ASIC v CAREY (Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) FCA 814) challenged traditional thinking about the utility of discretionary trusts in asset protection.
The Court made receivership orders in favour of ASIC which effectively enabled it to take control of assets in discretionary trusts pending further Court orders.
This article takes a retrospective look at ASIC v CAREY and provides users of discretionary trusts for asset protection purposes with some handy tips about what they should do in light of the decision.
The Westpoint Group of Companies (Westpoint Group), which collapsed in 2005, was engaged in the business of property development and the raising of finance for that purpose. It raised funds from traditional lending sources and smaller retail investors through various means, including mezzanine finance. Norman Carey was its principal and effective controller.
In mid 2005, the Australian Securities and Investments Commission (ASIC) began an investigation into the affairs of the Group. Over the next eight months, ASIC widened the scope of its investigation to cover what it described as “the Companies”, the "Mezzanine Companies" and the "Wider Westpoint Group". This group comprised tens of companies and individuals although the entire Westpoint Group comprised more than 150 corporate and trust entities. The investigation revealed many irregularities in the conduct of the Westpoint Group’s affairs and may well result in civil penalty and criminal proceedings.
When the Westpoint Group collapsed in 2005 it left some 4000 investors owed more than $300 million and a myriad of insolvency practitioners trying to come to terms with its Byzantine complexity.
ASIC continues to investigate the collapse and to bring court applications to expand orders designed to preserve assets. Its most recent application was heard and determined in March 2007.
In March 2006, ASIC sought the appointment of receivers to the property of certain officers, former officers and companies in the Westpoint Group. The application was brought under section 1323(1) Corporations Act 2001 which enables ASIC to seek a range of “protective orders” (including the appointment of receivers) where it is conducting an investigation, the interests of aggrieved persons need to be protected and the person under investigation is or may become liable whether by damages, compensation or otherwise to the aggrieved person.
French J of the Federal Court was satisfied the evidence showed wide-ranging and serious misconduct (the defendants did not submit rebutting evidence) and the appointment of receivers was necessary and desirable within the meaning of section 1323(1).
Not satisfied its orders cast a wide enough net, ASIC sought to vary the original orders made by French J to include the property of trusts of which individual defendants were trustees and beneficiaries.
Although both family and bankruptcy law have provisions which have the effect, in certain circumstances, of "looking" through trusts for the benefit of spouses and creditors respectively, it has been the commonly held view that assets held by a discretionary trust are not owned by the beneficiaries and therefore unavailable to creditors. The discretionary nature of such a trust meant at best, a beneficiary had no more than an expectancy or possibility of a distribution of income or capital.
For ASIC to succeed it had to persuade French J that section 1323 (and the section 9 definition of "property") permitted the appointment of a receiver to property held by a third party on a trust, whether discretionary or otherwise, of which the relevant person was a beneficiary and such an appointment should be made.
French J undertook an analysis of cases dealing with the meaning and nature of the discretionary trust. His Honour observed that the cases drew a distinction between the “ordinary case” where the beneficiary had no legal or equitable interest in the trust property and other cases where the beneficiaries were able to act as though they were the absolute owners of the trust property.
ASIC argued that a beneficiary under a discretionary trust had a "contingent interest" in property within section 9 and such an interest equated to a proprietary interest.
French J rejected the breadth of ASIC’s submission. His Honour said the definition of "property" in section 9 could not be narrowly construed because the definition applied in a variety of situations not limited to the power under section 1323(1) to appoint receivers to property.
"In the ordinary case the beneficiary of a discretionary trust, other than perhaps the sole beneficiary of an exhaustive trust, does not have an equitable interest in the trust income or property which would fall within even the most generous definition of 'property' in s9 of the Act and be amenable to control by receivers under s1323." The "ordinary" beneficiary does not have a "contingent interest" but rather an expectancy or mere possibility of a distribution.
However, from the cases examined by his Honour, he discerned them to say and so held that a beneficiary of a discretionary trust who effectively controlled 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, had what was tantamount to a general power and ownership of the trust property.
The trusts associated with the individual defendants showed they were one or more of: the trustee or one of them; in control of the trustee; the appointor, or in control of the appointor; or the sole beneficiary. On this basis, his Honour was satisfied the individual defendants had effective ownership of the relevant trust property and that the property of those trusts should be subject to the receiver orders previously made under section 1323.
Bad facts make bad law. This may be one of those cases. An obviously pressing need to preserve assets from a corporate collapse for the benefit of investors who appear to have been the subject of "foul play" has led to a decision which appears to turn orthodox thinking about discretionary trusts on its head.
The decision is an interlocutory one and may ultimately be confined to similar facts and circumstances. If it is applied broadly, it will affect the use of discretionary trusts as an asset protection vehicle.
In light of this decision, users of discretionary trusts should now:
examine their trust deeds to see who is the trustee, beneficiary, appointor or guardian (if applicable) and whether one or more people "control" all of these positions;
consider whether at a practical level, different people can be appointed to the position of trustee, appointor and guardian so that there is not a common identity between them (if there is one);
consider whether it might be appropriate to appoint a professional trustee as trustee (this is unlikely to suit most family discretionary trusts); and
ensure the trustee exercises its trust discretions in accordance with its fiduciary duties and the trust deed, that it does so without regard to the wishes or directions of an appointor, that it carefully minute all decisions made and seek professional advice wherever necessary.
As already mentioned, this decision arose in an insolvency context. Users of discretionary trusts not faced with this scenario may have nothing to fear if their discretionary trusts do not fit the mould that will not be amenable to a receiver order. However, until we know the extent to which French J’s decision will be applied, prudence suggests that existing and future discretionary trusts be carefully examined and drafted to take account of this decision, wherever possible.
For further information please contact:
John Hutchings on +61 3 9608 2245 or j.hutchings@cornwalls.com.au;
Damien Wurzel on +61 3 9608 2288 or d.wurzel@cornwalls.com.au;
Levent Shevki on +61 3 9608 2278 or l.shevki@cornwalls.com.au
