Does the bankruptcy of a
personal trustee or appointor of a discretionary trust
expose the trust assets?
In an important decision for the large number of
discretionary (family) trusts in Australia, the Supreme
Court of New South Wales has considered whether a family
trust structure is a sufficiently robust firewall to protect
the family trust assets against claims by a trustee in
bankruptcy appointed to the personal Trustee or Appointor of
a family trust.
The decision is Lewis v Condon; Condon v Lewis  NSWCA
204 which was handed down on 4 July 2013 by the Court of
The decision gives the beneficiaries of the family trust the
comfort that if the personal Trustee or Appointor of the
family trust becomes bankrupt, this does not breach the
firewall that a family trust structure provides to protect
the family trust assets. As a result, the trustee in
bankruptcy cannot seize the family trust assets for the
benefit of creditors.
The Kenthurst Investments Trust was settled in 2001, by
Deed. It had a corporate Trustee. It was a discretionary
trust where Colleen Lewis was the ‘first corpus
beneficiary’, and her daughters Louise and Melissa were the
‘second corpus beneficiary’. Colleen Lewis was the Appointor.
A property at Kenthurst was purchased by the trust the day
the trust was settled. Part of the purchase funds were
contributed at Colleen’s direction, and the balance purchase
funds were borrowed from an external financier.
In 2005, Colleen disclaimed her interest as a beneficiary of
the trust, retired as Appointor, and was appointed as the
new Trustee of the trust. In 2006, the Family Court ordered
that the title to the Kenthurst property be registered in
Colleen’s name. The resolution of the Family Court
proceedings and the avoidance of Land Tax liability appear
to have been the reasons why the corporate Trustee retired
and Colleen became a personal Trustee.
In 2010, Colleen took a loan from the ANZ Bank secured by
mortgage against the property. Colleen defaulted and the ANZ
Bank obtained an order for possession, as a precursor to
In May 2012, a sequestration order was made against Colleen
and Mr Schon Condon was appointed trustee in bankruptcy. He
became the registered proprietor of the property.
Mr Condon submitted that he could ignore the trust because
it was a sham, and therefore he held (the surplus proceeds
from the sale of) the Kenthurst property for the benefit of
Louise Lewis submitted that the property remained a trust
Was the trust a sham?
Most of the judgment of Appeal Justice Leeming (McColl JA
and Sackville AJA concurring) dealt with the issue of
whether Kenthurst Investments Trust was a sham. The Court
decided it was not a sham, for these reasons –
- The trust was not a sham in 2001, when the property was
purchased. Although there was an ‘improper purpose’ in
creating the trust, namely to conceal Colleen’s interest in
the property in Family Court proceedings current with her
former husband and also to evade taxation, the trust had
apparent legal consequence… It is perfectly regular for a settlor or a third party to contribute to the purchase price
of the property which is to be held on trust; to the extent
that Colleen did so, that does not in my view compel a
conclusion of a sham. [paragraphs 73 and 74]
- The trust did not become an “emerging sham” in 2005 and
2006 when Colleen was appointed as new Trustee, nor in 2010
when Colleen borrowed against the property and used the
funds for private purposes – While she became the registered
proprietor, she did so with full knowledge of the terms of
the Trust. Colleen’s legal title was subject to the terms of
the trust. [paragraph 84]
What effect did the sequestration order have on the trust?
The first consideration was the effect of the sequestration
order on the title to the property.
The Court stated that - upon making of the sequestration
order, Colleen’s interest in the property vested forthwith
in equity in Mr Condon under s 58 of the Bankruptcy Act 1966
(Cth); and that Mr Condon was entitled to become the
registered proprietor of the property by registering a
transmission application pursuant to s 90 of the Real
Property Act 1900 (NSW).
The next consideration was the effect of the sequestration
order on the Trust itself.
The court stated that – it is clear law that those statutory vestings do not destroy any trust of which the bankrupt was
a trustee. [paragraph 92] The Court relied upon
of the Bankruptcy Act 1966 (Cth) which excludes from
vesting, property held by the bankrupt in trust for another
person; and s 82 of the Real Property Act 1900 (NSW) which
excludes recording notice of trusts on the Land Titles
Register. Therefore the trustee in bankruptcy held title to
the property subject to the existing equities.
The final consideration was the effect of the sequestration
order on the power of appointment of a trustee, if it were
exercisable by Colleen as Appointor of the trust.
The Court stated that – The power to remove and replace a
trustee is precisely that: a power, not property. And the
Court quoted with approval what Davies J stated in Re
Burton: Wily v Burton  FCA 1146 that a power to remove
a trustee and appoint a replacement was not property falling
within s 116 of the Bankruptcy Act 1966 (Cth).
[paragraphs 94 and 95]
Did a Louise have standing to bring proceedings, as a
In accordance with the maxim that equity will not let a
trust fail for want of a trustee, the Court held that there
were special circumstances such that Louise had standing to
The special circumstances were: that it was uncertain if the
trust had a current Trustee; the fact that Colleen was
bankrupt; the fact that Colleen had disclaimed her interest
in the trust property; and finally that Louise was the
person best placed to advance the claim.
If the personal Trustee or Appointor of the family trust
becomes bankrupt, the family trust assets are protected
against seizure by the trustee in bankruptcy. The trustee in
bankruptcy is unable to breach the firewall that the family
trust structure provides around the trust assets or to
destroy the trust, except in the exceptional circumstances
that the trust has been set up, or is operated, as a sham.
Therefore, family trusts (discretionary trusts) continue to
provide robust asset protection for family trust assets from
claims by trustees in bankruptcy.
This article was first published by Cordato Partners in
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