One of my partners suggested a topic for an article for this newsletter. He had a case where a bankrupt had tried to alienate some personal property by transferring it to a family trust under circumstances that may make that transfer void. Interestingly in March I conducted an examination of transfers made by another bankrupt who tried to do a very similar thing and had the same result.
Both attempts led to one conclusion and recovery. My situation also led to a second issue.
We all know that trusts are really separate legal entities although they are not really a legal entity. The trustee is the legal entity and sometimes that trustee acts in a number of separate capacities, for themselves and for one or more trusts, etc.
We all know that trusts (through their trustees) can own assets and owe debt. We also know that trusts are used to hold assets to ‘protect’ them for the benefit of others. That is really the major idea of them. I will not go into the tax side of trusts – mainly because I am completely unqualified to do so.
Sometimes bankrupts and directors of companies try to use trusts to protect assets from their creditors. Divesting oneself of assets is problematic given the provisions of the different Acts to void transactions of these types, and these types of transactions can be voided the same as any other transfer of assets. It does not matter that the asset was transferred to a trust if the transfer itself is voided. These transfers can still be uncommercial or undervalue, or a transfer with an intention to defraud creditors, and sometimes preferential.
But these types of transactions and the voiding of them are not the topic of this article.
One of the issues mentioned at the start of this article arose in both of the matters under examination. The transfers of the assets were done by way of a sale in order to avoid the ‘uncommercial / undervalue’ problems. In both cases the sale was for value and based on a formal valuation with stamp duty paid. In one case the original mortgagee was paid out with a refinanced debt.
The problem in both cases was that the whole of the consideration was not paid when the transfer was made and this created a loan for the balance of that consideration to the relevant bankrupts. The transfer did not need to be attacked as void (they may not have been void), the equity in the asset was not paid and the bankrupt still had a collectable divisible asset – the loan from the trust. This arose because in both cases the assets were not settled on the trust, they were sold to it under a normal commercial transaction, with consideration payable.
In one of these two cases the non-bankrupt wife was the trustee of the trust, so now she has received a demand for payment and, if she does not pay what is due to the bankrupt from the trust, she will be sued as trustee and could also end up bankrupt.
In the other case, the trustee is a company. This is where the second issue arises. Was the asset sold to the company as trustee as the trust, or in its own capacity? The sale documents and the mortgage were silent about the trust. The company and trust had been set up 5 years before the sale and both had remained dormant for that period. Who owns the property?
No prizes for guessing our position given the bankrupt is also the only shareholder. Not that it matters in the first point, either the company in its own right or the company as trustee owes the balance to the bankruptcy trustee.
The other issue arises because the bankrupt was the sole shareholder in the company. If the company owns the property in its own right, the balance of the equity (after paying the loan) is an asset of the bankrupt estate through the shareholding. This circumstance could have been avoided if the documents were clear on the entity actually purchasing the property.
Advisors need to keep on mind that:
1. A sale of property to a trust may create a loan if the whole purchase price is not paid regardless of whether a trust is involved or not;
2. The sale needs to clearly show that the sale is to the trust and that the trustee is acting in that capacity at the time;
3. The transfer or sale can be attacked if it is not for value.