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01 Nov 2009

Companies acting as trustees of trading trusts

READ TIME

2 min

Knowing what you are winding up

It is more and more common these days that companies act as trustees of trading trusts. In such cases the relevant assets are held by and trading is conducted on behalf of the trust by the company in its capacity as trustee.

The important distinction in any recovery action by creditors is that winding up of the company alone will not automatically make those assets available to a Liquidator.

In nearly all instances these days the winding up of a company which acts as a trustee to a trust will trigger provisions in the trust deed which will see the company automatically removed as trustee. As a result the company no longer has a simple right of indemnity to the assets of the trust and must rely on a claim against the new trustee to recover the value of creditors of the company which were incurred in its former capacity as trustee.

This can cause significant delays and un-necessary obstacles to the Liquidator in recovering the assets of the trust to meet company creditors. It may also involve further Applications to the Court to rectify these obstacles.

Where a creditor is looking to recover its debt through a winding up of a company it should take care to carefully examine whether or not the company is acting as trustee of a trading trust.

If it is identified that the company acts as trustee of a trading trust then, in addition to seeking the appointment of Liquidators to the company, the Application should also include an Order that Receivers be appointed to the trust with specific power to realise the assets of the trust and apply the net proceeds to the right of indemnity of the company to the extent of creditor claims.

The Liquidator would then use the net proceeds from the receiver to pay a dividend to creditors.

It even gets more complicated where: (i) two or more trusts, each with separate corporate trustees, run a business in partnership (we have one of these); and (ii) where two or more trusts with the same corporate trustee, run a business in partnership (and we even have one of these). Add a few secured creditors into the mix, and ... you start to understand the grey hair.

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