protection concern if its PSI. But could also broaden it to involve Davo personally. Its a matter for legal advice after determining if it is a PSI issue

Sure is one to seek legal advice on.

 

Thank you Paul, believe it or not you have helped immensely. Getting good legal advice has proved difficult at best which has resulted in him doing his own research. Thank you again.

 

DIY legal & tax advice is often a poor value proposition.
Good legal advice is easy to find. Cheap good legal advice is hard to find.

 

Your example has Tom holding 60%, what if it was 50/50 with Tom and his wife? If 1 becomes bankrupt, the creditor would not have majority share (only 50%) and cannot appoint whoever they want as director.

I guess the next question would be, then who would be the new director if Tom becomes bankrupt? He becomes removed as director not because of a shareholder vote but because of the Corporations Act.

Then there would be deadlock between the creditors (50%) and your spouse (50%) on who would be the director? What would happen in this case?

 

That's would depend on the constitution and any shareholder agreement

 

A proper exercise of appointor powers, with correct legal advice, could override this anyway, tho?

 

Yes

But appointors are sometimes slow to act.

 

Creditors dont assume ownership of shares and cant be a Director. They remain creditors and the trustee in bankruptcy may or may not have issue. Tom would have known this prior to bankruptcy and may have appointed his brother as Director to avoid the Corps Act limits on who can be a director. Or its the liquidator / administrator if that entity is subject to insolvency.

 

If the individual owns shares in the trustee company and becomes bankrupt, the shares will vest in the trustee in bankruptcy who will stand in the shoes of the bankrupt. They could then exercise their powers as shareholder to appoint a director.

The trustee in bankruptcy must also meet their fiduciary obligations.

 

Couldn't Tom hold 40% shares and his wife hold 40% shares and have the children shareholders in the other 20%. If the company constitution then required an 80% shareholder agreement to take any action wouldn't this protect against any one bankruptcy and also allow for the controlling shares to be distributed via the will?