We recently had cause to again consider whether some rights that vested in bankrupts under a trust deed passed to a Bankruptcy Trustee upon bankruptcy. The question is really whether these rights fall under the definition of property under section 116 of the Bankruptcy Act.
There is no dispute that any right that the bankrupt may have to income or distributions from the trust will be divisible property. In cases where the bankrupt holds units in a unit trust, the Bankruptcy Trustee will have the same entitlements as the bankrupt had before bankruptcy, and the units themselves would be divisible property. It is doubtful that a trustee of a discretionary trust would normally make an income distribution to a bankrupt beneficiary – particularly above the income threshold – but if they did so, the Bankruptcy Trustee would be entitled to contributions from that distribution.
The question in this case does not involve income or distributions of property, it involves a right to change the trustee of the trust. Clearly controlling the trustee amounts to controlling the trust. The power to change the trustee had been granted to bankrupt by virtue of the wording of the trust deed. Does that right vest in the Bankruptcy Trustee on bankruptcy?
The most recent published case involved a person (called the Appointor in the trust deed) who had the right to change the trustee of the trust. The Appointor, who was also a beneficiary, became bankrupt. In that case the Court held that a general power of appointment held as Appointor was not property that vests under section 116. Considering that this decision refers to cases in 1886, 1927 and 1928, this is not an often litigated point.[Re Burton: Wiley v Burton (1994) 126 ARL 557]
The only real factual difference in the current question is that no one is defined as an Appointor in the current trust deed. The right to charge trustees was given to ‘the party as set out in the fifth schedule’. The primary beneficiary of the trust was also described as ‘the persons as set out in the fifth schedule’. He is now bankrupt. Does this mean that the right to change the trustee vests in the primary beneficiary and – because of section 116 and the definition of ‘the property of the bankrupt’ to include rights that attach to the property – now vests in the Bankruptcy Trustee?
We believe that the right will remain with the bankrupt, not vest in the Bankruptcy Trustee for the same reasons given in Burton. We believe that the wording of the trust deed is no more than a description of the person empowered to change the trustee, and does not attach to the power to the beneficiary in a way that makes it property.
We are on the edge of this discussion, not being the Bankruptcy Trustee or the old trustee of the trust. It is possible that this point will be litigated at some time in the future and, if so, we will let you know the result.