This matter concerned an application brought by the trustee in bankruptcy of a bankrupt beneficiary to appoint a receiver to wind up three trusts. It raises an important issue in relation to the characterisation of the rights of a beneficiary under a discretionary trust and considers whether a beneficiary’s legal or de facto control of the trustee of a discretionary trust results in the beneficiary’s interest becoming property within the meaning of the Bankruptcy Act 1966 (Cth), such that it vests in the trustee in bankruptcy.
There were three trusts relevant to the application. In each case the trustee was a company which had been deregistered. Two of the trusts were unit trusts holding interests in real property, while the third was a discretionary trust. The trustee of the discretionary trust held two-thirds of the units in one trust and all of the units in the other. The bankrupt, Mr Quinn, was a general beneficiary of the discretionary trust.
It is axiomatic that a beneficiary or object of a power under a purely discretionary trust () has no proprietary interest in the trust property. . The applicant here sought to argue that the position is different if the beneficiary has the requisite degree of control over the trustee of the trust. The bankrupt relevantly had been a director and sole shareholder of all three trustee companies. The applicant relied on the decisions in Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 509 (“Richstar”) and Kennon v Spry (2008) 238 CLR 366. .
In Richstar, French J considered the meaning of property under the Corporations Act 2001 (Cth). His Honour suggested that a beneficiary of a discretionary trust might have a proprietary interest where the “beneficiary effectively controls the trustee’s power of selection” (cited in the present case at –). Justice Jackson considered this reasoning but noted that it was concerned with the meaning of “property” for the purposes of the Corporations Act and did not consider the authorities in a bankruptcy context which were discussed by his Honour at –.
In Kennon v Spry, it was held that the right of a beneficiary under a discretionary trust could be taken into account in determining whether to make an order under s 79 of the Family Law Act 1975 (Cth) on the basis that the assets of the trust in that case were property of the marriage. Similarly, it was held that the power of a trustee to apply assets or income of the trust could be treated as a species of property, notwithstanding its characterisation under the general law. Justice Jackson noted that none of these conclusions “affect what constitutes property according to the general law” and stated that “[a]ccordingly, Kennon v Spry does not affect the answer to the present question”. .
His Honour ultimately held that the bankrupt did not have a proprietary interest in the discretionary trust. His Honour’s conclusion is encapsulated in the following passage at :
“It is difficult to accept as a principle of reasoning that a beneficiary’s legal or de facto control of the trustee of a discretionary trust alters the character of the interest of the beneficiary so that it will constitute property of the bankrupt if the beneficiary becomes a bankrupt. To the extent that Richstar might be thought to support such a principle, it has not been followed or applied subsequently and it has been criticised academically… In my view, there is no general principle of law of that kind.”
In addition, his Honour rejected the contention that a trust validly created could subsequently become a sham. His Honour referred at  to Lewis v Condon (2013) 85 NSWLR 99, where Leeming JA said:
“A trust once validly constituted does not change in nature because the trustee and some of the beneficiaries subsequently choose no longer to abide by the obligations of the trust relationship. Such conduct may amount to a breach of trust, and may lead to the removal of the trustee, but does not destroy the proprietary and personal rights and obligations which came into existence when the trust was created.”
The applicant had accepted that the trusts were validly created and was therefore prevented from contending that the interests of the bankrupt beneficiary had changed due to his conduct in causing the trustee to make distributions to himself. .
Proceeding “on an assumption that the applicant may have standing, despite the absence of any interest in the trust property” (at ), his Honour also considered whether it was appropriate to appoint a receiver to wind up the trusts. –. There were a number of matters which led his Honour to conclude that it would be inappropriate to appoint the receiver as sought by the applicant:
1.The receiver appointed to the trusts would not be a trustee or subject to the duties of a trustee. .
2.The appointment of an experienced insolvency practitioner was not, in his Honour’s opinion, warranted. . Each unit trust owned an interest in only one property and the surpluses which would be available for distribution were minimal. .
3.The applicant’s aim was for distributions to be made by the trustee of the discretionary trust in favour of the bankrupt. However, the power to distribute assets from the trust is a fiduciary or trust power which must be exercised in favour of all beneficiaries of the trust. The bankrupt was not the only beneficiary of the discretionary trust. His Honour considered it would be “inappropriate for the court to appoint a receiver who is not subject to the same fiduciary obligations” as the Court would be if it were to make a general administration order. .
In the result, the application was dismissed.