‘Near enough close enough’ trust establishments fine

Matthew Burgess, Director at View Legal, discusses the establishment of a trust with a trustee company. 

Arguably the quintessential example of a trust structure going horribly wrong in recent times was the decision in Re McGowan & Valentini Trusts [2021] VSC 154 (“Re McGowan”).

While that case involved numerous trust structuring fails, one aspect perhaps is the most prevalent for trust advisers, namely ‘non-existent’ trustee companies.  That is, trust deeds that are signed and dated on establishment of the trust by a company that is not registered until sometime later.

The equity heuristic courts appear to adopt in this style of situation is that a trust will not be permitted to fail for want of a trustee because that would be contrary to the settlor’s intention.

Reinforcement of position

The more recent case of Bolwell (Liquidator), in the matter of Mandalay Road Holdings Pty Ltd (in liq) v Goldsmith-Medd (Trustee) [2022] FCA 1300 (“Mandalay Road”) reinforces the conclusion in relation to trustee companies purporting to sign trust deeds before incorporation.

In Mandalay Road a trust deed and contract for the purchase of a property were both signed by a company that did not exist until some weeks later.

The individual who purported to sign on behalf of the trustee company did become the sole director and shareholder of the company following its registration.

Evidently leaving aside the (likely material) risk that both the trust deed and contract had been backdated, or at least retrospectively amended (given that details such as the ACN of the company would not have been known at the date the trust deed and contract were signed), the court confirmed:

• The requirements for the creation of an express trust are the so call ‘3 certainties’ – namely certainty of intention, certainty of subject matter, and certainty of object (see Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6).
• Based on a review of the trust deed the court was comfortable that the 3 certainties existed (see Legal Services Board v Gillespie-Jones [2013] HCA 35) – but the non-existence of the trustee company was clearly an issue that could potentially lead to invalidity.
• However, given (as noted above) that a court of equity will not allow a trust to fail for want of a trustee, it was reasonable to rely on the fact that as the trust deed provided for changes in the trustee this was evidence supporting a conclusion that the settlor did not intend for the trust to fail because the named trustee was not able to take the role, or in this case, because it did not in fact exist (see Raftland Pty Ltd (as trustee of the Raftland Trust) v Commissioner of Taxation [2006] FCA 109).
• Thus the individual signing the trust deed purportedly on behalf of the non-existent company individually became the trustee of the trust upon execution of the trust deed and maintained that position until such time as the trustee company was incorporated – at which time the company automatically became trustee.
• Furthermore, the trustee company clearly ratified the individual trustee’s pre-incorporation actions and assumed the role of trustee of the trust, with the relevant ratification actions listed as including:
  • The company was named as purchaser in its capacity as trustee for the trust in the contract for the purchase of the property;
  • The company settled on the property purchase and was named on the title as registered proprietor as trustee, with the transfer documents including a copy of the trust deed:
  • There was evidence supporting the fact that the company operated exclusively in its capacity as trustee of the trust – and never traded or carried on any business whether in its own right or as trustee of another trust;
  • As trustee, the company also entered into two chattel mortgage agreements;
  • Some years later, the company was replaced as trustee.

Ultimately then the court confirmed, as was the case in Re McGowan, that a party executing a trust deed on behalf of the intended corporate trustee prior to its incorporation becomes an individual trustee of the settled sum upon receipt.

Further, the individual holds the settlement sum (and any other assets acquired) on trust pending the intended trustee company being created and taking active steps to ratify the actions of the individual trustee prior to incorporation.

Some warnings for trust advisers

The key duties of trustees often practically create responsibilities for advisers of the trust.  For example, the following duties of a trustee tend to only be discharged where the advisers for the trust ensure the trustee discharges them:

• being thoroughly acquainted with the terms of the trust and all documents relating to or affecting the trust property;
• keeping all trust documentation safe and secure;
• adhering rigidly to the terms of the trust and conforming to and carrying out the wishes of the settlor as expressed in the deed of trust.

The key trustee duties are however ultimately predicated on the avatar of the trustee being known, correct and validly appointed at all times.

The tendency for 3rd parties to be pedantic about compliance with basic trust establishment issues appears to be on the increase, for example:

• Financiers, particularly in the context of the ‘know your client’ regime (for example, the significant rise in recent times of court applications where a trustee is unable to locate the original – wet signed – trust deed, see Jowill Nominees Pty Ltd v Cooper [2021] SASC 76)
• Trustees in bankruptcy (as was the case in Mandalay Road)
• Former spouses (for example, Rigby & Kingston (No 4) [2021] FamCA 501)
• Estranged family members (for example, the recent high profile decision in Smorgon v ES Group Operations Pty Ltd & Ors [2021] VSC 608)
• Statutory authorities; particularly revenue authorities (for example, the numerous cases where backdating or “retro dating”, “pre-dating” or “intended date” have been held to be invalid)
• Purchasers (and their advisers during due diligence) – we have seen examples where the validity of trust deeds signed electronically has been (correctly) denied
• Professional bodies and indemnity insurers (for example, in Legal Practice Board v Computer Accounting and Tax Pty Ltd [2007] WASC184 an accountant arranged for a trust deed to be bought for a client via an online provider. While the base trust instrument had been written by lawyers, the accountant then populated the template and was held liable for illegally providing legal advice).

Conclusion

Cases such as Mandalay Road and Re McGowan provide some comfort that a court of equity may remedy most, if not all, trust compliance issues.

This said, the cases themselves are a stark reminder that in many instances 3rd parties may refuse to accept the legitimacy of unilaterally created trustee solutions, such as deeds of rectification, clarification or confirmation.

Furthermore, if court approval is required to remedy defects in trust deeds, trustees – and their advisers – will need to endure the publicity, uncertainty, delays and financial costs associated with any application.

An earlier version of this article first appeared in Thomsen Reuters ‘Weekly Tax Bulletin’.

Matthew Burgess co-founded View in 2014, having been a partner and lawyer at one of Australia’s leading independent law firms for over 17 years. Matthew’s passion is helping clients to successfully achieve their goals. Matthew specialises in tax, estate and succession planning, providing strategic advice to business owners and high net worth individuals, and has been recognised in the ‘Best Lawyers’ list since 2014 in relation to trusts and estates and in ‘Doyles’ either personally or as part of View since 2015 in relation to taxation. In 2017 he was also nominated as Tax Partner of the Year (Lawyers Weekly). While a significant focus of Matthew’s practice is on small to medium enterprises and private business owners, the growth in this area in recent years has meant that he also regularly works on transactions with listed companies. In part leveraging off the skills he has developed working in the SME market space, Matthew has been the catalyst in developing a number of innovative legal products for advisers and their clients. You can find Matthew on LinkedIn, via his personal site, or the View Legal website.