Limited powers of a bare trustee to deal with trust assets

29 July 2011

In the recent case of Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677, the Federal Court of Australia considered the law relating to the duties, powers and rights of a bare trustee in a winding up.

Facts

Ovens Nominees Pty Ltd (Company) was the trustee of the Ovens Trust (Trust). The Company held all assets and liabilities as trustee of the Trust.  On 10 February 2011, the Company was wound up and a liquidator was appointed (Liquidator).

The trust deed prescribed that the trustee would cease to be the trustee immediately if an official liquidator was appointed to it.  As a result, the Company became a “bare trustee”, continuing to hold legal ownership of the Trust assets on behalf of the beneficiaries of the Trust but with limited powers to deal with those assets. The bare trustee is still entitled to an indemnity out of trust assets in respect of liabilities incurred.

Unaware of the automatic change to the Company’s trustee status, the Liquidator facilitated the sale of a Trust asset, a leased BMW motor vehicle. There were also assets that had not been sold.

When the Liquidator became aware that the Company was in fact a bare trustee, the Company and the Liquidator made an application to the Federal Court seeking orders that the Company be permitted to sell the remaining Trust assets and a declaration that the Liquidator had acted honestly in causing the Company to sell the BMW and be excused from any failures or omissions arising from that sale.

Judgment

The Federal Court considered the conflicting authorities regarding the position of a corporate trustee in a winding up, in particular where the trustee is removed as a result of a disqualification clause in a trust deed. 

The Federal Court held that:

  • As a matter of law, a bare trustee has no power of sale in respect of trust assets.  Its powers are limited to protecting the trust assets. 
  • The power of sale in respect of trust assets would transfer to any replacement trustee, who would be bound to deal with the trust assets subject to the old trustee’s rights of indemnity and exoneration for liabilities incurred.  However, in this case, the parties with power to do so had declined to appoint a replacement Trustee. 
  • Accordingly, the Court had power under the Trustee Act to authorise the Company to sell assets of the Trust and apply them to meet the liabilities of the Company in the course of the winding up, and it was appropriate to make those orders in this situation.
  • It was also appropriate to excuse the Liquidator from any wrongdoing relating to the sale of the BMW, because the evidence was that the Liquidator did not know (and did not have reason to know) that the Company was a bare trustee prior to the sale, and had acted honestly in realising the assets, paying out secured creditor and holding the balance in a separate account.

Conclusion

This case is an important reminder to practitioners of some of the difficulties that can arise where an insolvent company owns property as a corporate trustee. Care should be taken to carefully review the trust deed on appointment to ensure the trustee retains its powers to sell trust assets.


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