The directors of a company should be aware that in certain circumstances they may be held liable for the liabilities of the company. This includes the situation where the company is acting as trustee of a trust. This is particularly relevant for directors with significant personal assets.

In order to achieve maximum asset protection, the principal beneficiary should not also be a shareholder of the corporate trustee. When a principal that is a shareholder becomes bankrupt, the trustee in bankruptcy has the power to take control of the corporate trustee and distribute the income or capital to the bankrupt principal, which could then be used to pay the bankrupt’s creditors.

For example, in Rafferty v Time 2000 West Pty Ltd (No 9) [2011] FCA 1483 (“Rafferty”), Stephen Donovan was the sole shareholder of the trustee company of the family trust. Mr Donovan then became bankrupt, which resulted in his shares in the trustee company being vested in his trustees in bankruptcy. Those trustees were then able to appoint themselves as directors of the trustee company. They intended to distribute the trust assets to Mr Donovan, allowing them to be available to his creditors.

Mr Donovan’s wife was also the appointor of the trust, and intended to use her power to remove the company as trustee of the trust. However, the trustees in bankruptcy successfully applied to the court to restrain her from exercising her powers.

The Court highlighted that the trustees in bankruptcy are allowed to make a distribution to Mr Donovan provided that it was not made “in breach of the trustee’s fiduciary duties to the beneficiaries,” In this case, the fact that all of the trust assets had been accumulated through the endeavours of Mr Donovan was a factor that could be taken into consideration by the trustee.

This case demonstrates the significance of ensuring that a person at risk of becoming bankrupt is not the shareholder of the trustee company. Alternatively, the shareholders could be the principal’s children if they are over the age of 18 or other relatives.

If you need any advice regarding the above matter, the team at The Quinn Group can help. Contact us on on 02 9223 9166 or submit an online enquiry.