Appointors of Trusts and Bankruptcy

Appointors and Bankruptcy

When a person becomes bankrupt all of this ‘property’ vests in the trustee in bankruptcy. Property is defined under section 5 of the Bankruptcy Act 1966 as
“property ” means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.
http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s5.html

This property is then divisible amount creditors because of section 116 of the Bankruptcy Act.
http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s116.html

So is the position of being Appointor of a discretionary trust ‘property’? If it was the creditors could then get hold of the trust by having the trustee in bankruptcy remove the trustee and appoint its own trustee who could then make a resolution to transfer property of the trust to the bankrupt which will mean to the trustee in bankruptcy and to the creditors.

The case of Burton in 1994 confirmed that the general power of appointment was not property and therefore could not be passed to the trustee in bankruptcy. It was just a power. Re Burton: Wiley v Burton (1994) 126 ARL 557

This was confirmed more recently in Lewis v Condon (2013) NSWCA204:
‘The power to remove and replace a trustee is precisely that: a power, not property.’

But beware as many trusts do not have appointors. Some have been drafted that way from the beginning – usually with the trustee having the power to appoint another trustee, but sometimes through death or resignation. An appointor may die and not have appointed a successor, of the appointor may have appointed someone else, but the appointment be invalid because of some defect (not notifying the trustee in writing for example).

Many trust deeds are drafted in such a way so that if the appoint were to become legally disabled, such as entering bankruptcy or losing capacity, they would be automatically removed as appointor. This is an added safeguard but the appointor needs to plan their succession now to safeguard the safeguard.